<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 8, 1997
REGISTRATION NO. 333-23127
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO.1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
KINDERCARE LEARNING CENTERS, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 8351 63-0941966
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
------------------------
2400 PRESIDENTS DRIVE
MONTGOMERY, ALABAMA 36116
(334) 277-5090
(Address, including zip Code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
REBECCA S. BRYAN, ESQ.
KINDERCARE LEARNING CENTERS, INC.
2400 PRESIDENTS DRIVE
MONTGOMERY, ALABAMA 36116
(334) 227-5090
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
WITH A COPY TO:
<TABLE>
<S> <C>
JOHN B. TEHAN, ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 455-2000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT WITHOUT
NOTICE. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION DATED APRIL 8, 1997
PRELIMINARY PROSPECTUS
[LOGO]
KINDERCARE LEARNING CENTERS, INC.
OFFER TO EXCHANGE $300,000,000 OF ITS
9 1/2% SERIES B SENIOR SUBORDINATED NOTES DUE 2009,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR $300,000,000 OF ITS OUTSTANDING
9 1/2% SENIOR SUBORDINATED NOTES DUE 2009
------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1997, UNLESS EXTENDED.
------------------------------
KinderCare Learning Centers, Inc. (the "Company" or "KinderCare"), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together constitute
the "Exchange Offer"), to exchange an aggregate of up to $300,000,000 principal
amount of 9 1/2% Series B Senior Subordinated Notes due 2009 (the "Exchange
Notes") of the Company for an identical face amount of the issued and
outstanding 9 1/2% Senior Subordinated Notes due 2009 (the "Old Notes" and
together with the Exchange Notes, the "Notes") of the Company from the Holders
(as defined) thereof. As of the date of this Prospectus, there is $300,000,000
aggregate principal amount of the Old Notes outstanding. The terms of the
Exchange Notes are identical in all material respects to the Old Notes, except
that the Exchange Notes have been registered under the Securities Act of 1933,
as amended (the "Securities Act"), and therefore will not bear legends
restricting their transfer and will not contain certain provisions providing for
an increase in the interest rate on the Old Notes under certain circumstances
described in the Registration Rights Agreement (as defined), which provisions
will terminate as to all of the Notes upon the consummation of the Exchange
Offer.
Interest on the Exchange Notes will be payable semi-annually on February 15 and
August 15 of each year, commencing on August 15, 1997. The Exchange Notes will
mature on February 15, 2009. Except as described below, the Company may not
redeem the Exchange Notes prior to February 15, 2002. On or after such date, the
Company may redeem the Exchange Notes, in whole or in part, at the redemption
prices set forth herein, together with accrued and unpaid interest, if any, to
the date of redemption. In addition, at any time on or prior to February 15,
2000, the Company may, subject to certain requirements, redeem up to 40% of the
aggregate principal amount of the Exchange Notes originally issued with the net
proceeds of one or more Equity Offerings (as defined), at a price equal to
109.5% of the aggregate principal amount to be redeemed, together with accrued
and unpaid interest, if any, to the date of redemption; provided that at least
60% of the aggregate principal amount of the Exchange Notes remains outstanding
immediately after each such redemption. The Exchange Notes will not be subject
to any sinking fund requirements. Upon the occurrence of a Change of Control (as
defined), the Company will be required to make an offer to purchase the Exchange
Notes at a price equal to 101% of the aggregate principal amount thereof,
together with accrued and unpaid interest, if any, to the date of purchase. See
"Description of the Exchange Notes."
The Exchange Notes will be unsecured, will be subordinated in right of payment
to all existing and future Senior Indebtedness (as defined) of the Company and
will be effectively subordinated to all obligations of the subsidiaries of the
Company. The Exchange Notes will rank PARI PASSU with any future senior
subordinated indebtedness of the Company and will rank senior to all other
Subordinated Indebtedness (as defined) of the Company. The Indenture (as
defined) permits the Company to incur additional indebtedness, including up to
$550.0 million of Senior Indebtedness under the Credit Facilities (as defined),
subject to certain limitations. See "Description of the Exchange Notes." As of
December 13, 1996, on a pro forma basis, after giving effect to the Merger and
the Financings (as defined) (including the Offering, as defined), the aggregate
amount of the Company's outstanding Senior Indebtedness would have been
approximately $122.2 million (excluding unused commitments), and the Company
would have had no senior subordinated indebtedness outstanding other than the
Notes. See "Pro Forma Consolidated Financial Statements" and "Description of the
Exchange Notes--Subordination."
The Old Notes were issued and sold on February 13, 1997 in a transaction not
registered under the Securities Act in reliance upon an exemption from the
registration requirements thereof. In general, the Old Notes may not be offered
or sold unless registered under the Securities Act, except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act. The
Exchange Notes are being offered hereby in order to satisfy certain obligations
of the Company contained in the Registration Rights Agreement. Based on
interpretations by the staff of the Securities and Exchange Commission (the
"Commission") set forth in no-action letters issued to third parties, the
Company believes that the Exchange Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for resale, resold or otherwise
transferred by any holder thereof (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 promulgated under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, PROVIDED that such Exchange Notes are acquired
in the ordinary course of such holder's business, such holder has no arrangement
with any person to participate in the distribution of such Exchange Notes and
neither such holder nor any such other person is engaging in or intends to
engage in a distribution of such Exchange Notes. However, the Company has not
sought, and does not intend to seek, its own no-action letter, and there can be
no assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer. Notwithstanding the foregoing, each
broker-dealer that receives Exchange Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. The Letter of Transmittal states that by
so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act. This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with any resale of Exchange Notes
received in exchange for such Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities (other than Old Notes acquired directly from the Company). The
Company has agreed that, for a period of 120 days after the date of this
Prospectus, it will make this Prospectus available to any broker-dealer for use
in connection with any such resale. See "Plan of Distribution."
The Old Notes are designated for trading in the Private Offerings, Resales and
Trading through Automated Linkages ("PORTAL") market. There is no established
trading market for the Exchange Notes. The Company does not currently intend to
list the Exchange Notes on any securities exchange or to seek approval for
quotation through any automated quotation system. Accordingly, there can be no
assurance as to the development or liquidity of any market for the Exchange
Notes.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange. The date of acceptance and
exchange of the Old Notes (the "Exchange Date") will be the fourth business day
following the Expiration Date (as defined). Old Notes tendered pursuant to the
Exchange Offer may be withdrawn at any time prior to the Expiration Date. The
Company will not receive any proceeds from the Exchange Offer. The Company will
pay all of the expenses incident to the Exchange Offer.
------------------------------
SEE "RISK FACTORS," BEGINNING ON PAGE 17, FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY INVESTORS IN CONNECTION WITH THE EXCHANGE OFFER AND
AN INVESTMENT IN THE EXCHANGE NOTES.
------------------------
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1997
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (together with all amendments, exhibits, schedules and supplements thereto,
the "Registration Statement") under the Securities Act with respect to the
Exchange Notes being offered hereby. This Prospectus, which forms a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement. For further information with respect to the Company and
the Exchange Notes, reference is made to the Registration Statement. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and, where such contract or other
document is an exhibit to the Registration Statement, each such statement is
qualified in all respects by the provisions in such exhibit, to which reference
is hereby made. The Company is presently subject to the information requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports and other information with the Commission.
The Registration Statement, such reports and other information can be inspected
and copied at the Public Reference Section of the Commission located at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549 and at
regional public reference facilities maintained by the Commission located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of
such material, including copies of all or any portion of the Registration
Statement, can be obtained from the Public Reference Section of the Commission
at prescribed rates. Such material may also be accessed electronically by means
of the Commission's home page on the Internet (http://www.sec.gov).
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN EXHIBITS TO SUCH
DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED THEREIN BY
REFERENCE) ARE AVAILABLE UPON REQUEST FROM KINDERCARE LEARNING CENTERS, INC.,
2400 PRESIDENTS DRIVE, MONTGOMERY, ALABAMA 36116, ATTENTION: CORPORATE SECRETARY
(TELEPHONE: 334-277-5090). IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS,
ANY REQUEST SHOULD BE MADE BY , 1997.
------------------------
The names or phrases KinderCare At Work-Registered Trademark-, My Window On
The World-Registered Trademark-, Helping America's Busiest
Families-Registered Trademark-, Look At Me!-Registered Trademark-, Let Me Do
It!-Registered Trademark-, Let's Move, Let's Play-Registered Trademark-, Small
Talk-Registered Trademark-, The Whole Child Is The Whole
Idea-Registered Trademark-, Once Upon A Time . . .-TM-, Kid's Choice-TM-, and KC
Imagination Highway-TM-, as used herein, and the red schoolhouse logo, are
registered or unregistered trademarks of the Company.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED FINANCIAL AND OTHER INFORMATION CONTAINED
ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS ARE URGED TO READ THIS
PROSPECTUS IN ITS ENTIRETY. ALL REFERENCES TO THE "COMPANY" OR "KINDERCARE"
SHALL MEAN KINDERCARE LEARNING CENTERS, INC. AND ITS CONSOLIDATED SUBSIDIARIES,
UNLESS THE CONTEXT INDICATES OTHERWISE. ALL REFERENCES TO FISCAL YEAR IN THIS
PROSPECTUS REFER TO THE FISCAL YEAR ENDING ON THE FRIDAY CLOSEST TO MAY 31 OF
EACH YEAR. ALL REFERENCES TO MARKET SHARE AND DEMOGRAPHIC DATA IN THIS
PROSPECTUS ARE BASED ON INDUSTRY AND GOVERNMENT PUBLICATIONS AND COMPANY DATA.
THE COMPANY
GENERAL
KinderCare, founded in 1969, is the largest provider of for-profit preschool
educational and child care services in the United States based upon number of
centers operated, children served, operating revenues and operating income. The
Company provides center-based preschool educational and child care services five
days a week throughout the year to children between the ages of six weeks and
twelve years. At December 13, 1996, the Company operated 1,148 child care
centers, of which 736 are owned, located in 38 states and the United Kingdom and
had enrollment of approximately 125,000 full-time and part-time children. The
Company's total center capacity at December 13, 1996 was approximately 142,000
full-time children. For the fiscal years ended May 31, 1996 ("fiscal 1996") and
June 2, 1995 ("fiscal 1995"), average occupancy was 75.9% and 76.3%,
respectively, and the average full-time three-year-old weekly tuition rate
(which the Company believes approximates the Company's average full-time weekly
tuition rate) was $100 and $96, respectively. For the twenty-eight weeks ended
December 13, 1996, average occupancy was 74.2%, and the average full-time
three-year-old weekly tuition rate was $104. For the twelve months ended
December 13, 1996, the Company generated operating revenues of $555.6 million
and Adjusted EBITDA (as defined) of $89.6 million.
THE CHILD CARE INDUSTRY
FAVORABLE DEMOGRAPHICS AND SOCIAL TRENDS. The U.S. child care industry
(including home-based care, employer on-site care, and care delivered by private
facilities, government-sponsored institutions, church-affiliated centers,
colleges and universities, group day care center chains, and civic groups such
as the YMCA) has grown at a compound annual growth rate of 13.4% from $5.7
billion in revenues in 1982 to an estimated $29.3 billion in 1995, and is
expected to grow at a 6.8% compound annual growth rate for the rest of the
decade, according to Marketdata Enterprises, Inc., an independent market
research and consulting firm. This growth has been, and is expected to continue
to be, driven by several demographic and social trends, including: (i) an
increase in the number of births as compared generally to the 1970's and 1980's,
(ii) mothers continuing to enter the work force, and (iii) a significant
increase in the popularity of center-based care. According to the United States
National Center for Health Statistics, in 1989 (for the first time since 1964,
the final year of the "baby boom") and in each year since then through 1995, the
annual number of births approximated four million per year. The annual number of
births is expected to remain at or around this level through 2010. Furthermore,
the number of children under the age of five grew from approximately 16.1
million in 1975 to an estimated 20.2 million in 1995, according to the United
States Bureau of the Census (the "Census Bureau"). These trends are complemented
by the continued increase in mothers entering the work force. According to the
United States Bureau of Labor Statistics (the "USBLS"), the percentage of
mothers in the work force that have children under the age of six, relative to
all mothers that have children under the age of six, has risen from
approximately 39% in 1975 to an estimated 61% in 1995, and the percentage of
mothers in the work force that have children between the ages of five and
twelve, relative to all mothers that have children between the ages of five and
twelve, has risen from 53% in 1975 to 75% in 1995.
3
<PAGE>
Finally, there has also been a significant increase in the use of child care
centers by families with both working and non-working mothers as a method of
care for preschool age children. The Company believes this increase is due in
part to the recognition of the importance of early childhood development and
education. Center-based care typically offers a more structured curriculum,
better educational materials, more experienced personnel and more children for
social interaction than alternative forms of child care. Center-based care has
become an increasingly popular form of non-parental care for families with
working mothers, accounting for approximately 30% of such care in 1993,
according to the most recent data available from the Census Bureau, up from
about 6% in 1965, according to the National Association for the Education of
Young Children ("NAEYC"). Furthermore, 22% of children under the age of six with
mothers not in the labor force were enrolled in center-based child care programs
in 1995, according to the U.S. Department of Education.
FRAGMENTED INDUSTRY. The U.S. child care industry is highly fragmented,
with the aggregate capacity of the largest 50 for-profit child care companies
capable of serving less than 1% of the potential child care market, or
approximately 506,000 children out of a total of 51 million children under the
age of twelve in the United States as of January 1, 1996, according to CHILD
CARE INFORMATION EXCHANGE, an industry publication, and Company estimates.
KinderCare is the only child care company that has total center capacity in
excess of 100,000 children and the only company to operate more than 1,000
centers. Furthermore, including KinderCare, only nine for-profit companies have
a total center capacity in excess of 10,000 children and only seven have more
than 100 centers. Relative to smaller competitors, the few large national
operators such as KinderCare have a competitive advantage over other for-profit
child care companies and smaller independent operators with less extensive
resources.
COMPETITIVE STRENGTHS
LEADING MARKET POSITION. Based on the number of centers operated, children
served, operating revenues and operating income, KinderCare is the largest
provider of for-profit preschool educational and child care services in the
United States. At December 13, 1996, the Company operated 1,148 child care
centers in 38 states and the United Kingdom with total center capacity of
approximately 142,000 full-time children. In contrast, as of January 1, 1996,
the second and third largest for-profit competitors operated approximately 750
and 500 centers, respectively, with total center capacities of approximately
95,000 and 62,500 children, respectively, according to CHILD CARE INFORMATION
EXCHANGE. By virtue of its size and leadership position, the Company benefits
from several competitive advantages over smaller operations, including (i) the
resources available to invest in developing and regularly updating high quality
educational programs, services and curriculum materials; (ii) the expertise to
manage the complexities involved in complying with various state and local
regulations and licensing requirements; (iii) purchasing power in areas such as
insurance, equipment, supplies and food; and (iv) the ability to spread fixed
corporate and centralized support costs, including real estate, marketing and
educational staff, over a large center base.
STRONG BRAND IDENTITY AND REPUTATION. The Company's high quality preschool
educational and child care services have enabled it to develop a strong brand
identity and reputation in an industry where personal trust and parent referrals
play an important role in attracting new customers. The Company's brand
awareness is substantially greater than that of its closest competitor according
to recent market research commissioned by the Company. Throughout all of
KinderCare's communications (including informational brochures, parent
handbooks, advertising and marketing materials), the Company reinforces its
image as the market leader with a caring, well-trained staff having the
resources necessary to provide high quality preschool educational and child care
services.
HIGH QUALITY EDUCATIONAL PROGRAMS. The Company's resources have enabled it
to develop and regularly update a high quality proprietary curriculum that
incorporates professionally-designed, age-specific educational programs based on
its "Whole Child Development" concept. This concept includes
4
<PAGE>
programs that use developmentally appropriate materials, activities and
resources to promote the physical, intellectual, emotional and social
development of children ages six weeks to twelve years. In light of advancements
in childhood education theory and practice, new programs are introduced and
existing programs are frequently enhanced by the Company's education department
under the leadership of two professionals with Ph.D.'s in early childhood
education and curriculum supervision. All of the Company's programs are designed
and tailored specifically to accommodate the needs and safety requirements of
children.
GEOGRAPHICALLY DIVERSIFIED OPERATIONS. The Company's operations are
geographically diversified, with 1,146 child care centers located throughout 38
states and two centers located in the United Kingdom. The five states in which
the highest number of the Company's centers are located (Texas, California,
Illinois, Florida and Ohio) are well-dispersed, and together these states
account for less than 40% of the Company's centers. The geographical diversity
of the Company's operations mitigates the potential impact of regional economic
downturns or adverse changes in local regulations.
VALUABLE REAL ESTATE PORTFOLIO. At December 13, 1996, the Company owned
736, or 64%, of its 1,148 centers, with the remainder under lease or management
contract. The Company's real estate portfolio provides it with considerable
financial flexibility. Land and buildings, at December 13, 1996, had a net book
value of $392.9 million.
BUSINESS STRATEGY
The Company's objective is to build on its position as the nation's leading
preschool educational and child care services provider by offering high quality
services in a safe, healthy and nurturing environment. To meet this objective,
management's business strategy includes the following:
ACCELERATE NEW CENTER DEVELOPMENT AND PURSUE SELECTIVE ACQUISITIONS. The
Company plans to expand by accelerating the development of new child care
centers in attractive markets and selectively acquiring child care businesses.
The Company seeks to identify attractive sites for its centers in large
metropolitan and smaller, growth markets that meet the Company's operating and
financial goals and where the Company believes the market for child care
services will support higher tuition rates than the Company's existing rates. In
fiscal 1996, the Company's newer community centers (operating for at least 18
months, but less than five years) had an average capacity of 145 full-time
children and achieved an average operating revenue of approximately $684,000
versus community centers opened prior to the fiscal year ended December 27, 1991
("fiscal 1991"), which had an average capacity of 115 full-time children and an
average operating revenue of approximately $453,000. These newer community
centers had an average occupancy rate and an average three-year-old weekly
tuition rate of 82% and $114, respectively, compared to community centers opened
prior to fiscal 1991, which achieved 76% and $99, respectively. Also, these
newer community centers achieved an average center controllable profit margin
(center operating revenues, less labor costs and controllable expenses, such as
food and supplies) which is four percentage points higher than community centers
opened prior to fiscal 1991.
In addition to accelerating new center development, the Company may seek to
acquire existing child care centers where demographics, operating standards, and
customer services complement the KinderCare business strategy. Management
believes that the Company's competitive position, economies of scale and
financial strength will allow it to capitalize on selective acquisition
opportunities in the fragmented child care industry.
INCREASE OCCUPANCY. The Company plans to increase center occupancy by (i)
emphasizing local marketing programs, (ii) enhancing recruiting, retention and
training of staff, and (iii) improving customer retention and loyalty. The
Company's marketing activities are currently designed to increase new
enrollments primarily through local marketing efforts, including direct mail
solicitation, telephone directory yellow pages and customer referrals. See
"Business--Marketing, Advertising and Promotions."
5
<PAGE>
These methods communicate to parents the Company's commitment to quality
preschool education and child care by emphasizing KinderCare's nurturing
environment, state-of-the-art educational programs, quality staff, and excellent
facilities and equipment, such as computers for children's educational programs.
Moreover, beginning in the current fiscal year that began June 1, 1996 ("fiscal
1997"), the Company implemented an automated consumer inquiry tracking system to
provide rapid responses more efficiently to inquiries from potential customers
and to develop a comprehensive consumer database.
Because a high quality teaching and administrative staff is a key factor in
maintaining and increasing center occupancy, the Company emphasizes recruiting,
retaining and training qualified center personnel. KinderCare's recruiting
process seeks to identify high quality candidates for its teaching, center
director and area coordinator positions. Furthermore, management believes its
current compensation and benefit plans are highly competitive in the child care
industry and, along with the Company's subsidized training programs, will result
in increased retention of qualified staff personnel. Additionally, the Company
rewards center directors and area coordinators through an annual bonus program
designed to increase center occupancy and center controllable profit.
The Company also strives to increase occupancy by improving its customer
retention and loyalty by strengthening its current parents' emotional commitment
to KinderCare. During fiscal 1997, the Company initiated parent orientation
meetings at centers during the fall enrollment season, introduced organized
parent involvement programs and parent advisory forums, and began conducting
ongoing market research on customer satisfaction.
ENHANCE EDUCATIONAL PROGRAMS AND QUALITY OF SERVICES. The Company
continually evaluates and strives to improve the quality of its preschool
educational and child care services. KinderCare has invested significant
resources in formulating a proprietary educational program, maintaining safe and
up-to-date facilities, and hiring, retaining, and training high quality
employees. The Company plans to continue to test and implement innovative
services and offerings, such as computers for children's educational programs
and its new program for school-aged children called KC Imagination Highway-TM-,
which encourages children to engage in meaningful, purposeful, long-lasting
projects that require an active imagination. The Company also plans to continue
encouraging its centers to become accredited by NAEYC, a national organization
that has established comprehensive criteria for providing quality child care and
implemented a formal, though voluntary, child care center accreditation process.
IMPROVE OPERATIONAL EFFICIENCIES. During fiscal 1996, the Company
introduced numerous organizational initiatives to increase the Company's
operating efficiencies by (i) streamlining management, (ii) increasing local
authority and decision making, and (iii) enhancing centralized support
productivity. The Company plans to continue to improve its operating performance
primarily by reducing center labor costs principally through improved staff
scheduling by utilizing automated information systems to match better the number
of staff personnel at work at a given time of day to the number of students in
attendance at that time in accordance with state required student/teacher
ratios. The Company also plans to continue to leverage its economies of scale
and purchasing power.
CAPITALIZE ON KINDERCARE'S STRONG BRAND IDENTITY. KinderCare's strong brand
identity plays a significant role in the Company's continued growth of its
preschool education and child care business, as management believes that, among
other benefits, this factor contributes to higher enrollment for new child care
centers. Furthermore, management believes that there are opportunities to
leverage the Company's brand identity. Possibilities include licensing of the
KinderCare name for educational materials, clothes, toys and other consumer
products, as well as potential brand extensions into other forms of educational
or child care services, such as the operation of primary and private schools.
6
<PAGE>
THE MERGER AND THE FINANCINGS
On October 3, 1996, the Company entered into an agreement and plan of
merger, as amended as of December 27, 1996 (the "Merger Agreement"), with KCLC
Acquisition Corp. ("KCLC Acquisition"). KCLC Acquisition was a wholly owned
subsidiary of KLC Associates, L.P. (the "Partnership"), a partnership formed at
the direction of Kohlberg Kravis Roberts & Co., L.P. ("KKR"), which is an
affiliate of Kohlberg Kravis Roberts & Co., a private investment firm. Pursuant
to the Merger Agreement, on February 13, 1997 (the "Effective Time") KCLC
Acquisition merged with and into the Company, with the Company as the surviving
corporation (the "Merger"). The Merger Agreement contemplates the conversion of
approximately 93% of the issued and outstanding shares of the Company's common
stock, $.01 par value per share (the "Common Stock"), at the election of each
holder, into $19.00 in cash per share, and the retention of approximately 7% of
the shares by stockholders. In addition, the Merger Agreement provides for the
cancellation and conversion of each warrant to purchase shares of Common Stock
(each a "Warrant" and collectively the "Warrants") issued and outstanding
immediately prior to the Effective Time into the right to receive an amount in
cash determined as specified in the Merger Agreement. Because the total number
of outstanding shares of Common Stock decreased from approximately 19,423,577,
as of January 8, 1997, to 9,210,526 immediately after the Merger, the
approximately 7% of the outstanding Common Stock (1,381,579 shares) retained by
existing stockholders in the Merger represented approximately 15% of the shares
outstanding immediately after the Merger and the 7,828,947 shares owned by the
Partnership represented approximately 85% of the shares outstanding immediately
after the Merger.
The transactions contemplated by the Merger Agreement were funded by (i)
approximately $76.2 million of bank borrowings by the Company (certain of which
borrowings have yet to be made) pursuant to a senior secured term loan facility
of up to $90.0 million (the "Term Loan Facility"), (ii) the offering of $300.0
million aggregate principal amount of Old Notes (the "Offering"), and (iii) an
equity contribution to the Company by the Partnership of approximately $148.8
million. Such amounts were used to (x) pay approximately $382.4 million of cash
merger consideration, (y) repay approximately $107.6 million of indebtedness of
the Company under its then-existing bank credit facility (the "Old Bank Credit
Facility") and (z) pay an estimated $35.0 million in transaction fees and
expenses incurred in connection with the Merger (certain of which fees have yet
to be paid). The Company also entered into a $300.0 million senior secured
revolving credit facility (the "Revolving Credit Facility") to provide for the
Company's working capital requirements and growth plans following the Merger.
The Revolving Credit Facility and the Term Loan Facility (collectively the
"Credit Facilities") have been provided by a group of banks led by The Chase
Manhattan Bank ("Chase"). The Credit Facilities and the Offering are
collectively referred to herein as the "Financings."
7
<PAGE>
The pro forma sources and uses of the funds for the Merger and the related
transactions (including the Financings), assuming that the Merger occurred on
December 13, 1996, were as follows (dollars in thousands):
<TABLE>
<CAPTION>
SOURCES OF FUNDS
Term Loan Facility............................................... $ 75,981
<S> <C>
Old Notes........................................................ 300,000
Equity contribution.............................................. 148,750
---------
Total sources.............................................. $ 524,731
---------
---------
<CAPTION>
USES OF FUNDS
<S> <C>
Repayment of Old Bank Credit Facility (a)........................ $ 122,500
Payment of cash merger consideration (a)......................... 367,231
Estimated transaction fees and expenses (b)...................... 35,000
---------
Total uses................................................. $ 524,731
---------
---------
</TABLE>
- ------------------------
(a) Due to the exercise of a number of options and warrants prior to the
Effective Time, the cash merger consideration paid was approximately $382.4
million and the indebtedness repaid under the Old Bank Credit Facility was
approximately $107.6 million.
(b) Includes a transaction bonus of $1.0 million payable to certain members of
management of the Company.
8
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
The Exchange Offer................ The Company is offering to exchange pursuant to the
Exchange Offer up to $300,000,000 aggregate principal
amount of its new 9 1/2% Series B Senior Subordinated
Notes due 2009 (the "Exchange Notes") for a like
aggregate principal amount of its outstanding 9 1/2%
Senior Subordinated Notes due 2009 (the "Old Notes" and
together with the Exchange Notes, the "Notes"). The
terms of the Exchange Notes are identical in all
material respects (including principal amount, interest
rate and maturity) to the terms of the Old Notes for
which they may be exchanged pursuant to the Exchange
Offer, except that the Exchange Notes are freely
transferrable by Holders (as defined) thereof (other
than as provided herein), and are not subject to any
covenant regarding registration under the Securities
Act. See "The Exchange Offer."
Interest Payments................. Interest on the Exchange Notes shall accrue from the
last interest payment date (February 15 or August 15) on
which interest was paid on the Notes so surrendered or,
if no interest has been paid on such Notes, from
February 13, 1997 (the "Interest Payment Date").
Minimum Condition................. The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Old Notes being tendered
for exchange.
Expiration Date; Withdrawal of
Tender.......................... The Exchange Offer will expire at 5:00 p.m., New York
City time, on , 1997, unless the Exchange Offer
is extended, in which case the term "Expiration Date"
means the latest date and time to which the Exchange
Offer is extended. Tenders may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
Expiration Date. See "The Exchange Offer-- Withdrawal
Rights."
Exchange Date..................... The date of acceptance for exchange of the Old Notes
will be the fourth business day following the Expiration
Date.
Conditions to the Exchange
Offer........................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. The
Company currently expects that each of the conditions
will be satisfied and that no waivers will be necessary.
See "The Exchange Offer--Certain Conditions to the
Exchange Offer." The Company reserves the right to
terminate or amend the Exchange Offer at any time prior
to the Expiration Date upon the occurrence of any such
condition.
Procedures for Tendering
Old Notes....................... Each holder of Old Notes wishing to accept the Exchange
Offer must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in accordance with
the instructions contained herein and therein, and mail
or otherwise deliver such Letter of
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Transmittal, or such facsimile, together with the Old
Notes and any other required documentation to the
Exchange Agent (as defined) at the address set forth
therein. See "The Exchange Offer--Procedures for
Tendering Old Notes" and "Plan of Distribution."
Use of Proceeds................... There will be no proceeds to the Company from the
exchange of Notes pursuant to the Exchange Offer.
Federal Income Tax Consequences... The exchange of Notes pursuant to the Exchange Offer
should not be a taxable event for federal income tax
purposes. See "Certain U.S. Federal Income Tax
Consequences."
Special Procedures for Beneficial
Owners.......................... Any beneficial owner whose Old Notes are registered in
the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender should
contact such registered holder promptly and instruct
such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to
tender on such beneficial owner's own behalf, such
beneficial owner must, prior to completing and executing
the Letter of Transmittal and delivering the Old Notes,
either make appropriate arrangements to register
ownership of the Old Notes in such beneficial owner's
name or obtain a properly completed bond power from the
registered holder. The transfer of registered ownership
may take considerable time. See "The Exchange
Offer--Procedures for Tendering Old Notes."
Guaranteed Delivery Procedures.... Holders of Old Notes who wish to tender their Old Notes
and whose Old Notes are not immediately available or who
cannot deliver their Old Notes, the Letter of
Transmittal or any other documents required by the
Letter of Transmittal to the Exchange Agent prior to the
Expiration Date must tender their Old Notes according to
the guaranteed delivery procedures set forth in "The
Exchange Offer--Procedures for Tendering Old Notes."
Acceptance of Old Notes and
Delivery of Exchange Notes...... The Company will accept for exchange any and all Old
Notes which are properly tendered in the Exchange Offer
prior to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange Notes issued pursuant to
the Exchange Offer will be delivered promptly following
the Expiration Date. See "The Exchange Offer--Acceptance
of Old Notes for Exchange; Delivery of Exchange Notes."
Effect on Holders of Old Notes.... As a result of the making of, and upon acceptance for
exchange of all validly tendered Old Notes pursuant to
the terms of this Exchange Offer, the Company will have
fulfilled a covenant contained in the Registration
Rights Agreement (the "Registration Rights Agreement")
dated February 13, 1997 among the Company and Chase
Securities Inc., BT Securities Corporation, Salomon
Brothers Inc and Smith Barney Inc. (the "Initial
Purchasers") and, accordingly, there will be no increase
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
in the interest rate on the Old Notes pursuant to the
terms of the Registration Rights Agreement, and the
holders of the Old Notes will have no further
registration or other rights under the Registration
Rights Agreement. Holders of the Old Notes who do not
tender their Old Notes in the Exchange Offer will
continue to hold such Old Notes and will be entitled to
all the rights and limitations applicable thereto under
the Indenture between the Company and Marine Midland
Bank relating to the Old Notes and the Exchange Notes
(the "Indenture"), except for any such rights under the
Registration Rights Agreement that by their terms
terminate or cease to have further effectiveness as a
result of the making of, and the acceptance for exchange
of all validly tendered Old Notes pursuant to, the
Exchange Offer. All untendered Old Notes will continue
to be subject to the restrictions on transfer provided
for in the Old Notes and in the Indenture. To the extent
that Old Notes are tendered and accepted in the Exchange
Offer, the trading market for untendered Old Notes could
be adversely affected.
Consequence of Failure to
Exchange........................ Holders of Old Notes who do not exchange their Old Notes
for Exchange Notes pursuant to the Exchange Offer will
continue to be subject to the restrictions on transfer
of such Old Notes as set forth in the legend thereon as
a consequence of the offer or sale of the Old Notes
pursuant to an exemption from, or in a transaction not
subject to, the registration requirements of the
Securities Act and applicable state securities laws. In
general, the Old Notes may not be offered or sold,
unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state
securities laws. The Company does not currently
anticipate that it will register the Old Notes under the
Securities Act.
Exchange Agent.................... Marine Midland Bank is serving as exchange agent (the
"Exchange Agent") in connection with the Exchange Offer.
See "The Exchange Offer--Exchange Agent."
</TABLE>
TERMS OF THE EXCHANGE NOTES
<TABLE>
<S> <C>
Securities Offered................ $300,000,000 principal amount of 9 1/2% Senior
Subordinated Notes due 2009.
Maturity Date..................... February 15, 2009.
Interest Payment Dates............ February 15 and August 15 of each year, commencing
August 15, 1997.
Optional Redemption............... Except as described below, the Company may not redeem
the Exchange Notes prior to February 15, 2002. On or
after such date, the Company may redeem the Exchange
Notes, in whole or in part, at the redemption prices set
forth herein, together
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
with accrued and unpaid interest, if any, to the date of
redemption. In addition, at any time on or prior to
February 15, 2000, the Company may, subject to certain
requirements, redeem up to 40% of the original aggregate
principal amount of the Exchange Notes with the net
proceeds of one or more Equity Offerings (as defined),
at a price equal to 109.5% of the aggregate principal
amount to be redeemed, together with accrued and unpaid
interest, if any, to the date of redemption; provided
that at least 60% of the original aggregate principal
amount of the Notes remains outstanding immediately
after each such redemption. See "Description of the
Exchange Notes-- Optional Redemption."
Change of Control................. Upon the occurrence of a Change of Control (as defined),
the Company will be required to make an offer to
purchase the Exchange Notes at a price equal to 101% of
the principal amount thereof, together with accrued and
unpaid interest, if any, to the date of purchase. See
"Description of the Exchange Notes--Repurchase at the
Option of Holders--Change of Control."
Ranking........................... The Exchange Notes will be unsecured, will be
subordinated in right of payment to all existing and
future Senior Indebtedness (as defined) of the Company
and will be effectively subordinated to all obligations
of the subsidiaries of the Company. The Exchange Notes
will rank PARI PASSU with any future senior subordinated
indebtedness of the Company and will rank senior to all
other Subordinated Indebtedness (as defined) of the
Company. The Indenture (as defined) permits the Company
to incur additional indebtedness, including up to $550.0
million of Senior Indebtedness under the Credit
Facilities, subject to certain limitations. At December
13, 1996, on a pro forma basis after giving effect to
the Merger and the Financings (including the Offering),
the aggregate amount of the Company's outstanding Senior
Indebtedness would have been approximately $122.2
million (excluding unused commitments), and the Company
would have had no senior subordinated indebtedness
outstanding other than the Old Notes. See "Pro Forma
Consolidated Financial Statements" and "Description of
the Exchange Notes--Subordination."
Certain Covenants................. The Indenture contains covenants, including, but not
limited to, covenants with respect to the following
matters: (i) restricted payments; (ii) limitations on
incurrence of indebtedness and issuance of disqualified
stock; (iii) liens; (iv) merger, consolidation, or sale
of all or substantially all assets; (v) limitation on
transactions with affiliates; (vi) dividend and other
payment restrictions affecting restricted subsidiaries;
(vii) limitation on guarantees of indebtedness by
restricted subsidiaries; (viii) limitation on other
senior subordinated indebtedness; and (ix) asset sales.
See "Description of the Exchange Notes."
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
Absence of Market................. The Exchange Notes are new securities for which there is
currently no established market. Accordingly, there can
be no assurance as to the development or liquidity of
any market for the Exchange Notes. The Company does not
intend to apply for a listing on a securities exchange
of the Exchange Notes.
</TABLE>
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by holders of the Old Notes prior to tendering Old Notes in the
Exchange Offer.
13
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth certain summary consolidated financial and
other data of the Company. The historical consolidated statement of operations
data of the Company for the year ended May 28, 1993 is presented for comparison
to the fiscal years ended June 3, 1994, June 2, 1995 and May 31, 1996 to reflect
the Company's change in fiscal year. The historical consolidated statement of
operations data of the Company for the three fiscal years ended June 3, 1994,
June 2, 1995 and May 31, 1996 have been derived from, and should be read in
conjunction with, the audited consolidated financial statements of the Company
and the related notes thereto included elsewhere in this Prospectus. The
historical unaudited consolidated financial data for the twenty-eight weeks
ended December 15, 1995 and December 13, 1996 have been derived from, and should
be read in conjunction with, the unaudited consolidated financial statements of
the Company and the related notes thereto included elsewhere in this Prospectus.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been included in the unaudited consolidated financial
statements of the Company. Interim results for the twenty-eight weeks ended
December 13, 1996 are not necessarily indicative of results that can be expected
for the entire 1997 fiscal year. The pro forma consolidated financial data have
been derived from the Pro Forma Financial Statements (as defined) and the
related notes thereto included elsewhere herein. The pro forma statement of
operations data for the periods presented give effect to the Merger and related
transactions as if such transactions were consummated as of June 3, 1995 for the
fiscal year ended May 31, 1996 and for the twenty-eight weeks ended December 13,
1996, and as of December 16, 1995 for the twelve months ended December 13, 1996.
The pro forma balance sheet data gives effect to the Merger and related
transactions as if such transactions had occurred as of December 13, 1996. The
statement of operations for the year ended May 28, 1993 is presented for
comparison to the fiscal years ended June 3, 1994, June 2, 1995 and May 31, 1996
to reflect the Company's change in fiscal year. On November 10, 1992, the
Company filed a pre-arranged petition under Chapter 11 of the United States
Bankruptcy Code. On March 31, 1993 the Company emerged from bankruptcy pursuant
to its plan of reorganization (the "Plan of Reorganization"). Due to the
implementation on April 2, 1993 of fresh start reporting ("Fresh Start
Reporting") in accordance with AICPA Statement of Position 90-7 "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code" (SOP 90-7),
the statement of operations for the year ended May 28, 1993 includes both pre-
and post-bankruptcy amounts, and is therefore not comparable to the other
periods presented. The balance sheet data for the Company as of December 13,
1996, and the statement of operations data for the years ended June 3, 1994,
June 2, 1995 and May 31, 1996, and twenty-eight weeks ended December 15, 1995
and December 13, 1996, after giving effect to the Company's Plan of
Reorganization, pursuant to which it emerged from bankruptcy on March 31, 1993,
are not comparable to the historical financial condition or results of
operations of the Company prior to the Plan of Reorganization. See "Pro Forma
Consolidated Financial Statements," "Selected Historical Consolidated Financial
and Other Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the historical consolidated financial statements
and the related notes thereto included elsewhere in this Prospectus.
14
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
TWENTY-EIGHT
FISCAL YEAR ENDED WEEKS ENDED (b) TWELVE MONTHS
YEAR ENDED ---------------------------------- ------------------------------ ENDED
MAY 28, JUNE 3, 1994 JUNE 2, MAY 31, DECEMBER 15, DECEMBER 13, DECEMBER 13,
1993 (a) (53 WEEKS) 1995 1996 1995 1996 1996 (c)
----------- ------------ --------- --------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT CHILD CARE CENTER DATA)
STATEMENT OF OPERATIONS
DATA:
Operating revenues........ $ 447,243 $ 488,726 $ 506,505 $ 541,264 $ 285,392 $ 299,751 $ 555,623
Operating income.......... 23,402 47,166 50,786 51,709 22,363 24,117 53,463
Net investment income..... 8,686 3,176 2,635 250 161 86 175
Interest expense (d)...... 24,709 17,675 17,318 16,727 9,219 8,141 15,649
Net income................ 61,685(e) 17,433 22,066 21,683 8,116 3,318 16,885
OTHER FINANCIAL DATA:
EBITDA (f)................ $ 114,175 $ 73,093 $ 81,492 $ 85,931 $ 40,577 $ 36,931 $ 82,285
Adjusted EBITDA (f)....... 51,399 72,314 77,969 87,165 39,397 41,798 89,566
Adjusted EBITDA margin.... 11.5% 14.8% 15.4% 16.1% 13.8% 13.9% 16.1%
Depreciation.............. 27,997 25,148 28,071 33,972 18,053 19,208 35,127
Capital expenditures...... 38,112 35,710 74,376 67,304 38,933 27,849 56,220
Ratio of earnings to fixed
charges (g)............. (g) 2.3x 2.4x 2.4x 1.9x 2.2x 2.5x
CHILD CARE CENTER DATA:
Number of centers (at end
of period).............. 1,166 1,132 1,137 1,148 1,142 1,148 1,148
Center capacity (at end of
period)................. 138,000 136,000 137,000 141,000 138,000 142,000 142,000
Average occupancy (h)..... 74% 77% 76% 76% 76% 74% 75%
Average three-year-old
weekly tuition rate
(h)..................... $ 83 $ 90 $ 96 $ 100 $ 100 $ 104 $ 104
PRO FORMA DATA:
EBITDA (f)................ $ 85,931 $ 36,931 $ 82,285
Adjusted EBITDA (f)....... 87,165 41,798 89,566
Cash interest expense
(i)..................... 38,001 20,163 37,546
Ratio of Adjusted EBITDA
to cash interest
expense................. 2.3x 2.1x 2.4x
Ratio of earnings to fixed
charges (g)............. 1.2x 1.1x 1.3x
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 13, 1996
------------------------
HISTORICAL PRO FORMA
----------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency) (j).................................................... $ (19,632) $ (19,632)
Total assets........................................................................ 529,438 547,515
Total debt (k)...................................................................... 168,763 422,244
Shareholders' equity (l)............................................................ 255,451 20,047
</TABLE>
- ------------------------------
(a) To facilitate a discussion of the Company's operating performance for the
fiscal year ended June 3, 1994 (a 53-week fiscal year), the corresponding
prior year period ended May 28, 1993 (a 52-week fiscal year) is presented.
Due to the implementation of Fresh Start Reporting, the operating results
for the year ended May 28, 1993 include both pre- and post-bankruptcy
amounts.
(b) The Company's fiscal year ends 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality."
(c) Summary consolidated historical and pro forma financial data for the twelve
months ended December 13, 1996 have been presented in view of the effects of
seasonality upon the results presented for the twenty-eight weeks ended
December 13, 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality."
(d) During the Chapter 11 petition from November 10, 1992 through March 31,
1993, the Company did not pay or accrue interest on approximately $356.5
million of debt obligations classified as "Liabilities subject to settlement
under reorganization proceedings" on the Company's consolidated balance
sheet at January 1, 1993.
(e) In connection with the Company's emergence from bankruptcy in 1993, the
value of cash distributed, new debt and equity securities issued, and
liabilities assumed was $157.6 million less than the allowed claims of
$457.6 million and the resulting gain was recorded as an extraordinary item.
15
<PAGE>
(f) "EBITDA" represents earnings before interest expense, income taxes,
depreciation and amortization. "Adjusted EBITDA" represents EBITDA exclusive
of investment income, litigation settlements and restructuring costs
(income), net (which includes loss on asset impairment) and extraordinary
items as reflected in the following table. Neither EBITDA nor Adjusted
EBITDA is intended to represent cash flow from operations as defined by
generally accepted accounting principles and should not be considered as an
alternative to net income as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity. Adjusted EBITDA is
presented because the Company believes that Adjusted EBITDA represents a
more consistent financial indicator of the Company's ability to service its
debt. The items reflected in the following table are more fully described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
TWENTY-EIGHT
FISCAL YEAR ENDED WEEKS ENDED
---------------------------------------------- --------------------------------
YEAR ENDED JUNE 3, 1994 DECEMBER 15, DECEMBER 13,
MAY 28, 1993 (53 WEEKS) JUNE 2, 1995 MAY 31, 1996 1995 1996
-------------- -------------- -------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
EBITDA............................ $ 114,175 $ 73,093 $ 81,492 $ 85,931 $ 40,577 $ 36,931
Adjustments--Increase (Decrease):
Investment income............... (8,686) (3,176) (2,635) (250) (161) (86)
Gain on litigation
settlements................... -- -- (888) (11,334) (11,334) (1,527)
Restructuring charge............ 103,483 -- -- 6,499 3,996 --
Loss on asset impairment........ -- -- -- 6,319 6,319 --
Extraordinary items............. (157,573) 2,397 -- -- -- 6,480
-------------- -------------- -------------- -------------- --------------- ---------------
Adjusted EBITDA................... $ 51,399 $ 72,314 $ 77,969 $ 87,165 $ 39,397 $ 41,798
-------------- -------------- -------------- -------------- --------------- ---------------
-------------- -------------- -------------- -------------- --------------- ---------------
<CAPTION>
TWELVE MONTHS
ENDED
DECEMBER 13,
1996
---------------
<S> <C>
EBITDA............................ $ 82,285
Adjustments--Increase (Decrease):
Investment income............... (175)
Gain on litigation
settlements................... (1,527)
Restructuring charge............ 2,503
Loss on asset impairment........ --
Extraordinary items............. 6,480
---------------
Adjusted EBITDA................... $ 89,566
---------------
---------------
</TABLE>
(g) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings before income taxes and extraordinary items, plus
fixed charges. Fixed charges consist of interest expense on all
indebtedness, amortization of deferred financing costs, and one-third of
rental expense on operating leases representing that portion of rental
expense deemed by the Company to be attributable to interest. For the year
ended May 28, 1993, the deficiency of earnings to fixed charges was $96.1
million.
(h) Occupancy, a measure of the utilization of center capacity, is defined as
actual operating revenues for the respective period divided by the building
capacity of each of the Company's centers multiplied by such center's basic
tuition rate for full-time, three-year-old students for the respective
period. The three-year-old tuition rate represents the weekly tuition rate
paid by a parent for a three-year-old child to attend a KinderCare center
five days during one week. The three-year-old tuition rate represents an
approximate average of all tuition rates at each center. Center occupancy
mix, however, can significantly affect these averages.
(i) Pro forma cash interest expense is defined as interest expense exclusive of
bank agency fees and amortization of deferred financing costs.
(j) Excludes cash and cash equivalents, bank overdrafts and current portion of
long-term debt.
(k) Total debt includes long-term debt and current portion of long-term debt.
(l) As part of the Merger and related transactions, KKR, through KCLC
Acquisition, contributed $148.75 million in common equity for approximately
85% of the shares outstanding immediately after the Merger, and existing
stockholders retained approximately 15% of the shares outstanding
immediately after the Merger. Thus, including the $26.25 million of equity
that was retained by existing stockholders, the implied value of
shareholders' equity to be purchased and retained in the Merger and related
transactions is approximately $175.0 million.
16
<PAGE>
RISK FACTORS
HOLDERS OF OLD NOTES SHOULD CONSIDER CAREFULLY, IN ADDITION TO THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING FACTORS BEFORE DECIDING
TO TENDER OLD NOTES IN THE EXCHANGE OFFER. THE RISK FACTORS SET FORTH BELOW ARE
GENERALLY APPLICABLE TO THE OLD NOTES AS WELL AS THE EXCHANGE NOTES.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon. In general,
Old Notes may not be offered or sold unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. The Company does not currently intend to register the Old Notes under the
Securities Act. Based on interpretations by the staff of the Commission, the
Company believes that Exchange Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale, resold or otherwise
transferred by Holders thereof (other than any such Holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such Old Notes were acquired in the
ordinary course of such Holders' business and such Holders have no arrangement
with any person to participate in the distribution of such Exchange Notes. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. See "Plan of Distribution." To the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Notes will be adversely affected.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE
The Company incurred substantial indebtedness in connection with the Merger
and the Company is highly leveraged. See "The Merger" and "Capitalization." As
of December 13, 1996, after giving pro forma effect to the Merger and the
Financings (including the Offering), the Company would have had $422.2 million
of consolidated indebtedness and $20.0 million of consolidated shareholders'
equity. Upon completion of the Financings, the Company had consolidated
long-term indebtedness substantially greater than the Company's pre-Merger
long-term indebtedness. Upon execution of the Credit Facilities and consummation
of the Merger, the Company had $251.1 million available to be borrowed under the
$300.0 million Revolving Credit Facility (reduced by $48.9 million of
outstanding letters of credit). Also after giving pro forma effect to such
transactions, the Company's ratio of earnings to fixed charges would have been
1.1 to 1.0 and 1.2 to 1.0 for the twenty-eight weeks ended December 13, 1996 and
for the fiscal year ended May 31, 1996, respectively. Pro forma net income
(loss) for the twenty-eight weeks ended December 13, 1996 and the fiscal year
ended May 31, 1996 would have been $(5.1) million and $6.6 million,
respectively, as compared to $3.3 million and $21.7 million for the same periods
on a historical basis, and pro forma interest expense for the twenty-eight weeks
ended December 13, 1996 and fiscal year ended May 31, 1996 would have been $21.9
million and $41.4 million, respectively, as compared to $8.1 million and $16.7
million for the same periods on a historical basis. See "Capitalization" and
"Pro Forma Consolidated Financial Statements." The Company and its subsidiaries
may incur additional indebtedness in the future, subject to certain limitations
contained in the instruments governing its indebtedness. Accordingly, the
Company will have significant debt service obligations.
The Company's debt service obligations could have important consequences to
holders of the Notes, including the following: (i) a substantial portion of the
Company's cash flow from operations will be dedicated to the payment of
principal and interest on its indebtedness, thereby reducing the funds
17
<PAGE>
available to the Company for operations, future business opportunities and other
purposes and increasing the Company's vulnerability to adverse general economic
and industry conditions; (ii) the Company's ability to obtain additional
financing in the future may be limited; (iii) certain of the Company's
borrowings (including, but not limited to, the amounts borrowed under the Credit
Facilities) will be at variable rates of interest, which could cause the Company
to be vulnerable to increases in interest rates; and (iv) all of the
indebtedness incurred in connection with the Credit Facilities will become due
prior to the time the principal payment on the Notes will become due.
The Company's ability to make scheduled payments of the principal of, or to
pay interest on, or to refinance its indebtedness (including the Notes) and to
make scheduled payments under its operating leases depends on its future
performance, which to a certain extent is subject to economic, financial,
competitive and other factors beyond its control. Based upon the current level
of operations and anticipated growth, management believes that future cash flow
from operations, together with available borrowings under the Revolving Credit
Facility, will be adequate to meet the Company's anticipated requirements for
capital expenditures, interest payments and scheduled principal payments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." There can be no assurance,
however, that the Company's business will continue to generate sufficient cash
flow from operations in the future to service its debt and make necessary
capital expenditures. If unable to do so, the Company may be required to
refinance all or a portion of its existing debt, including the Notes, to sell
assets or to obtain additional financing. There can be no assurance that any
such refinancing would be possible or that any such sales of assets or
additional financing could be achieved.
RESTRICTIVE LOAN COVENANTS
The Credit Facilities and the Indenture contain numerous financial and
operating covenants that limit the discretion of the Company's management with
respect to certain business matters. These covenants place significant
restrictions on, among other things, the ability of the Company to incur
additional indebtedness, to create liens or other encumbrances, to make certain
payments and investments, and to sell or otherwise dispose of assets and merge
or consolidate with other entities. See "Description of Credit Facilities" and
"Description of the Exchange Notes--Certain Covenants." The Credit Facilities
will also require the Company to meet certain financial ratios and tests. A
failure to comply with the obligations contained in the Credit Facilities or the
Indenture could result in an event of default under either the Credit Facilities
or the Indenture which could result in acceleration of the related debt and the
acceleration of debt under other instruments evidencing indebtedness, that may
contain cross-acceleration or cross-default provisions. If, as a result thereof,
a default occurs with respect to Senior Indebtedness, the subordination
provisions in the Credit Facilities or the Indenture would likely restrict
payments to the holders of the Notes.
SUBORDINATION
The Company's obligations under the Notes are subordinate and junior in
right of payment to all existing and future Senior Indebtedness of the Company.
As of December 13, 1996, on a pro forma basis after giving effect to the Merger
and the Financings (including the Offering), the aggregate amount of the
Company's outstanding Senior Indebtedness would have been approximately $122.2
million (excluding unused commitments). Additional Senior Indebtedness may be
incurred by the Company from time to time, subject to certain restrictions. By
reason of such subordination, in the event of an insolvency, liquidation, or
other reorganization of the Company, the lenders under the Credit Facilities and
other creditors who are holders of Senior Indebtedness must be paid in full
before the holders of the Notes may be paid; accordingly, there may be
insufficient assets remaining after payment of prior claims to pay amounts due
on the Notes. In addition, under certain circumstances, no payments may be made
with respect to the Notes if a default exists with respect to Senior
Indebtedness. The Notes are also effectively
18
<PAGE>
subordinated to the obligations of the Company's subsidiaries. In the event of
an insolvency, liquidation or other reorganization of any of the subsidiaries of
the Company, the creditors of the Company (including the holders of the Notes),
as well as stockholders of the Company, will have no right to proceed against
the assets of such subsidiaries or to cause the liquidation or bankruptcy of
such subsidiaries under federal bankruptcy laws. Creditors of such subsidiaries
would be entitled to payment in full from such assets before the Company would
be entitled to receive any distribution therefrom. Except to the extent that the
Company may itself be a creditor with recognized claims against such
subsidiaries, claims of creditors of such subsidiaries will have priority with
respect to the assets and earnings of such subsidiaries over the claims of
creditors of the Company, including claims under the Notes. See "Description of
the Exchange Notes--Subordination."
ENCUMBRANCES ON ASSETS TO SECURE CREDIT FACILITIES
In addition to being subordinated to all existing and future Senior
Indebtedness of the Company, the Notes will not be secured by any of the
Company's assets. The Company's obligations under the Credit Facilities will be
secured by a first priority pledge of and security interest in certain common
stock of certain of the Company's subsidiaries and, in certain circumstances,
non-cash consideration received for certain sales of assets. In addition, the
Indenture permits the Company to incur secured indebtedness in connection with
any Real Estate Financing Transaction (as defined). If the Company becomes
insolvent or is liquidated, or if payment under any of the Credit Facilities or
any Real Estate Financing Transaction is accelerated, the lenders under the
Credit Facilities or such Real Estate Financing Transaction will be entitled to
exercise the remedies available to a secured lender under applicable law.
Accordingly, such lenders will have a prior claim with respect to the assets
securing such indebtedness. See "Description of Credit Facilities" and
"Description of the Exchange Notes."
CHANGE OF CONTROL
The Indenture provides that, upon the occurrence of a Change of Control the
Company will make an offer to purchase all or any part of the Notes at a price
in cash equal to 101% of the aggregate principal amount thereof plus accrued and
unpaid interest, if any, to the date of purchase. The Credit Facilities prohibit
the Company from repurchasing any Notes, except with certain proceeds of one or
more Equity Offerings. The Credit Facilities also provide that certain change of
control events with respect to the Company would constitute a default
thereunder. Any future credit agreements or other agreements relating to Senior
Indebtedness to which the Company becomes a party may contain similar
restrictions and provisions. In the event a Change of Control occurs at a time
when the Company is prohibited from purchasing the Notes, or if the Company is
required to make an Asset Sale Offer (as defined) pursuant to the terms of the
Notes, the Company could seek the consent of its lenders to purchase the Notes
or could attempt to refinance the borrowings that contain such prohibition. If
the Company does not obtain such a consent or refinance such borrowings, the
Company will remain prohibited from purchasing the Notes. In such case, the
Company's failure to purchase tendered Notes would constitute an Event of
Default (as defined) under the Indenture. If, as a result thereof, a default
occurs with respect to any Senior Indebtedness, the subordination provisions in
the Indenture would likely restrict payments to the holders of the Notes. The
provisions relating to a Change of Control included in the Indenture may
increase the difficulty of a potential acquiror obtaining control of the
Company. See "Description of the Exchange Notes--Repurchase at the Option of
Holders--Change of Control."
COMPETITION
The U.S. preschool education and child care industry is highly fragmented
and competitive. The Company's competition consists principally of local nursery
schools and day care centers, some of which are non-profit (including
church-affiliated centers), providers of services that operate out of their
homes and other for-profit companies which may operate a number of centers.
Local nursery schools
19
<PAGE>
and day care centers generally charge less for their services than the Company
charges. Many church-affiliated and other non-profit child care centers have no
or lower rental costs than the Company and may receive donations or other
funding to cover operating expenses. Consequently, tuition rates at these
facilities are commonly less than the Company's rates. Additionally, fees for
home-based care are typically lower than fees for center-based care because
providers of home care are not always required to satisfy the same health,
safety or operational regulations as the Company's centers. The Company's
competition also includes other large, national, for-profit child care companies
that may have more aggressive tuition discounting and different pricing policies
than the Company. As a result of the above factors, the Company could suffer a
greater negative impact than certain of its competitors from downturns in
general economic conditions.
POSSIBLE ADVERSE EFFECT OF GOVERNMENTAL REGULATION AND LICENSING REQUIREMENTS
Child care centers are subject to numerous state and local regulations and
licensing requirements. Although these regulations vary greatly from
jurisdiction to jurisdiction, government agencies generally review the fitness
and adequacy of buildings and equipment, the ratio of staff personnel to
enrolled children, staff training, record keeping, the dietary program, the
daily curriculum and compliance with health and safety standards. Were a
particular center of the Company to fail repeatedly to comply with applicable
regulations, such a center could be subject to state sanctions, which might
include fines, corrective orders, placement on probation or, in more serious
cases, suspension or revocation of the center's license to operate. Although the
Company believes that it is in substantial compliance with laws and regulations
currently in effect, failure to comply with such laws or regulations or the
imposition of additional restrictions on the Company's activities could
materially adversely affect the operations of the Company.
State and local licensing regulations often provide that the licenses held
by the Company may not be transferred. As a result, any transferee of a child
care business must apply to the appropriate administrative body for a new
license. The Company believes that the change in ownership of the equity capital
of the Company effected pursuant to the Merger is not a transfer of the
Company's business under applicable state and local regulations. If any
administrative body took a contrary position, the Company could, in certain
circumstances, be required to apply for relicensing in that jurisdiction. If
such relicensing were to be required, there can be no assurance that the Company
would not have to incur material expenditures to relicense its centers in such
jurisdictions.
GROWTH STRATEGY; MANAGEMENT OF GROWTH
The Company's ability to increase revenues and operating cash flow
significantly over time depends, in part, on its success in acquiring and/or
building new centers on satisfactory terms and successfully integrating them
into the Company's operations. There can be no assurance that acceptable
acquisition opportunities or appropriate sites for the Company's expansion
program will be available. Such availability could be adversely impacted by the
expansion activities of the Company's competitors. In addition, the Company's
ability to take successful advantage of any available acquisition opportunity
will be dependent, in part, on the availability of adequate financial resources.
Furthermore, construction costs, the receipt of necessary regulatory (in
particular zoning) approvals or other factors may slow the Company's building
program.
As the Company's business develops and expands, the Company may need to
implement enhanced operational and financial systems (some of which are already
in place or in the process of being implemented) and may require additional
employees and management, operational and financial resources. There can be no
assurance that the Company will be able to implement and maintain successfully
such operational and financial systems or obtain, integrate and utilize
successfully the required employees and management, operational and financial
resources to manage a rapidly developing and expanding business. Failure to
implement such systems successfully and to use such
20
<PAGE>
resources effectively could have a material adverse effect on the Company.
Furthermore, although the Company's growth strategy contemplates the possibility
of future acquisitions, there can be no assurance that such business
opportunities will be available, or, if available, will be consummated. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Business Strategy."
IMPACT OF POSSIBLE LOSS OF GOVERNMENT FUNDING
During the twenty-eight weeks ended December 13, 1996, approximately 13% of
the Company's operating revenues were generated from federal and state child
care assistance programs. Funding for such programs is subject to changes in
federal and state environments and governmental appropriations processes, which
are unpredictable and outside the Company's control. Accordingly, there is no
assurance that funding for such federal and state programs will continue at
current levels and a significant reduction in such funding may have an adverse
impact on the Company. Although under new legislation, signed by President
Clinton in August 1996, additional funding for child care will be available for
low income families as part of welfare reform, no assurance can be given that
the Company will benefit from any such additional funding. In addition, although
under the Internal Revenue Code of 1986, as amended (the "Code"), certain tax
incentives are available to parents utilizing child care programs, such
provisions of the Code are subject to change. See "Business--Governmental Laws
and Regulation."
ADVERSE PUBLICITY; ABILITY TO OBTAIN INSURANCE
As a result of adverse publicity concerning reported incidents of alleged
child physical and sexual abuse at child care centers and the length of time
before the expiration of applicable statutes of limitations for the bringing of
child abuse and personal injury claims (typically a number of years after the
child reaches the age of majority), many operators of child care centers have
had difficulty obtaining general liability insurance, child abuse liability
insurance or similar liability insurance or have been able to obtain such
insurance only at substantially higher rates. To date, the Company has been able
to obtain insurance in amounts it believes to be appropriate. There can be no
assurance, however, that the Company's insurance premiums will not increase in
the future as a consequence of conditions in the insurance business generally or
the Company's experience in particular or that continuing publicity with respect
to alleged instances of child abuse will not result in the Company's being
unable to obtain insurance. Like its major competitors, the Company is
periodically subject to claims of child abuse arising out of alleged incidents
at its centers. In addition, any adverse publicity concerning reported incidents
of alleged physical or sexual abuse of children at child care centers, including
those of the Company, has the potential to affect occupancy levels at the
Company's centers.
SEASONALITY
The Company's revenues and the initial success of new centers are subject to
seasonal variation. New enrollments are generally highest in September and
January because children return to child care and/or school after summer and
holiday vacations; accordingly, August and December are ideal months to open new
centers. Centers which open at other times usually experience a lower rate of
enrollment during early months of operation. Enrollment generally decreases 5%
to 10% during holiday periods and summer months.
IMPACT OF RECESSION
Demand for the Company's services may be subject to fluctuations in general
economic conditions, and the Company's revenues depend, in part, on the number
of working mothers and working single parents who require child care services.
Recessionary pressure on the economy, and a consequent
21
<PAGE>
reduction in the general labor force, may adversely impact the Company, in part,
because of the tendency of out-of-work parents to stop using child care
services.
CONTROL BY KKR AFFILIATES
Approximately 83.6% of the outstanding shares of Common Stock is owned by
the Partnership, of which KKR Associates (KLC) L.P. ("KKR Associates (KLC)") is
the general partner. The general partner of KKR Associates (KLC) is KKR-KLC
L.L.C., a limited liability company organized under Delaware law. The members of
KKR-KLC L.L.C. are also the members of the limited liability company which is
the general partner of KKR. Accordingly, the members of KKR-KLC L.L.C. control
the Company and have the power to elect all of its directors (other than the
director appointed by Oaktree (as defined)), appoint new management and approve
any action requiring the approval of the Company's stockholders, including
adopting amendments to the Company's Certificate of Incorporation and approving
mergers or sales of substantially all of the Company's assets. The directors
elected by the Partnership will have the authority to effect decisions affecting
the capital structure of the Company, including the issuance of additional
capital stock, the implementation of stock repurchase programs and the
declaration of dividends. There can be no assurance that the interests of the
members of KKR-KLC L.L.C. will not conflict with the interests of holders of the
Exchange Notes. The managing members of KKR-KLC L.L.C. are Messrs. Henry R.
Kravis, George R. Roberts, Robert I. MacDonnell, Paul E. Raether, Michael W.
Michelson, Michael T. Tokarz, James H. Greene, Jr., Perry Golkin, Clifton S.
Robbins, Scott M. Stuart and Edward A Gilhuly. Messrs. Kravis and Roberts are
members of the Executive Committee of KKR-KLC L.L.C. Messrs. Kravis, Roberts and
Robbins are also directors of the Company, as is Mr. Nils P. Brous who is a
limited partner of KKR Associates (KLC). Each of the members of KKR-KLC L.L.C.
is also a member of KKR & Co. L.L.C., the limited liability company which serves
as the general partner of KKR. See "Management," "Ownership of Common Stock" and
"Related Party Transactions."
FRAUDULENT TRANSFER CONSIDERATIONS
Under applicable provisions of the United States Bankruptcy Code or
comparable provisions of state fraudulent transfer or conveyance law, if the
Company, at the time it issued the Exchange Notes, (a) incurred such
indebtedness with the intent to hinder, delay or defraud creditors, or (b)(i)
received less than reasonably equivalent value or fair consideration, and
(ii)(A) was insolvent at the time of such incurrence, (B) was rendered insolvent
by reason of such incurrence (and the application of the proceeds thereof), (C)
was engaged or was about to engage in a business or transaction for which the
assets remaining with the Company constituted unreasonably small capital to
carry on its business, or (D) intended to incur, or believed that it would
incur, debts beyond its ability to pay such debts as they mature, then, in each
such case, a court of competent jurisdiction could avoid, in whole or in part,
the Exchange Notes or, in the alternative, subordinate the Exchange Notes to
existing and future indebtedness of the Company. The measure of insolvency for
purposes of the foregoing would likely vary depending upon the law applied in
such case. Generally, however, a debtor would be considered insolvent if the sum
of its debts, including contingent liabilities, was greater than all of its
assets at a fair valuation, or if the present fair saleable value of its assets
was less than the amount that would be required to pay the probable liabilities
on its existing debts, including contingent liabilities, as such debts become
absolute and matured. Management of the Company believes that, for purposes of
the United States Bankruptcy Code and state fraudulent transfer or conveyance
laws, the Exchange Notes are being issued without the intent to hinder, delay or
defraud creditors and for proper purposes and in good faith, and that the
Company will receive reasonably equivalent value or fair consideration therefor,
and that after the issuance of the Exchange Notes and the application of the net
proceeds therefrom, the Company will be solvent, will have sufficient capital
for carrying on its business and will be able to pay its debts as they mature.
However, there can be no assurance that a court passing on such issues would
agree with the determination of the Company's management.
22
<PAGE>
LACK OF PRIOR MARKET FOR THE EXCHANGE NOTES
The Exchange Notes are being offered to the holders of the Old Notes. The
Old Notes were offered and sold in February 1997 to a small number of
institutional investors and are eligible for trading in the Private Offerings,
Resale and Trading through Automatic Linkages (PORTAL) Market.
The Company does not intend to apply for a listing of the Exchange Notes on
a securities exchange. There is currently no established market for the Exchange
Notes and there can be no assurance as to the liquidity of markets that may
develop for the Exchange Notes, the ability of the holders of the Exchange Notes
to sell their Exchange Notes or the price at which such holders would be able to
sell their Exchange Notes. If such markets were to exist, the Exchange Notes
could trade at prices that may be lower than the initial market values thereof
depending on many factors, including prevailing interest rates and the markets
for similar securities. Although there is currently no market for the Exchange
Notes, the Initial Purchasers have advised the Company that they currently
intend to make a market in the Exchange Notes. However, the Initial Purchasers
are not obligated to do so, and any market making with respect to the Exchange
Notes may be discontinued at any time without notice.
The liquidity of, and trading market for, the Exchange Notes also may be
adversely affected by general declines in the market for similar securities.
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements concerning the
Company's operations, economic performances and financial condition, including,
in particular, the likelihood of the Company's success in developing and
expanding its business. These statements are based upon 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. Some of these assumptions
inevitably will not materialize, and unanticipated events will occur which will
affect the Company's results.
THE MERGER
Certain of the statements made under this heading relating to the Merger are
summaries of the agreements described therein, do not purport to be complete and
are qualified in their entirety by reference to such agreements, which are
incorporated herein by reference. See "Available Information" and "Incorporation
of Certain Information by Reference."
MERGER AGREEMENT
On October 3, 1996, the Company entered into the Merger Agreement, as
amended as of December 27, 1996, with KCLC Acquisition. KCLC Acquisition was a
wholly owned subsidiary of the Partnership. Pursuant to the Merger Agreement, at
the Effective Time KCLC Acquisition merged with and into the Company, with the
Company as the surviving corporation. The Merger Agreement contemplates the
conversion of approximately 93% of the issued and outstanding shares of the
Company's Common Stock at the election of each holder, into $19.00 in cash per
share, and the retention of approximately 7% of the shares by stockholders. In
addition, the Merger Agreement provides for the cancellation and conversion of
each Warrant issued and outstanding immediately prior to the Effective Time into
the right to receive an amount in cash determined as specified in the Merger
Agreement. Because the total number of outstanding shares of Common Stock
decreased from approximately 19,423,577, as of January 8, 1997, to 9,210,526
immediately after the Merger, the approximately 7% of the outstanding Common
Stock (1,381,579 shares) retained by existing stockholders in the Merger
represented approximately 15% of the shares outstanding immediately after the
Merger and the 7,828,947 shares owned by the Partnership represented
approximately 85% of the shares outstanding immediately after the Merger.
23
<PAGE>
STOCKHOLDERS' AGREEMENT
At the Effective Time, the Company, Oaktree Capital Management LLC
("Oaktree"), an affiliate of Oaktree (together with Oaktree, the "Oaktree
Investors" each of which is an affiliate of the TCW Group, Inc.), the
Partnership and an affiliate of the Partnership entered into a stockholders'
agreement (the "Stockholders' Agreement") in fulfillment in part of the terms of
a voting agreement among KCLC Acquisition, Oaktree and certain of Oaktree's
affiliates, dated as of October 3, 1996 and as amended as of December 27, 1996.
Pursuant to such voting agreement, Oaktree and such of its affiliates (who
collectively owned a majority of the issued and outstanding shares of Common
Stock immediately prior to the Effective Time) voted their shares in favor of
the approval and the adoption of the Merger Agreement. As a result of the
election by the Oaktree Investors to retain shares of Common Stock in the
Merger, the Oaktree Investors and the TCW Group, Inc. beneficially own 949,244
shares, or approximately 10.3% of the shares outstanding immediately after the
Merger. Subject to the terms of the Stockholders' Agreement, the Oaktree
Investors are entitled to designate one director to the Board of Directors of
the Company, who, initially, is Mr. Stephen A. Kaplan, a director of the Company
immediately prior to the Effective Time. In addition, the Stockholders'
Agreement provides that (i) the Oaktree Investors have the right to participate
pro rata in certain sales of Common Stock by the Partnership (or its affiliates)
and (ii) the Partnership (or its affiliates) have the right to require the
Oaktree Investors to participate pro rata in certain sales by the Partnership
(or its affiliates). No transferee of shares of Common Stock from any Oaktree
Investor will acquire any rights under the Stockholders' Agreement. The
Stockholders' Agreement will terminate no later than its tenth anniversary, and
may terminate earlier if (a) the number of shares of Common Stock held in the
aggregate by the Oaktree Investors falls below certain ownership levels through
sales or other dilution events (as more fully described therein) or (b) the
Partnership and its affiliates, in the aggregate, own less than 15% of the
outstanding shares of Common Stock, on a fully diluted basis.
USE OF PROCEEDS
There will be no proceeds to the Company from the exchange of Notes pursuant
to the Exchange Offer.
The gross proceeds received by the Company from the Offering of the Old
Notes were $300 million. Such proceeds, together with borrowings under the Term
Loan Facility and the equity contribution by the Partnership, were used upon
consummation of the Merger to pay approximately $382.4 million of cash merger
consideration, repay approximately $107.6 million of indebtedness of the Company
under the Old Bank Credit Facility, and pay an estimated $35.0 million in
transaction fees and expenses (certain of which fees have yet to be paid), which
includes a transaction bonus of $1.0 million payable to certain members of
management of the Company. On a pro forma basis, assuming the Merger occurred on
December 13, 1996, the cash merger consideration and indebtedness under the Old
Bank Credit Facility would have been approximately $367.2 million and $122.5
million, respectively. Such pro forma calculations do not account for the effect
of the exercise of a number of options and warrants prior to the Effective Time.
See "The Merger" and "Capitalization."
24
<PAGE>
CAPITALIZATION
The following table sets forth as of December 13, 1996 the (i) unaudited
consolidated historical capitalization of the Company and (ii) unaudited
consolidated pro forma capitalization of the Company, as adjusted to give effect
to the transactions contemplated by the Merger Agreement, including the sale of
the Old Notes pursuant to the Offering. This table should be read in conjunction
with the "Pro Forma Consolidated Financial Statements" and the notes thereto and
the consolidated financial statements of the Company and its subsidiaries and
the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 13, 1996
----------------------------------
<S> <C> <C>
PRO FORMA
FOR MERGER AND
HISTORICAL RELATED TRANSACTIONS
----------- ---------------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents..................................................... $ 10,426 $ 10,426
----------- ----------
----------- ----------
Debt:
10 3/8% Senior Notes........................................................ $ 211 $ 211
Old Bank Credit Facility.................................................... 122,500 --
Credit Facilities (a)....................................................... -- 75,981
Notes....................................................................... -- 300,000
Other debt (b).............................................................. 46,052 46,052
----------- ----------
Total debt................................................................ 168,763 422,244
Shareholders' equity (c)...................................................... 255,451 20,047
----------- ----------
Total capitalization...................................................... $ 424,214 $ 442,291
----------- ----------
----------- ----------
</TABLE>
- ------------------------
(a) At December 13, 1996, on a pro forma basis after giving effect to the
Merger, the Company would have had additional availability of $251.1 million
under the $300.0 million Revolving Credit Facility (reduced by $48.9 million
of outstanding letters of credit). See "Description of Credit Facilities."
(b) Consists of industrial revenue bonds and obligations secured by mortgages.
(c) As part of the Merger and related transactions, KKR, through KCLC
Acquisition, contributed $148.75 million in common equity for approximately
85% of the shares outstanding immediately after the Merger, and existing
stockholders retained approximately 15% of the shares outstanding
immediately after the Merger. Thus, including the $26.25 million of equity
that was retained by existing stockholders, the implied value of
shareholders' equity purchased and retained in the Merger and related
transactions is approximately $175.0 million.
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<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements (the
"Pro Forma Financial Statements") have been derived by the application of pro
forma adjustments to the Company's historical consolidated financial statements
included elsewhere in this Prospectus. The pro forma consolidated statements of
operations for the periods presented gives effect to the Merger and related
transactions (including the Offering) as if such transactions were consummated
as of June 3, 1995 for the fiscal year ended May 31, 1996 and for the
twenty-eight weeks ended December 13, 1996, and as of December 16, 1995 for the
twelve months ended December 13, 1996. The pro forma consolidated balance sheet
gives effect to the Merger and related transactions as if such transactions had
occurred as of December 13, 1996. The adjustments are described in the
accompanying notes. The Pro Forma Financial Statements should not be considered
indicative of actual results that would have been achieved had the Merger and
related transactions (including the Offering) been consummated on the date or
for the periods indicated and do not purport to indicate balance sheet data or
results of operations as of any future date or for any future period. The Pro
Forma Financial Statements should be read in conjunction with the Company's
historical consolidated financial statements and the notes thereto included
elsewhere in this Prospectus.
The pro forma adjustments were applied to the respective historical
consolidated financial statements to reflect and account for the Merger as a
recapitalization. Accordingly, the historical basis of the Company's assets and
liabilities has not been impacted by the transaction.
26
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 13, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA
----------- ------------ -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents........................................... $ 10,426 $ -- (a) $ 10,426
Receivables......................................................... 15,167 15,167
Prepaid expenses and supplies....................................... 10,240 10,240
Deferred income taxes............................................... 4,664 4,664
----------- -----------
Total current assets............................................ 40,497 40,497
Property and equipment, net......................................... 476,546 476,546
Deferred income taxes............................................... 4,454 4,454
Deferred financing costs............................................ -- 20,000(b) 20,000
Other assets........................................................ 7,941 (1,923)(c) 6,018
----------- ------------ -----------
Total Assets.......................................................... $ 529,438 $ 18,077 $ 547,515
----------- ------------ -----------
----------- ------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................... $ 20,549 $ -- $ 20,549
Accrued liabilities................................................. 40,482 40,482
Current portion of long-term debt................................... 1,095 1,095
----------- -----------
Total current liabilities....................................... 62,126 62,126
Long-term debt........................................................ 167,668 253,481(d) 421,149
Other noncurrent liabilities.......................................... 23,983 23,983
Self insurance liabilities............................................ 20,210 20,210
----------- ------------ -----------
Total liabilities............................................... 273,987 253,481 527,468
Shareholders' equity.................................................. 255,451 (235,404)(e) 20,047
----------- ------------ -----------
Total Liabilities and Shareholders' Equity............................ $ 529,438 $ 18,077 $ 547,515
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
See Notes to Pro Forma Consolidated Balance Sheet.
27
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
The pro forma consolidated financial data have been derived by the
application of pro forma adjustments to the Company's historical consolidated
financial statements for the period noted. The Merger will be accounted for as a
recapitalization which will have no impact on the historical basis of assets and
liabilities. The pro forma consolidated financial data assumes that there are no
dissenting stockholders to the Merger and that all options and warrants will be
redeemed for cash (rather than exercised).
(a) The net effect of $0 reflects the following:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
------------
<S> <C>
SOURCES OF FUNDS
Term Loan Facility.............................................................. $ 75,981
Old Notes....................................................................... 300,000
Equity contribution............................................................. 148,750
------------
Total sources............................................................... $ 524,731
------------
------------
USES OF FUNDS
Purchase equity................................................................. $ 342,623
Options/warrants redeemed....................................................... 24,608
Repayment of Old Bank Credit Facility........................................... 122,500
Estimated transaction fees and expenses......................................... 35,000
------------
Total uses.................................................................. $ 524,731
------------
------------
Net......................................................................... $ 0
------------
------------
</TABLE>
(b) To reflect the anticipated portion of transaction fees which will be
recorded as deferred financing fees and will be amortized over the life of
the debt to be issued.
(c) To reflect the write-off of deferred financing fees associated with the
termination of the Old Bank Credit Facility.
(d) To reflect the following:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
------------
<S> <C>
Repayment of Old Bank Credit Facility........................................... $ (122,500)
Old Notes....................................................................... 300,000
Term Loan Facility.............................................................. 75,981
------------
Total adjustment............................................................ $ 253,481
------------
------------
</TABLE>
28
<PAGE>
(e) To reflect the aggregate net change as a result of the Merger and the
related transactions:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
-------------
<S> <C>
Convert to cash 18.0 million shares of Common Stock............................ $ (342,623)
Issue 7.8 million shares of Common Stock....................................... 148,750
Purchase Warrants.............................................................. (19,897)
Cancellation of Company stock options.......................................... (4,711)
Write-off of deferred financing fees referred to in note (c)................... (1,923)
Estimated transaction fees and expenses (1).................................... (15,000)
-------------
Total...................................................................... $ (235,404)
-------------
-------------
</TABLE>
- ------------------------
(1) Represents the portion of the total $35.0 million of estimated transaction
fees and expenses which will be recorded as an expense. Such estimated
transaction fees and expenses are anticipated to consist of: (i)
professional, advisory and investment banking fees and expenses, (ii)
management bonuses and (iii) miscellaneous fees and expenses such as
printing and filing fees.
29
<PAGE>
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE
MONTHS
ENDED
TWENTY-EIGHT WEEKS ENDED DECEMBER
FISCAL YEAR ENDED MAY 31, 1996 DECEMBER 13, 1996 13, 1996
---------------------------------------- ---------------------------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
PRO FORMA PRO PRO FORMA PRO
HISTORICAL ADJUSTMENTS(A) FORMA HISTORICAL ADJUSTMENTS(A) FORMA HISTORICAL
----------- ---------------- --------- ----------- ---------------- --------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues...... $ 541,264 $ 541,264 $ 299,751 $ 299,751 $ 555,623
Operating expenses...... 489,555 489,555 275,634 275,634 502,160
----------- ---------------- --------- ----------- ---------------- --------- -----------
Operating income........ 51,709 51,709 24,117 24,117 53,463
Net investment income... 250 250 86 86 175
Interest expense........ 16,727 $ 24,717(b) 41,444 8,141 $ 13,763(b) 21,904 15,649
----------- ---------------- --------- ----------- ---------------- --------- -----------
Income before income
taxes and
extraordinary item.... 35,232 (24,717) 10,515 16,062 (13,763) 2,299 37,989
Income tax expense...... 13,549 (9,640)(c) 3,909 6,264 (5,367)(c) 897 14,624
----------- ---------------- --------- ----------- ---------------- --------- -----------
Income before
extraordinary item.... 21,683 (15,077) 6,606 9,798 (8,396) 1,402 23,365
Extraordinary item--loss
on early
extinguishment of
debt, net of income
tax benefit........... 6,480 6,480 6,480
----------- ---------------- --------- ----------- ---------------- --------- -----------
Net income (loss)....... $ 21,683 $ (15,077) $ 6,606 $ 3,318 $ (8,396) $ (5,078) $ 16,885
----------- ---------------- --------- ----------- ---------------- --------- -----------
----------- ---------------- --------- ----------- ---------------- --------- -----------
Ratio of earnings to
fixed charges (d)..... 1.2x 1.1x
--------- ---------
<CAPTION>
<S> <C> <C>
PRO FORMA PRO
ADJUSTMENTS(A) FORMA
---------------- ---------
<S> <C> <C>
Operating revenues...... $ 555,623
Operating expenses...... 502,160
---------------- ---------
Operating income........ 53,463
Net investment income... 175
Interest expense........ $ 25,194(b) 40,843
---------------- ---------
Income before income
taxes and
extraordinary item.... (25,194) 12,795
Income tax expense...... (9,826)(c) 4,798
---------------- ---------
Income before
extraordinary item.... (15,368) 7,997
Extraordinary item--loss
on early
extinguishment of
debt, net of income
tax benefit........... 6,480
---------------- ---------
Net income (loss)....... $ (15,368) $ 1,517
---------------- ---------
---------------- ---------
Ratio of earnings to
fixed charges (d)..... 1.3x
---------
</TABLE>
See Notes to Pro Forma Consolidated Statements of Operations.
30
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
The pro forma consolidated financial data have been derived by the
application of pro forma adjustments to the Company's historical consolidated
financial statements for the periods noted. The Merger will be accounted for as
a recapitalization which will have no impact on the historical basis of assets
and liabilities. The pro forma consolidated financial data assumes that there
are no dissenting stockholders to the Merger and that all options and Warrants
will be redeemed for cash (rather than exercised).
(a) As provided in note (e) to the Pro Forma Consolidated Balance Sheet, the pro
forma adjustments exclude (i) $4.7 million of compensation expense related
to the Company stock options assumed to be canceled in conjunction with the
Merger, (ii) write-off of $1.9 million of deferred financing fees associated
with the termination of the Old Bank Credit Facility, and (iii) $15.0
million of estimated transaction fees and expenses to be incurred in
connection with the Merger. Such amounts represent non-recurring expenses
which the Company anticipates will be reflected in the Consolidated
Statement of Operations for the period including the Merger.
(b) The pro forma adjustment to interest expense reflects the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED TWENTY-EIGHT WEEKS ENDED TWELVE MONTHS ENDED
MAY 31, 1996 DECEMBER 13, 1996 DECEMBER 13, 1996
------------------ -------------------------- ---------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest on historical debt repaid in Merger..... $ (12,241) $ (6,138) $ (11,764)
Interest expense on the Term Loan Facility
(assumed 8.5% rate)............................ 6,458 3,478 6,458
Interest expense on the Notes (at a 9.5% rate)... 28,500 15,346 28,500
Amortization of deferred financing costs
(10 years)..................................... 2,000 1,077 2,000
-------- -------- --------
Total adjustment............................. $ 24,717 $ 13,763 $ 25,194
-------- -------- --------
-------- -------- --------
</TABLE>
A 0.125% increase or decrease in the assumed interest rate on the Term Loan
Facility would change the pro forma interest expense by $0.10 million for
the fiscal year ended May 31, 1996 and the twelve months ended December 13,
1996 and $0.05 million for the twenty-eight weeks ended December 13, 1996.
(c) To reflect the tax effects of the pro forma adjustments at a 39% effective
income tax rate.
(d) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings before income taxes and extraordinary items, plus
fixed charges. Fixed charges consist of interest expense on all
indebtedness, amortization of deferred financing costs, and one-third of
rental expense on operating leases representing that portion of rental
expense deemed by the Company to be attributable to interest.
31
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth selected historical consolidated financial
and other data for the Company. The historical consolidated financial statements
of the Company for the five most recent fiscal years have been audited. The
historical consolidated financial data for the three fiscal years ended May 31,
1996 have been derived from, and should be read in conjunction with, the audited
consolidated financial statements of the Company and the related notes thereto
included elsewhere in this Prospectus. The historical unaudited consolidated
financial data for the twenty-eight weeks ended December 15, 1995 and December
13, 1996 have been derived from, and should be read in conjunction with, the
unaudited consolidated financial statements of the Company and the related notes
thereto included elsewhere in this Prospectus. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included in
the unaudited consolidated financial statements of the Company. Interim results
for the twenty-eight weeks ended December 13, 1996 are not necessarily
indicative of results that can be expected for the entire 1997 fiscal year. The
consolidated statement of operations for the year ended May 28, 1993 is
presented for comparison to the fiscal years ended June 3, 1994, June 2, 1995
and May 31, 1996 to reflect the Company's change in fiscal year. On November 10,
1992, the Company filed a pre-arranged petition under Chapter 11 of the United
States Bankruptcy Code. On March 31, 1993 the Company emerged from bankruptcy
pursuant to its Plan of Reorganization. Due to the implementation on April 2,
1993 of Fresh Start Reporting in accordance with AICPA Statement of Position
90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code" (SOP 90-7), the consolidated statement of operations for the year ended
May 28, 1993 includes both pre- and post- bankruptcy amounts, and is therefore
not comparable to the other periods presented. The consolidated balance sheet
data for the Company as of April 2, 1993, May 28, 1993, June 3, 1994, June 2,
1995, May 31, 1996 and December 13, 1996 and the consolidated statements of
operations data for the eight weeks ended May 28, 1993, the years ended June 3,
1994, June 2, 1995 and May 31, 1996, and the twenty-eight weeks ended December
15, 1995 and December 13, 1996, after giving effect to the Company's Plan of
Reorganization, pursuant to which it emerged from bankruptcy on March 31, 1993,
are not comparable to the historical financial condition or results of
operations of the Company prior to the Plan of Reorganization. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Notes to Consolidated Financial Statements" included elsewhere in this
Prospectus.
32
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
PRE-CONFIRMATION
----------------------------------------- POST-CONFIRMATION
--------------------------------------------
FISCAL YEAR ENDED
------------------------- FISCAL YEAR ENDED
JANUARY 3, THIRTEEN YEAR ENDED EIGHT ----------------------------
1992 JANUARY 1, WEEKS ENDED MAY 28, WEEKS ENDED, JUNE 3, 1994
(53 WEEKS) 1993 APRIL 2, 1993 1993 (A) MAY 28, 1993 (53 WEEKS) JUNE 2, 1995
------------ ----------- -------------- ----------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT CHILD CARE CENTER DATA)
STATEMENT OF OPERATIONS DATA:
Operating revenues......... $ 411,040 $ 437,203 $ 114,705 $ 447,243 $ 72,612 $ 488,726 $ 506,505
Operating expenses......... 412,299(c) 413,800(c) 104,675 423,841 68,609 441,560 455,719
------------ ----------- -------------- ----------- -------------- ------------- -------------
Operating income (loss).... (1,259) 23,403 10,030 23,402 4,003 47,166 50,786
Net investment income
(loss)................... (1,216) 5,908 3,309 8,686 140 3,176 2,635
Interest expense (d)....... 46,578 38,400 692 24,709 3,253 17,675 17,318
Reorganization items....... -- 1,879 101,604(e) 103,483(e) -- -- --
------------ ----------- -------------- ----------- -------------- ------------- -------------
Income (loss) before income
taxes and extraordinary
items.................... (49,053) (10,968) (88,957) (96,104) 890 32,667 36,103
Income tax expense
(benefit)................ 1,655 (246) 404 (216) 273 12,837 14,037
------------ ----------- -------------- ----------- -------------- ------------- -------------
Income (loss) before
extraordinary items...... (50,708) (10,722) (89,361) (95,888) 617 19,830 22,066
Extraordinary items, net of (2,397)
income taxes............. -- -- 157,573(f) 157,573(f) -- (g) --
------------ ----------- -------------- ----------- -------------- ------------- -------------
Net income (loss).......... $ (50,708) $ (10,722) $ 68,212 $ 61,685 $ 617 $ 17,433 $ 22,066
------------ ----------- -------------- ----------- -------------- ------------- -------------
------------ ----------- -------------- ----------- -------------- ------------- -------------
OTHER FINANCIAL DATA:
EBITDA (h)................. $ 24,594 $ 54,281 $ 76,173 $ 114,175 $ 8,373 $ 73,093 $ 81,492
Adjusted EBITDA (h)........ 25,810 50,252 16,895 51,399 8,233 72,314 77,969
Adjusted EBITDA margin..... 6.3% 11.5% 14.7% 11.5% 11.3% 14.8% 15.4%
Depreciation............... 27,069 26,849 6,865 27,997 4,230 25,148 28,071
Capital expenditures....... 27,492 34,498 5,927 38,112 5,839 35,710 74,376
Ratio of earnings to fixed
charges (i).............. (i) (i) (i) (i) 1.2x 2.3x 2.4x
CHILD CARE CENTER DATA:
Number of centers (at end
of period)............... 1,240 1,196 1,166 1,166 1,166 1,132 1,137
Center capacity (at end of
period) (j).............. 146,000 140,000 139,000 138,000 138,000 136,000 137,000
Average occupancy (k)...... 70% 72% 75% 74% 75% 77% 76%
Average three-year-old
weekly tuition rate
(k)...................... $ 80 $ 83 $ 83 $ 83 $ 83 $ 90 $ 96
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital
(deficiency) (l)......... $ (79,554) $ (23,789) $ (23,844) $ (22,745) $ (22,745) $ (23,323) $ (37,115)
Total assets............... 486,942 516,282 457,000 457,388 457,388 456,920 501,274
Total debt (m)............. 402,146 400,136 218,175 218,037 218,037 178,692 160,394
Shareholders' equity
(deficiency) (n)......... (34,164) (44,886) 178,870 179,487 179,487 206,905 244,239
<CAPTION>
See Notes to Selected Historical Consolidated Financial and Other Data.
<CAPTION>
TWENTY-EIGHT WEEKS
ENDED (B)
------------------------------
DECEMBER 15, DECEMBER 13,
MAY 31, 1996 1995 1996
------------- -------------- --------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues......... $ 541,264 $ 285,392 $ 299,751
Operating expenses......... 489,555 263,029 275,634
------------- -------------- --------------
Operating income (loss).... 51,709 22,363 24,117
Net investment income
(loss)................... 250 161 86
Interest expense (d)....... 16,727 9,219 8,141
Reorganization items....... -- -- --
------------- -------------- --------------
Income (loss) before income
taxes and extraordinary
items.................... 35,232 13,305 16,062
Income tax expense
(benefit)................ 13,549 5,189 6,264
------------- -------------- --------------
Income (loss) before
extraordinary items...... 21,683 8,116 9,798
Extraordinary items, net of
income taxes............. -- -- (6,480) (g)
------------- -------------- --------------
Net income (loss).......... $ 21,683 $ 8,116 $ 3,318
------------- -------------- --------------
------------- -------------- --------------
OTHER FINANCIAL DATA:
EBITDA (h)................. $ 85,931 $ 40,577 $ 36,931
Adjusted EBITDA (h)........ 87,165 39,397 41,798
Adjusted EBITDA margin..... 16.1% 13.8% 13.9%
Depreciation............... 33,972 18,053 19,208
Capital expenditures....... 67,304 38,933 27,849
Ratio of earnings to fixed
charges (i).............. 2.4x 1.9x 2.2x
CHILD CARE CENTER DATA:
Number of centers (at end
of period)............... 1,148 1,142 1,148
Center capacity (at end of
period) (j).............. 141,000 138,000 142,000
Average occupancy (k)...... 76% 76% 74%
Average three-year-old
weekly tuition rate
(k)...................... $ 100 $ 100 $ 104
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital
(deficiency) (l)......... $ (36,584) $ (29,519) $ (19,632)
Total assets............... 525,476 513,190 529,438
Total debt (m)............. 146,617 159,856 168,763
Shareholders' equity
(deficiency) (n)......... 265,458 245,222 255,451
</TABLE>
33
<PAGE>
NOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
(a) To facilitate a discussion of the Company's operating performance for the
fiscal year ended June 3, 1994 (a 53-week fiscal year), the corresponding
prior year period ended May 28, 1993 (a 52-week fiscal year) is presented.
For purposes of this discussion, this period is referred to as "the year
ended May 28, 1993." Due to the implementation of Fresh Start Reporting, the
consolidated financial statements of the Company after April 2, 1993 are not
comparable in all material respects to any financial statements prior to
that time, and the operating results for the year ended May 28, 1993 include
both pre- and post-bankruptcy amounts.
(b) The Company's fiscal year ends 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality."
(c) In fiscal year 1991, the Company recorded charges related to the write-off
of goodwill of its wholly-owned subsidiary, Sylvan Learning Corporation. In
fiscal years 1991 and 1992, portions of the 1990 closed center reserves were
recaptured. The net effect of these items was to increase operating expenses
by $7.3 million in fiscal year 1991 and to reduce operating expenses by $4.0
million in fiscal year 1992. In addition, debt restructuring costs of $7.0
million and $5.3 million are included in operating expenses for fiscal years
1991 and 1992, respectively. Debt restructuring costs represent legal and
other professional fees incurred in connection with the Company's efforts to
reorganize its debt prior to filing for Chapter 11 on November 10, 1992.
(d) During the Chapter 11 petition from November 10, 1992 through March 31,
1993, the Company did not pay or accrue interest on approximately $356.5
million of debt obligations classified as "Liabilities subject to settlement
under reorganization proceedings" on the Company's consolidated balance
sheet at January 1, 1993.
(e) Reorganization items for the year ended May 28, 1993 and the 13 weeks ended
April 2, 1993 include $97.7 million of net adjustments to state assets and
liabilities at fair value in connection with the adoption of Fresh Start
Reporting.
(f) In connection with the Company's emergence from bankruptcy in 1993, the
value of cash distributed, new debt and equity securities issued, and
liabilities assumed was $157.6 million less than the allowed claims of
$457.6 million and the resulting gain was recorded as an extraordinary item.
(g) In fiscal 1994 and during the twenty-eight weeks ended December 13, 1996,
the Company retired debt prior to maturity, the losses on which were
recorded as extraordinary items.
(h) "EBITDA" represents earnings before interest expense, income taxes,
depreciation and amortization. "Adjusted EBITDA" represents EBITDA exclusive
of investment income, litigation settlements and restructuring costs
(income), net (which includes loss on asset impairment) and extraordinary
items as reflected in the following table. Neither EBITDA nor Adjusted
EBITDA is intended to represent cash flow from operations as defined by
generally accepted accounting principles and should not be considered as an
alternative to net income as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity. Adjusted EBITDA is
presented because the Company believes that Adjusted EBITDA represents a
more consistent financial indicator of the Company's ability to service its
debt. The items reflected in the following table are more fully described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED
JANUARY 3, ----------------------------
1992 JANUARY 1, YEAR ENDED JUNE 3, 1994
(53 WEEKS) 1993 MAY 28, 1993 (53 WEEKS) JUNE 2, 1995
----------- ----------- ------------- ------------- -------------
EBITDA.......................................... $ 24,594 $ 54,281 $ 114,175 $ 73,093 $ 81,492
Adjustments--Increase (Decrease):
Investment income............................. 1,216 (5,908) (8,686) (3,176) (2,635)
Gain on litigation settlements................ -- -- -- -- (888)
Restructuring charge.......................... -- 1,879 103,483 -- --
Loss on asset impairment...................... -- -- -- -- --
Extraordinary items........................... -- -- (157,573) 2,397 --
----------- ----------- ------------- ------------- -------------
Adjusted EBITDA................................. $ 25,810 $ 50,252 $ 51,399 $ 72,314 $ 77,969
----------- ----------- ------------- ------------- -------------
----------- ----------- ------------- ------------- -------------
<CAPTION>
<S> <C> <C> <C>
TWENTY-EIGHT WEEKS ENDED
--------------------------------
DECEMBER 15, DECEMBER 13,
MAY 31, 1996 1995 1996
------------- --------------- ---------------
EBITDA.......................................... $ 85,931 $ 40,577 $ 36,931
Adjustments--Increase (Decrease):
Investment income............................. (250) (161) (86)
Gain on litigation settlements................ (11,334) (11,334) (1,527)
Restructuring charge.......................... 6,499 3,996 --
Loss on asset impairment...................... 6,319 6,319 --
Extraordinary items........................... -- -- 6,480
------------- --------------- ---------------
Adjusted EBITDA................................. $ 87,165 $ 39,397 $ 41,798
------------- --------------- ---------------
------------- --------------- ---------------
</TABLE>
(i) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income taxes and extraordinary
items, plus fixed charges. Fixed charges consist of interest expense on all
indebtedness, amortization of deferred financing costs, and one-third of
rental expense on operating leases representing that portion of rental
expense deemed by the Company to be attributable to interest. For the fiscal
years ended January 3, 1992 and January 1, 1993, the deficiency of earnings
to fixed charges was $49.1 million and $11.0 million, respectively. For the
thirteen weeks ended April 2, 1993, the deficiency of earnings to fixed
34
<PAGE>
charges was $89.0 million. For the year ended May 28, 1993, the deficiency
of earnings to fixed charges was $96.1 million.
(j) Prior to January 4, 1992, the Company utilized licensed capacity in
measuring its center capacity. As of January 4, 1992, the Company changed
its method of measuring center capacity to building capacity. As of April 2,
1992, aggregate building capacity was approximately 101.0% of licensed
capacity.
(k) Occupancy, a measure of the utilization of center capacity, is defined as
actual operating revenues for the respective period divided by the building
capacity of each of the Company's centers multiplied by such center's basic
tuition rate for full-time, three-year-old students for the respective
period. The three-year-old tuition rate represents the weekly tuition rate
paid by a parent for a three-year-old child to attend a KinderCare center
five days during one week. The three-year-old tuition rate represents an
approximate average of all tuition rates at each center. Center occupancy
mix, however, can significantly affect these averages.
(l) Excludes cash and cash equivalents, bank overdrafts and current portion of
long-term debt.
(m) Total debt includes long-term debt, current portion of long-term debt and,
at January 1, 1993, debt obligations of $356.5 million included in the
classification, "Liabilities subject to settlement under reorganization
proceedings" on the Company's consolidated balance sheet.
(n) As part of the Merger and related transactions, KKR, through KCLC
Acquisition, contributed $148.75 million in common equity for approximately
85% of the shares outstanding immediately after the Merger, and existing
stockholders retained approximately 15% of the shares outstanding
immediately after the Merger. Thus, including the $26.25 million of equity
that was retained by existing stockholders, the implied value of
shareholders' equity purchased and retained in the Merger and related
transactions is approximately $175.0 million.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this document. The
Company's fiscal year ends on the Friday closest to May 31. The information
presented herein refers to the twenty-eight weeks ended December 13, 1996
("year-to-date 1997") and December 15, 1995 ("year-to-date 1996") and the years
ended May 31, 1996 ("fiscal 1996"), June 2, 1995 ("fiscal 1995"), and June 3,
1994 ("fiscal 1994"). The sixteen weeks ended September 20, 1996, and the twelve
weeks ended December 13, 1996 are defined as "first quarter 1997" and "second
quarter 1997," respectively. Fiscal 1996 and fiscal 1995 were 52-week fiscal
years. Fiscal 1994 was a 53-week fiscal year with the additional week included
in the fourth quarter.
Occupancy, a measure of the utilization of center capacity, is defined as
actual operating revenues for the respective period divided by the building
capacity of each of the Company's centers multiplied by such center's basic
tuition rate for a full-time, three-year-old student for the respective period.
The three-year-old tuition rate represents the weekly tuition rate paid by a
parent for a three-year-old child to attend a KinderCare center five days during
one week. The three-year-old tuition rate represents an approximate average of
all tuition rates at each center. Center occupancy mix, however, can
significantly affect these averages with respect to any specific child care
center. This revenue measurement of center capacity utilization does not
necessarily reflect the actual number of full and part-time children enrolled.
THE TWENTY-EIGHT WEEKS ENDED DECEMBER 13, 1996, COMPARED TO THE TWENTY-EIGHT
WEEKS ENDED DECEMBER 15, 1995
The Company's operating results for the comparative twenty-eight week
periods were as follows (dollars in thousands):
<TABLE>
<CAPTION>
CHANGE
------------------------
<S> <C> <C> <C> <C> <C> <C>
YEAR-TO-DATE PERCENT OF YEAR-TO-DATE PERCENT OF PERCENT OF
1997 REVENUES 1996 REVENUES AMOUNT REVENUES
------------ ----------- ------------ ----------- --------- -------------
Operating revenues.......................... $ 299,751 100.0% $ 285,392 100.0% $ 14,359 -- %
------------ ----- ------------ ----- --------- ---
Operating expenses:
Salaries, wages and benefits.............. 162,215 54.1 150,814 52.9 11,401 1.2
Depreciation.............................. 19,208 6.4 18,053 6.3 1,155 0.1
Rent...................................... 14,507 4.8 14,367 5.0 140 (0.2)
Other..................................... 81,231 27.1 80,814 28.3 417 (1.2)
Litigation settlements and restructuring
costs (income), net..................... (1,527) (0.5) (1,019) (0.3) (508) (0.2)
------------ ----- ------------ ----- --------- ---
Total operating expenses.............. 275,634 91.9 263,029 92.2 12,605 (0.3)
------------ ----- ------------ ----- --------- ---
Operating income............................ $ 24,117 8.1% $ 22,363 7.8% $ 1,754 0.3%
------------ ----- ------------ ----- --------- ---
------------ ----- ------------ ----- --------- ---
Centers open at the end of each period...... 1,148 1,142 6
------------ ------------ ---------
------------ ------------ ---------
</TABLE>
OPERATING REVENUES. Operating revenues increased $14.4 million, or 5.0%, to
$299.8 million year-to-date 1997 versus year-to-date 1996. The increase in
revenues is attributable to 4.7% and 4.2% weighted average tuition increases
implemented during the second quarter of fiscal 1997 and fiscal 1996,
respectively, and new centers opened or acquired during fiscal 1996 and first
quarter 1997. These revenue increases were partially offset by center closings
during fiscal 1996 and first quarter 1997 and declines in total company average
occupancy in year-to-date 1997. Same center revenues, defined as revenues from
centers in operation during both full periods, were up 2.9% over year-to-date
1996. Same
36
<PAGE>
center revenue increases associated with the tuition increases for year-to-date
1997 were partially offset by same center occupancy declines during second
quarter 1997.
Total company average occupancy decreased to 74.2% year-to-date 1997 from
75.6% year-to-date 1996. Same center average occupancy also decreased to 74.8%
year-to-date 1997 from 76.2% year-to-date 1996. The Company believes these
declines in occupancy were caused by a variety of factors, including in
particular, the following recently implemented initiatives: (a) a reduced, lower
cost marketing program, (b) an expanded employee child care discount program
that may preclude the enrollment of tuition paying children, and (c) changes in
field operations management which provide less direct center supervision. The
Company is in the process of evaluating such initiatives.
During year-to-date 1997, the Company opened 11 new centers: ten KinderCare
community centers and one KinderCare at Work-Registered Trademark- center; and
closed 11 centers. During year-to-date 1996 (including the conversion of one
community center to a Kid's Choice-TM- center), the Company opened 22 new
centers: 11 community centers, four KinderCare at Work-Registered Trademark-
centers, and seven Kid's Choice-TM- centers; and closed 17 centers. Since the
end of second quarter 1996, the Company has opened a total of 26 new centers
with an average building capacity of 177 children and has closed 20 centers with
an average building capacity of 100 children. Total center capacity has
increased to approximately 142,000 at the end of second quarter 1997 from
approximately 138,000 at the end of second quarter 1996.
SALARIES, WAGES AND BENEFITS. Salaries, wages and benefits expense
increased $11.4 million or 7.6%, to $162.2 million year-to-date 1997 versus the
comparable period in 1996. As a percentage of operating revenues, salaries,
wages and benefits increased to 54.1% year-to-date 1997 from 52.9% year-to-date
1996. Approximately 58% of the year-to-date increases are attributable to
increased center staff hours. Average hourly center staff wages increased
approximately 4% for year-to-date 1997 versus the comparable period in 1996. As
a percentage of operating revenues, a portion of the increase in salaries, wages
and benefits is due to an approximately 28% increase in employee-enrolled
children (who are only charged an administrative fee plus either a discounted
tuition fee or no tuition) in year-to-date 1997 versus year-to-date 1996, which
resulted in additional staffing costs without a commensurate increase in
operating revenues. The increase in employee-enrolled children is due to an
enhanced staff discount program initiated to improve staff retention. Management
has revised and continues to evaluate this program. Further, benefit costs have
increased slightly due to the partial implementation of new employee health
insurance plans. Higher center labor costs associated with these benefits have
been partially offset by improvements in field overhead and management
reorganizations implemented during 1996.
DEPRECIATION. Depreciation expense increased to $19.2 million year-to-date
1997 from $18.0 million year-to-date 1996 due to asset additions related to
renovations of existing centers, purchases of short-lived assets, and to the
opening of 26 new centers, offset partially by the closing of 20 centers since
the end of second quarter 1996 and by a reduction in depreciation expense
related to the end of the estimated depreciable lives of certain assets.
RENT. Rent expense increased to $14.5 million year-to-date 1997 from $14.4
million year-to-date 1996. Eleven leased centers have been opened and 15 leased
centers have been closed since the end of second quarter 1996.
OTHER. Other operating expenses increased to $81.2 million year-to-date
1997 from $80.8 million year-to-date 1996. As a percentage of operating
revenues, other operating expenses decreased to 27.1% year-to-date 1997 from
28.3% year-to-date 1996. This margin improvement is principally due to a
reduced, lower cost marketing program and improved administrative and center
support efficiencies from re-engineering efforts initiated during fiscal 1996.
37
<PAGE>
LITIGATION SETTLEMENTS AND RESTRUCTURING COSTS (INCOME), NET.
LITIGATION SETTLEMENTS. During first quarter 1996, the Company received
the final cash distribution of $11.3 million from The Enstar Group, Inc.
("Enstar"), the Company's former parent, in settlement of the Company's
$12.0 million claim against Enstar in U.S. Bankruptcy Court in Montgomery,
Alabama. During second quarter 1997, the Company received a $1.5 million
interest payment from Enstar in connection with this claim.
RESTRUCTURING. On June 15, 1995, the Board of Directors appointed Dr.
Sandra Scarr, Chairman of the Board, to be Chief Executive Officer ("CEO"),
replacing the former CEO whose resignation was effective on the same date.
Subsequent to this appointment, the Company made substantial changes to its
field operations management and support functions. As a result of these
changes, the Company charged $4.0 million of restructuring costs, primarily
severance agreements, against fiscal 1996 earnings during first quarter
1996.
Although substantial reorganization changes were implemented during
fiscal 1996, the Company continues to evaluate certain other support
functions and systems in an effort to improve future operating effectiveness
and efficiencies, as well as to improve the quality of services.
During first quarter 1996, management limited Kid's Choice-TM-
development to contracts in process until the concept is more fully
developed, and recorded an impairment loss of $6.3 million, consisting of a
writedown of $5.3 million for the recoverability of long lived assets,
primarily leasehold improvements, and $1.0 million for anticipated lease
termination costs.
OPERATING INCOME. Operating income increased $1.8 million, or 7.8% to $24.1
million year-to-date 1997 as compared to year-to-date 1996. Operating income
before litigation settlements and restructuring costs increased $1.2 million, or
5.8%, to $22.6 million year-to-date 1997 as compared to year-to-date 1996 for
the reasons discussed above.
Year-to-date 1997 EBITDA, defined as earnings before interest expense,
income taxes, depreciation, and amortization, of $36.9 million was $3.6 million
below year-to-date 1996. As a percentage of operating revenues, EBITDA for
year-to-date 1997 was 12.3% versus 14.2% for year-to-date 1996. Adjusted EBITDA,
defined as EBITDA excluding the effects of investment income; litigation
settlements and restructuring costs (income), net; and extraordinary items, was
$41.8 million year-to-date 1997, an increase of $2.4 million over year-to-date
1996. As a percentage of operating revenues, Adjusted EBITDA improved to 13.9%
year-to-date 1997 versus 13.8% year-to-date 1996. Neither EBITDA nor Adjusted
EBITDA is intended to indicate that cash flow is sufficient to fund all of the
Company's cash needs or represent cash flow from operations as defined by
generally accepted accounting principles.
NET INVESTMENT INCOME. Net investment income was $0.1 million year-to-date
1997 versus $0.2 million year-to-date 1996.
INTEREST EXPENSE. Interest expense decreased to $8.1 million from $9.2
million for year-to-date 1997 versus year-to-date 1996. The Company's weighted
average interest rate on its long-term debt, including debt cost amortization,
was 9.5% year-to-date 1997 versus 10.9% year-to-date 1996.
INCOME TAX EXPENSE. Income tax expense for year-to-date 1997 of $6.3
million is in excess of amounts computed by applying statutory federal income
tax rates to income before income taxes due primarily to state income taxes.
38
<PAGE>
THE FISCAL YEAR ENDED MAY 31, 1996, COMPARED TO THE FISCAL YEAR ENDED JUNE 2,
1995
The Company's operating results for the comparative fiscal years were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
CHANGE
----------------------
<S> <C> <C> <C> <C> <C> <C>
MAY 31, PERCENT OF JUNE 2, PERCENT OF PERCENT OF
1996 REVENUES 1995 REVENUES AMOUNT REVENUES
----------- ----------- ----------- ----------- --------- -----------
Operating revenues............................ $ 541,264 100.0% $ 506,505 100.0% $ 34,759 -- %
----------- ----- ----------- ----- --------- -----------
Operating expenses:
Salaries, wages and benefits................ 284,115 52.5 263,527 52.0 20,588 0.5
Depreciation................................ 33,972 6.3 28,071 5.5 5,901 0.8
Rent........................................ 26,515 4.9 26,099 5.2 416 (0.3)
Other....................................... 143,469 26.5 138,910 27.5 4,559 (1.0)
Litigation settlements and restructuring
costs (income), net....................... 1,484 0.3 (888) (0.2) 2,372 0.5
----------- ----- ----------- ----- --------- -----------
Total operating expenses................ 489,555 90.5 455,719 90.0 33,836 0.5
----------- ----- ----------- ----- --------- -----------
Operating income.............................. $ 51,709 9.5% $ 50,786 10.0% $ 923 (0.5)%
----------- ----- ----------- ----- --------- -----------
----------- ----- ----------- ----- --------- -----------
Centers open at the end of each fiscal year... 1,148 1,137 11
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
OPERATING REVENUES. Fiscal 1996 operating revenues increased $34.8 million
or 6.9% over fiscal 1995. The increase in operating revenues is primarily
attributable to a 4.2% weighted average tuition increase implemented during
second quarter 1996 and to new center openings and acquisitions, offset by a
slight decline in same center occupancy and center closings. Fiscal 1996 same
center operating revenues, defined as centers in operation during both full
years, increased 4.5% over fiscal 1995.
Total company average occupancy decreased slightly to 75.9% in fiscal 1996
from 76.3% in fiscal 1995. Same center average occupancy remained almost
constant at 76.9% for fiscal 1996 compared to 77.1% for fiscal 1995. The slight
decrease in same center average occupancy is attributable to heavy competitor
promotional activities and increasing market price sensitivities during the fall
of 1995.
During fiscal 1996 (including the conversion of one community center to a
Kid's Choice-TM- center), the Company opened 37 new centers: 22 KinderCare
community centers, six KinderCare at Work-Registered Trademark- centers and nine
Kid's Choice-TM- centers; and closed or sold 26 centers. During fiscal 1995
(including the conversion of three community centers to Kid's Choice-TM-
centers), the Company opened or acquired 45 new centers: 29 KinderCare community
centers (including 12 acquired centers), three KinderCare at
Work-Registered Trademark- centers and 13 Kid's Choice-TM- centers; and closed
or sold 40 centers. The average capacity for new community center openings or
acquisitions was 175 and 163 in fiscal 1996 and 1995, respectively, while closed
center average capacity was 103 and 112, respectively, and the average capacity
of the new Kid's Choice-TM- centers is 149. Total center capacity increased from
137,000 at the end of fiscal 1995 to 141,000 at the end of fiscal 1996.
SALARIES, WAGES AND BENEFITS. Salaries, wages and benefits expense
increased, as a percentage of operating revenues, to 52.5% in fiscal 1996 from
52.0% in fiscal 1995. The increase is attributable to increased hours and wage
rates since the end of fiscal 1995 offset partially by improvements in field
overhead and administrative costs due to management reorganizations.
DEPRECIATION. Depreciation expense increased $5.9 million to $34.0 million
in fiscal 1996 from $28.1 million in fiscal 1995. This increase is primarily
attributable to the opening of 36 new centers and to the expenditure of $27.3
million in fiscal 1996 for center renovations and short-lived assets, such as
the
39
<PAGE>
computers for children's educational programs, offset somewhat by the closing or
sale of 25 older centers in fiscal 1996.
RENT. Rent expense increased $0.4 million in fiscal 1996 from fiscal 1995.
This increase is attributable to rent incurred on new Kid's Choice-TM- and
community center leases offset partially by the closing of 17 leased community
centers and the favorable effects of the disposal of some leased vehicles.
OTHER. Other operating expenses, as a percentage of operating revenues,
decreased to 26.5% in fiscal 1996 from 27.5% in fiscal 1995. This improvement is
primarily due to: (1) a decrease in insurance costs due to improving claims
experience, (2) gains on the sales of assets, and (3) improvements associated
with the field management reorganization such as decreases in travel costs and
office supplies. These improvements are partially offset by increased costs
associated with upgrades in the food and educational programs and increased
marketing costs.
OPERATING INCOME. Fiscal 1996 operating income increased 1.8% or $0.9
million from fiscal 1995. As a percentage of operating revenues, fiscal 1996
operating margin of 9.5% decreased from the prior year operating income margin
of 10.0% for the reasons discussed above. Before litigation settlements and
restructuring costs, fiscal 1996 operating income of $53.2 million is $3.3
million better than fiscal 1995 operating income of $49.9 million and, as a
percentage of revenues, operating income margin remained about flat at 9.8%.
Fiscal 1996 EBITDA, defined as earnings before interest expense, income
taxes, depreciation and amortization, increased 5.4% or $4.4 million from fiscal
1995. As a percentage of operating revenues, EBITDA decreased to 15.9% for
fiscal 1996 from 16.1% for fiscal 1995. Adjusted EBITDA increased 11.8% or $9.2
million to $87.2 million from $78.0 million in fiscal 1995, and, as a percentage
of operating revenues, improved to 16.1% from 15.4%. Neither EBITDA nor Adjusted
EBITDA is intended to indicate that cash flow is sufficient to fund all of the
Company's cash needs or represent cash flow from operations as defined by
generally accepted accounting principles.
NET INVESTMENT INCOME. Net investment income was $0.2 million for fiscal
1996 compared to $2.6 million for fiscal 1995. The decrease is primarily due to
the sale of securities during fiscal 1995.
INTEREST EXPENSE. Interest expense decreased to $16.7 million for fiscal
1996 from $17.3 million for fiscal 1995. This decrease is attributable to a
reduction of long-term debt obligations offset by higher average interest rates.
The Company's weighted average interest rate on its long-term debt, including
amortization of debt issuance costs, was 10.8% for fiscal 1996 versus 10.0% for
fiscal 1995.
INCOME TAX EXPENSE. Income tax expense for fiscal 1996 of $13.5 million was
in excess of amounts computed by applying statutory federal income tax rates to
income before income taxes due primarily to state income taxes. Additional
paid-in capital was increased by $4.1 million for tax benefits recognized in
fiscal 1996 relating to valuation allowances established for deferred taxes at
April 2, 1993, the effective date of the Company's emergence from bankruptcy.
40
<PAGE>
THE FISCAL YEAR ENDED JUNE 2, 1995 COMPARED TO THE FISCAL YEAR ENDED JUNE 3,
1994
The Company's operating results for the comparative fiscal years were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
CHANGE
------------------------
<S> <C> <C> <C> <C> <C> <C>
JUNE 2, PERCENT OF JUNE 3, PERCENT OF PERCENT OF
1995 REVENUES 1994(A) REVENUES AMOUNT REVENUES
----------- ----------- ----------- ----------- --------- -------------
Operating revenues............................ $ 506,505 100.0% $ 488,726 100.0% $ 17,779 -- %
----------- ----- ----------- ----- --------- ---
Operating expenses:
Salaries, wages and benefits................ 263,527 52.0 256,468 52.5 7,059 (0.5)
Depreciation................................ 28,071 5.5 25,148 5.1 2,923 0.4
Rent........................................ 26,099 5.2 22,563 4.6 3,536 0.6
Other....................................... 138,910 27.5 137,381 28.1 1,529 (0.6)
Gain on litigation settlements.............. (888) (0.2) -- 0.0 (888) (0.2)
----------- ----- ----------- ----- --------- ---
Total operating expenses................ 455,719 90.0 441,560 90.3 14,159 (0.3)
----------- ----- ----------- ----- --------- ---
Operating income.............................. $ 50,786 10.0% $ 47,166 9.7% $ 3,620 0.3%
----------- ----- ----------- ----- --------- ---
----------- ----- ----------- ----- --------- ---
Centers open at the end of each fiscal year... 1,137 1,132 5
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
- ------------------------
(a) Fiscal 1994 was a 53-week year.
OPERATING REVENUES. Including the 53rd week in fiscal 1994, fiscal 1995
operating revenues (52 weeks) increased $17.8 million or 3.6%. After adjusting
fiscal 1994 to a comparable 52-week basis, fiscal 1995 revenues of $506.5
million increased $27.3 million or 5.7% over fiscal 1994. The increase in
operating revenues is primarily attributable to tuition increases. In fiscal
1995, weighted average tuition rates were increased approximately 4.4% during
the second quarter. In fiscal 1994, weighted average tuition rates were
increased 4.8% during the second quarter and increased an additional 1.0% during
the fourth quarter. Fiscal 1995 revenues also were favorably impacted by $0.5
million from 12 centers acquired on May 5, 1995. Fiscal 1995 same center
revenues, defined as centers in operation during both full years, increased 5.8%
over fiscal 1994, after adjusting fiscal 1994 to a comparable 52-week basis.
Total company average occupancy decreased slightly to 76.3% in fiscal 1995
from 76.5% in fiscal 1994. Same center average occupancy remained almost
constant at 77.1% for fiscal 1995 compared to 77.4% for fiscal 1994. The slight
decrease in occupancy is attributable to new center openings and a softer than
expected third and fourth quarter.
During fiscal 1995 (including the conversion of three community centers to
Kid's Choice-TM- centers), the Company opened or acquired 45 new centers: 29
KinderCare community centers (including 12 acquired centers of which 10 centers
were acquired in a single transaction), three KinderCare at
Work-Registered Trademark- centers and 13 Kid's Choice-TM- centers; and closed
or sold 40 centers. During fiscal 1994 (including the conversion of two
community centers to Kid's Choice-TM- centers), the Company opened 31 new
centers: four KinderCare community centers, four KinderCare at
Work-Registered Trademark- centers and 23 Kid's Choice-TM- centers; and closed
or sold 65 centers. The average capacity for new community center openings was
163 and 171 in fiscal 1995 and 1994, respectively, while closed center average
capacity was 112 and 101, respectively. Total center capacity remained
approximately the same.
SALARIES, WAGES AND BENEFITS. Salaries, wages and benefits expense
decreased, as a percentage of operating revenues, to 52.0% in fiscal 1995 from
52.5% in fiscal 1994. These improvements reflect continued management focus on
center staff scheduling initiated in early fiscal 1994, which led to improvement
throughout fiscal 1994 and 1995 and favorable cost reductions in employee
medical costs
41
<PAGE>
due to new program roll-outs and management focus on medical cost containment.
The improvement in center staff productivity (calculated as a percentage of
revenues) was partially offset by increased support services and the expansion
of the Kid's Choice-TM- format as the Company continued its focus on improving
the quality of services and the expansion of new centers and new center format
concepts.
DEPRECIATION. Depreciation expense increased $2.9 million to $28.1 million
in fiscal 1995 from $25.2 million in fiscal 1994. The increase is attributable
to the opening of 42 new centers, of which 28 were owned, offset somewhat by the
closing or sale of 37 older centers, of which only nine were owned, and
depreciation on short-lived assets acquired in fiscal 1995.
RENT. Rent expense increased $3.5 million in fiscal 1995 from fiscal 1994.
This increase is primarily attributable to an increase in rent on the Company's
vehicle leases and rent incurred on new Kid's Choice-TM- leases.
OTHER. Other operating expenses, as a percentage of operating revenues,
decreased to 27.5% in fiscal 1995 from 28.1% in fiscal 1994. This improvement is
mostly due to a decrease in insurance costs from improving claims experience,
which was partially offset by increases in support services, new center
development, replacement of educational supplies, and pre-opening and start-up
costs of new centers.
GAIN ON LITIGATION SETTLEMENTS. In third quarter 1995, the Company received
approximately $0.9 million in connection with litigation settlements with Enstar
and KinderCare's former Chairman of the Board.
OPERATING INCOME. Including the 53rd week in fiscal 1994, fiscal 1995
operating income (52 weeks) increased 7.7% or $3.6 million. After adjusting
fiscal 1994 to a comparable 52-week basis operating income for fiscal 1995 of
$50.8 million increased 9.8% or $4.5 million over fiscal 1994. As a percentage
of operating revenues, fiscal 1995 operating margin of 10.0% improved over the
prior year operating income margin of 9.7% for the reasons discussed above.
Including the 53rd week in fiscal 1994, fiscal 1995 EBITDA, defined as
earnings before interest expense, income taxes, depreciation and amortization,
increased 11.5% or $8.4 million for fiscal 1995 (52 weeks) versus fiscal 1994.
After adjusting fiscal 1994 to a comparable 52-week basis, EBITDA increased 8.6%
or $6.4 million over fiscal 1994 EBITDA. As a percentage of operating revenues,
the EBITDA margin, after adjusting fiscal 1994 to a comparable 52-week basis,
improved to 16.1% for fiscal 1995 from 15.7% for fiscal 1994. Including the 53rd
week in fiscal 1994, Adjusted EBITDA increased 7.8% or $5.7 million to $78.0
million for fiscal 1995 from $72.3 million in fiscal 1994. As a percentage of
operating revenues, it improved to 15.4% from 14.8%. After adjusting fiscal 1994
to a comparable 52-week basis, Adjusted EBITDA increased 8.4% or $6.1 million to
$78.0 million for fiscal 1995 from $71.9 million in fiscal 1994. As a percentage
of operating revenues, it improved to 15.4% from 15.0%. 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 decreased $0.6 million from
$3.2 million in fiscal 1994 to $2.6 million in fiscal 1995. During fiscal 1995,
the Company recognized a $2.0 million gain on the sale of securities and earned
$0.6 million of interest on cash balances. In fiscal 1994, a $1.9 million gain
was recognized on the collection and retirement of the note receivable received
in conjunction with the sale of Sylvan Learning Corporation ("Sylvan"), a wholly
owned subsidiary, in July 1993, and earned $1.3 million interest on cash
balances.
INTEREST EXPENSE. Interest expense decreased slightly to $17.3 million for
fiscal 1995 from $17.7 million for fiscal 1994. This decrease is attributable to
a reduction of long term debt obligations offset by higher average interest
rates and amortization of debt issuance costs associated with the Refinancing
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<PAGE>
Plan. The "Refinancing Plan," effective as of June 2, 1994, consisted of the
sale of $100.0 million principal amount of the 10 3/8% Senior Notes, the
execution of the Old Bank Credit Facility and a $35.0 million letter of credit
facility and the repayment in full of the Company's floating rate senior secured
notes due 2000 and the 12% senior secured notes due 2002, in an amount
aggregating $173.6 million (including accrued interest and redemption premiums).
The Company's weighted average interest rate on its long-term debt, including
amortization of debt issuance costs, was 10.0% for fiscal 1995 versus 9.6% for
fiscal 1994.
INCOME TAX EXPENSE. Income tax expense for fiscal 1995 of $14.0 million is
in excess of amounts computed by applying statutory federal income tax rates to
income before income taxes due primarily to state income taxes. Additional
paid-in capital was increased by $13.9 million for tax benefits recognized in
fiscal 1995 relating to valuation allowances established for deferred taxes at
April 2, 1993, the effective date of the Company's emergence from a
pre-organized bankruptcy.
LIQUIDITY AND CAPITAL RESOURCES
POST-MERGER (INCLUDING THE FINANCINGS)
The Company's principal sources of liquidity are cash flow generated from
operations and borrowings under the $300.0 million Revolving Credit Facility.
The Company's principal uses of liquidity will be to meet debt service
requirements, finance the Company's capital expenditures and provide working
capital.
The Company incurred substantial indebtedness in connection with the Merger.
On a pro forma basis to reflect the Merger, the Company had approximately $422.2
million of consolidated indebtedness as compared to $168.8 million of
consolidated indebtedness at December 13, 1996. The Company's debt service
obligations could have important consequences to holders of the Exchange Notes.
See "Risk Factors."
The Financings include $390.0 million under the Credit Facilities comprised
of a $90.0 million Term Loan Facility, of which $50.0 million was drawn at the
Effective Time with an additional amount to be drawn, and a $300.0 million
Revolving Credit Facility and the Offering of $300.0 million of Old Notes. The
gross proceeds from the Offering, together with borrowings under the Term Loan
Facility and the equity contribution by the Partnership, were used upon
consummation of the Merger to pay cash merger consideration, repay indebtedness
of the Company and pay transaction fees and expenses in connection therewith. At
December 13, 1996, on a pro forma basis after giving effect to the Merger, the
Company would have borrowed approximately $76.0 million under the Term Loan
Facility, issued $300.0 million of the Old Notes, and would have had additional
availability of $251.1 million under the $300.0 million Revolving Credit
Facility (reduced by $48.9 million of outstanding letters of credit).
The Term Loan Facility is also subject to mandatory prepayment with the
proceeds of certain asset sales and certain debt offerings and a portion of
Excess Cash Flow (as defined in the Credit Facilities). The Term Loan Facility
will terminate nine years after the Effective Time and will provide for nominal
annual amortization. The Revolving Credit Facility will terminate seven years
after the Effective Time.
The Company utilized approximately $56.5 million of net operating loss
carryforwards to offset taxable income in its 1994, 1995 and 1996 fiscal years.
Approximately $20.0 million of net operating loss carryforwards is available to
be utilized in the current and future fiscal years. If such net operating losses
were reduced, the Company could be required to pay additional taxes and
interest, thereby reducing available cash.
CAPITAL EXPENDITURES
The Company anticipates substantial increases in its capital expenditures
budget over the next several years. During fiscal 1997, the Company expects to
open 16 to 17 new centers consisting of 14 to
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<PAGE>
15 community centers, one KinderCare at Work-Registered Trademark- center and
one center in the United Kingdom. The number of new center openings is down from
the 20 to 23 centers originally planned for 1997 because three community centers
originally scheduled to open in fiscal 1997 are now expected to open in fiscal
1998 and because of a reduction in planned openings in the United Kingdom from
two or three centers to one center. 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 regular practice of closing a select number of centers per year that have
been identified as underperforming. The length of time from site selection to
the opening of a center ranges from 18 to 24 months. The average total cost per
community center ranges from approximately $1.2 million to $1.8 million
depending upon 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.
During the twenty-eight weeks ended December 13, 1996, the Company opened
ten community centers and one KinderCare at Work-Registered Trademark- center.
There are no planned additions to the Company's Kid's Choice-TM- format as
management does not believe the new format concept is meeting its full potential
and needs further refinement. The Company currently anticipates that any Kid's
Choice-TM- center that is underperforming when its lease expires will be closed
at that time. Fiscal 1996 new center openings totaled 37 centers (including the
conversion of one community center to a Kid's Choice-TM- center); consisting of
22 KinderCare community centers, six KinderCare at Work-Registered Trademark-
centers and nine Kid's Choice-TM- centers. This total compares to 45 center
openings or acquisitions in fiscal 1995, consisting of 29 KinderCare community
centers (including 12 acquired centers of which 10 centers were acquired in a
single transaction), three KinderCare at Work-Registered Trademark- centers and
13 Kid's Choice-TM- centers.
Capital expenditures year-to-date 1997 amounted to approximately $27.8
million. Approximately $7.6 million was spent on renovations and improvements to
existing facilities, approximately $4.1 million was spent on computers for
children's educational programs, approximately $14.0 million was spent on new
center development, and the remaining approximately $2.1 million was spent on
corporate information systems.
Capital expenditures during fiscal 1996 amounted to approximately $67.3
million. Approximately $14.9 million was spent on renovations and improvements
to existing facilities, approximately $12.4 million was spent on equipment
purchases, including $0.5 million on computers for children's educational
programs, and the remaining $40.0 million was spent on new center development.
Capital expenditures during fiscal 1995 amounted to approximately $74.4 million.
During fiscal 1995, approximately $13.5 million was spent on renovations and
improvements to existing facilities, approximately $17.4 million was spent on
equipment purchases, including $6.8 million on computers for children's
educational programs, and the remaining $43.5 million was spent on new center
development.
Management believes that cash flow generated from operations and borrowings
under the $300.0 million 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 near term, if the
Company were to reduce substantially or postpone its capital expenditures,
management believes there would be no substantial impact on current operations
and it is likely that more cash would be available for working capital needs and
debt
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service. In the long term, if these expenditures were substantially reduced, in
management's opinion, its operations and its cash flow would be adversely
impacted.
YEAR TO DATE FISCAL YEAR 1997
The Company's consolidated net cash flow from operations year-to-date 1997
was $16.6 million, compared to $26.8 million for year-to-date 1996. The reduced
cash flow from operations year-to-date 1997 is due primarily to the receipt of a
$1.5 million interest payment from Enstar offset by a $5.2 million interest
payment on the Company's 10 3/8% Senior Notes during year-to-date 1997, as
compared to the Company's receipt of the final cash distribution of $11.3
million from Enstar offset by a $5.0 million one-time restructuring charge
during year-to-date 1996. As of December 13, 1996, the Company had $10.4 million
in cash and cash equivalents and its ratio of current assets to current
liabilities was 0.65 to 1 at December 13, 1996 versus 0.58 to 1 at May 31, 1996.
During first quarter 1997, the Company purchased $30.0 million aggregate
principal amount of its 10 3/8% Senior Notes at an aggregate price of $31.5
million. This transaction resulted in an extraordinary loss of $1.2 million, net
of income taxes, in first quarter 1997. During second quarter 1997, the Company
announced and completed a tender offer and consent solicitation for its
outstanding 10 3/8% Senior Notes seeking the elimination of substantially all of
the restrictive covenants, and 99.7% of the remaining notes were purchased at an
aggregate price of $76.8 million. This second transaction resulted in an
extraordinary loss of $5.3 million, net of income taxes, recorded in second
quarter 1997. The Company increased its Existing Bank Credit Facility by $50.0
million to $200.0 million to finance the tender offer.
On June 3, 1996, the Board of Directors authorized the repurchase of $23.0
million of the Company's Common Stock. As of the end of the first quarter 1997,
1,111,500 shares and 435,000 warrants had been repurchased for $18.3 million.
All shares that were repurchased have been retired. No shares of Common Stock or
warrants have been purchased since July 22, 1996.
FISCAL YEAR 1996
The Company's consolidated net cash flow from operations for fiscal year
1996 was $75.9 million compared to $73.0 million for the corresponding period in
fiscal year 1995.
During first quarter 1996, the Company received the final cash distribution
of $11.3 million from Enstar in connection with a settlement of the Company's
claim against Enstar in U.S. Bankruptcy Court in Montgomery, Alabama. During
second quarter 1996, the Company sold holdings in certain investments for $3.4
million. During fiscal 1996, the Company received $2.0 million in cash from the
repayments of notes receivable related to the sales of centers in prior years.
In addition, the Company also received $3.7 million in cash from the sale of
assets during the year.
FISCAL YEAR 1995
The Company's consolidated net cash flow from operations for the fiscal year
1995 was $73.0 million compared to $74.4 million for the corresponding period in
fiscal year 1994.
Other income included approximately $2.0 million from the sale of investment
securities during the third and fourth quarter of fiscal year 1995. In late
fiscal year 1994, the Company coordinated the transfer and sale of its fleet
vehicle leases from one leasing company to another and entered into a contract
with the new leasing company. As a result, during the first quarter of fiscal
1995, the Company received approximately $7.8 million relating to prepayments
and accelerated payments of principal required by the previous lessor. Also
included in cash flow from other income was $0.4 million received from the claim
against Enstar.
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RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), was issued. SFAS 123
encourages companies to adopt a fair value based method of accounting for
stock-based compensation plans in place of the intrinsic value based method
provided for by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25). Companies which continue to apply the
provisions of APB 25 must make pro forma disclosures in the notes to their
financial statements of net income and earnings per share as if the fair value
based method of accounting defined in SFAS 123 had been applied. The Company
plans to adopt SFAS 123 in fiscal year 1997 on a pro forma disclosure basis.
SEASONALITY
New enrollments are generally highest in September and January, with
attendance declining 5% to 10% during the summer months and the year-end holiday
period. As a result, the Company seeks to open centers in August and December in
anticipation of the peak enrollment periods. The combination of decreased
attendance and escalated center development in the summer months and during the
year-end holiday period may result in decreased liquidity during these periods.
GOVERNMENTAL LAWS AND REGULATIONS
There are certain tax incentives for child care programs. Section 21 of the
Code provides a federal income tax credit ranging from 20% to 30% of certain
child care expenses for "qualifying individuals" (as defined therein). The fees
paid to the Company for child care services by eligible taxpayers qualify for
the tax credit, subject to the limitations of Section 21. Approximately 13% of
the Company's operating revenues are generated from federal and state child care
assistance programs, primarily the Child Care and Development Block Grant and
At-Risk Programs. These programs are designed to assist low-income families with
child care expenses and are administered through various state agencies.
Although under new legislation, signed by President Clinton in August 1996,
additional funding for child care will be available for low income families as
part of welfare reform, no assurance can be given that the Company will benefit
from any such additional funding.
INFLATION AND WAGE INCREASES
Approximately 58.0% of operating expenses during fiscal 1996 consisted of
salary, wages and benefits. As of May 31, 1996, the Company's average wage rate
for hourly employees was $6.45 per hour, compared to the current federal minimum
wage rate of $4.75 per hour.
Management does not believe that the effect of inflation on the results of
the Company's operations has been significant in recent periods. 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 to be effective
on September 1, 1997. Management currently believes that the new wage rates,
including the effects of wage compression (commensurate wage increases granted
to certain hourly employees (with two or more years experience at KinderCare at
the time of such increase) earning more than minimum wage), will result in
increased expenses of approximately $0.3 million in fiscal 1997 and $1.5 million
in fiscal 1998. On an annualized basis, the total effect of the two-step minimum
wage increases is expected to be approximately $1.8 million and the full effect
will not be experienced until fiscal 1999. The Company believes that, through
increases in its tuition rates, it can recover any increase in expenses caused
by the 1996-1997 wage adjustments and additional compensation adjustments
necessitated by such increases in the minimum wage rate. However, there can be
no assurance that the Company will be able to increase its rates sufficiently to
offset such increased costs. The Company continually evaluates its wage
structure and may implement further changes in addition to those discussed
above.
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BUSINESS
GENERAL
KinderCare, founded in 1969, is the largest provider of for-profit preschool
educational and child care services in the United States based upon number of
centers operated, children served, operating revenues and operating income. The
Company provides center-based preschool educational and child care services five
days a week throughout the year to children between the ages of six weeks and
twelve years. At December 13, 1996, the Company operated 1,148 child care
centers, of which 736 are owned, located in 38 states and the United Kingdom and
had enrollment of approximately 125,000 full-time and part-time children. The
Company's total center capacity at December 13, 1996 was approximately 142,000
full-time children. For the fiscal years ended May 31, 1996 and June 2, 1995,
average occupancy was 75.9% and 76.3%, respectively, and the average full-time
three-year-old weekly tuition rate (which the Company believes approximates the
Company's average full-time weekly tuition rate) was $100 and $96, respectively.
For the twenty-eight weeks ended December 13, 1996, average occupancy was 74.2%,
and the average full-time three-year-old weekly tuition rate was $104. For the
twelve months ended December 13, 1996, the Company generated operating revenues
of $555.6 million and EBITDA of $89.6 million.
KinderCare seeks to differentiate its educational and other child care
services through its Whole Child Development concept with professionally
planned, age-specific educational programs. This concept includes programs that
provide children with activities that support physical, intellectual, emotional,
and social development. New programs are developed and existing programs are
frequently enhanced by the Company's education department, under the leadership
of two professionals with Ph.D.'s in early childhood education/curriculum
supervision. The programs use developmentally appropriate materials, activities
and resources which cater to the differing needs of various age groups and are
used by center teachers as the foundation for each week's program. The programs
include age-appropriate experiences in areas such as reading, math, science and
language, and provide a range of opportunities for motor skill development
through indoor and outdoor activities. "Computer Clubs," a program for children
of preschool and school age, provides educational opportunities linked to the
curriculum for children to acquire computer literacy at an early age. These
programs are further enhanced by "Playscapes," which are designed to create an
outdoor learning environment, and the Company's Let's Move, Let's Play-TM-
movement video for children. The Company's Whole Child Development programs are
provided in Company centers designed and tailored specifically to accommodate
the needs and safety requirements of children. Centers are staffed with a
director, an assistant director and an appropriate number of staff and teachers
as required by state licensing requirements and Company standards.
The Company operates three types of child care centers--KinderCare community
centers, KinderCare at Work-Registered Trademark- centers and Kid's Choice-TM-
centers. KinderCare community centers, which comprise approximately 93% of the
Company's centers, and KinderCare at Work-Registered Trademark- centers
typically provide educational and child care services to children between the
ages of six weeks and 12 years. Kid's Choice-TM- centers are for school age
children and are provided in separate facilities designed specifically for this
age group. The Company's centers are open throughout the year, generally Monday
through Friday from 6:30 a.m. to 6:00 p.m., although hours vary by location.
Children are usually enrolled on a weekly basis for either full-day or half-day
sessions and are accepted, where capacity permits, on an hourly basis. The
Company's tuition rates vary for children of different ages and with location,
with the tuition for three-year-old children approximating the average tuition
rate charged for all children. Centers are staffed with a director, an assistant
director and an appropriate number of staff and teachers as required by state
licensing requirements and Company standards. As of December 13, 1996, land and
buildings with respect to the 736 centers owned by the Company had a net book
value of $392.9 million.
The principal executive offices of the Company are located at 2400
Presidents Drive, Montgomery, Alabama 36116, and its telephone number is (334)
277-5090.
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THE CHILD CARE INDUSTRY
FAVORABLE DEMOGRAPHICS AND SOCIAL TRENDS. The U.S. child care industry
(including home-based care, employer on-site care, and care delivered by private
facilities, government-sponsored institutions, church-affiliated centers,
colleges and universities, group day care center chains, and civic groups such
as the YMCA) has grown at a compound annual growth rate of 13.4% from $5.7
billion in revenues in 1982 to an estimated $29.3 billion in 1995, and is
expected to grow at a 6.8% compound annual growth rate for the rest of the
decade, according to Marketdata Enterprises, Inc. This growth has been, and is
expected to continue to be, driven by several demographic and social trends,
including: (i) an increase in the number of births as compared generally to the
1970's and 1980's, (ii) mothers continuing to enter the work force, and (iii) a
significant increase in the popularity of center-based care. According to the
United States National Center for Health Statistics, in 1989 (for the first time
since 1964, the final year of the "baby boom") and in each year since then
through 1995, the annual number of births approximated four million per year.
The annual number of births is expected to remain at or around this level
through 2010. Furthermore, the number of children under the age of five grew
from approximately 16.1 million in 1975 to an estimated 20.2 million in 1995,
according to the Census Bureau. These trends are complemented by the continued
increase in mothers entering the work force. According to the USBLS, the
percentage of mothers in the work force that have children under the age of six,
relative to all mothers that have children under the age of six, has risen from
approximately 39% in 1975 to an estimated 61% in 1995, and the percentage of
mothers in the work force that have children between the ages of five and
twelve, relative to all mothers that have children between the ages of five and
twelve, has risen from 53% in 1975 to 75% in 1995.
Finally, there has also been a significant increase in the use of child care
centers by families with both working and non-working mothers as a method of
care for preschool age children. The Company believes this increase is due in
part to the recognition of the importance of early childhood development and
education. Center-based care typically offers a more structured curriculum,
better educational materials, more experienced personnel and more children for
social interaction than alternative forms of child care. Center-based care has
become an increasingly popular form of non-parental care for families with
working mothers, accounting for approximately 30% of such care in 1993,
according to the most recent data available from the Census Bureau, up from
about 6% in 1965, according to NAEYC. Furthermore, 22% of children under the age
of six with mothers not in the labor force were enrolled in center-based child
care programs in 1995, according to the U.S. Department of Education.
FRAGMENTED INDUSTRY. The U.S. child care industry is highly fragmented,
with the aggregate capacity of the largest 50 for-profit child care companies
capable of serving less than 1% of the potential child care market, or
approximately 506,000 children out of a total of 51 million children under the
age of twelve in the United States as of January 1, 1996, according to CHILD
CARE INFORMATION EXCHANGE and Company estimates. KinderCare is the only child
care company that has total center capacity in excess of 100,000 children and
the only company to operate more than 1,000 centers. Furthermore, including
KinderCare, only nine for-profit companies have a total center capacity in
excess of 10,000 children and only seven have more than 100 centers. Relative to
smaller competitors, the few large national operators such as KinderCare have a
competitive advantage over other for-profit child care companies and smaller
independent operators with less extensive resources.
COMPETITIVE STRENGTHS
LEADING MARKET POSITION. Based on the number of centers operated, children
served, operating revenues and operating income, KinderCare is the largest
provider of for-profit preschool educational and child care services in the
United States. At December 13, 1996, the Company operated 1,148 child care
centers in 38 states and the United Kingdom with total center capacity of
approximately 142,000 full-time children. In contrast, as of January 1, 1996,
the second and third largest for-profit competitors operated approximately 750
and 500 centers, respectively, with total center capacities of approximately
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95,000 and 62,500 children, respectively, according to CHILD CARE INFORMATION
EXCHANGE. By virtue of its size and leadership position, the Company benefits
from several competitive advantages over smaller operations, including (i) the
resources available to invest in developing and regularly updating high quality
educational programs, services and curriculum materials; (ii) the expertise to
manage the complexities involved in complying with various state and local
regulations and licensing requirements; (iii) purchasing power in areas such as
insurance, equipment, supplies and food; and (iv) the ability to spread fixed
corporate and centralized support costs, including real estate, marketing and
educational staff, over a large center base.
STRONG BRAND IDENTITY AND REPUTATION. The Company's high quality preschool
educational and child care services have enabled it to develop a strong brand
identity and reputation in an industry where personal trust and parent referrals
play an important role in attracting new customers. The Company's brand
awareness is substantially greater than that of its closest competitor according
to recent market research commissioned by the Company. Throughout all of
KinderCare's communications (including informational brochures, parent
handbooks, advertising and marketing materials), the Company reinforces its
image as the market leader with a caring, well-trained staff having the
resources necessary to provide high quality preschool educational and child care
services.
HIGH QUALITY EDUCATIONAL PROGRAMS. The Company's resources have enabled it
to develop and regularly update a high quality proprietary curriculum that
incorporates professionally-designed, age-specific educational programs based on
its Whole Child Development concept. This concept includes programs that use
developmentally appropriate materials, activities and resources to promote the
physical, intellectual, emotional and social development of children ages six
weeks to twelve years. In light of advancements in childhood education theory
and practice, new programs are introduced and existing programs are frequently
enhanced by the Company's education department under the leadership of two
professionals with Ph.D.'s in early childhood education and curriculum
supervision. All of the Company's programs are designed and tailored
specifically to accommodate the needs and safety requirements of children.
GEOGRAPHICALLY DIVERSIFIED OPERATIONS. The Company's operations are
geographically diversified, with 1,146 child care centers located throughout 38
states and two centers located in the United Kingdom. The five states in which
the highest number of the Company's centers are located (Texas, California,
Illinois, Florida and Ohio) are well-dispersed, and together these states
account for less than 40% of the Company's centers. The geographical diversity
of the Company's operations mitigates the potential impact of regional economic
downturns or adverse changes in local regulations.
VALUABLE REAL ESTATE PORTFOLIO. At December 13, 1996, the Company owned
736, or 64%, of its 1,148 centers, with the remainder under lease or management
contract. The Company's real estate portfolio provides it with considerable
financial flexibility. Land and buildings, at December 13, 1996, had a net book
value of $392.9 million.
BUSINESS STRATEGY
The Company's objective is to build on its position as the nation's leading
preschool educational and child care services provider by offering high quality
services in a safe, healthy and nurturing environment. To meet this objective,
management's business strategy includes the following:
ACCELERATE NEW CENTER DEVELOPMENT AND PURSUE SELECTIVE ACQUISITIONS. The
Company plans to expand by accelerating the development of new child care
centers in attractive markets and selectively acquiring child care businesses.
The Company seeks to identify attractive sites for its centers in large
metropolitan and smaller, growth markets that meet the Company's operating and
financial goals and where the Company believes the market for child care
services will support higher tuition rates than the Company's existing rates. In
fiscal 1996, the Company's newer community centers (operating for at least
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18 months, but less than five years) had an average capacity of 145 full-time
children and achieved an average operating revenue of approximately $684,000
versus community centers opened prior to fiscal 1991, which had an average
capacity of 115 full-time children and an average operating revenue of
approximately $453,000. These newer community centers had an average occupancy
rate and an average three-year-old weekly tuition rate of 82% and $114,
respectively, compared to community centers opened prior to fiscal 1991, which
achieved 76% and $99, respectively. Also, these newer community centers achieved
an average center controllable profit margin (center operating revenues, less
labor costs and controllable expenses, such as food and supplies) which is four
percentage points higher than community centers opened prior to fiscal 1991.
In addition to accelerating new center development, the Company may seek to
acquire existing child care centers where demographics, operating standards, and
customer services complement the KinderCare business strategy. Management
believes that the Company's competitive position, economies of scale and
financial strength will allow it to capitalize on selective acquisition
opportunities in the fragmented child care industry.
INCREASE OCCUPANCY. The Company plans to increase center occupancy by (i)
emphasizing local marketing programs, (ii) enhancing recruiting, retention and
training of staff, and (iii) improving customer retention and loyalty. The
Company's marketing activities are currently designed to increase new
enrollments primarily through local marketing efforts, including direct mail
solicitation, telephone directory yellow pages and customer referrals. See
"--Marketing, Advertising and Promotions." These methods communicate to parents
the Company's commitment to quality preschool education and child care by
emphasizing KinderCare's nurturing environment, state-of-the-art educational
programs, quality staff, and excellent facilities and equipment, such as
computers for children's educational programs. Moreover, beginning in fiscal
1997, the Company implemented an automated consumer inquiry tracking system to
provide rapid responses more efficiently to inquiries from potential customers
and to develop a comprehensive consumer database.
Because a high quality teaching and administrative staff is a key factor in
maintaining and increasing center occupancy, the Company emphasizes recruiting,
retaining and training qualified center personnel. KinderCare's recruiting
process seeks to identify high quality candidates for its teaching, center
director and area coordinator positions. Furthermore, management believes its
current compensation and benefit plans are highly competitive in the child care
industry and, along with the Company's subsidized training programs, will result
in increased retention of qualified staff personnel. Additionally, the Company
rewards center directors and area coordinators through an annual bonus program
designed to increase center occupancy and center controllable profit.
The Company also strives to increase occupancy by improving its customer
retention and loyalty by strengthening its current parents' emotional commitment
to KinderCare. During fiscal 1997, the Company initiated parent orientation
meetings at centers during the fall enrollment season, introduced organized
parent involvement programs and parent advisory forums, and began conducting
ongoing market research on customer satisfaction.
ENHANCE EDUCATIONAL PROGRAMS AND QUALITY OF SERVICES. The Company
continually evaluates and strives to improve the quality of its preschool
educational and child care services. KinderCare has invested significant
resources in formulating a proprietary educational program, maintaining safe and
up-to-date facilities, and hiring, retaining, and training high quality
employees. The Company plans to continue to test and implement innovative
services and offerings, such as computers for children's educational programs
and its new program for school-aged children called KC Imagination Highway-TM-,
which encourages children to engage in meaningful, purposeful, long-lasting
projects that require an active imagination. The Company also plans to continue
encouraging its centers to become accredited by NAEYC, a national organization
that has established comprehensive criteria for providing quality child care and
implemented a formal, though voluntary, child care center accreditation process.
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IMPROVE OPERATIONAL EFFICIENCIES. During fiscal 1996, the Company
introduced numerous organizational initiatives to increase the Company's
operating efficiencies by (i) streamlining management, (ii) increasing local
authority and decision making, and (iii) enhancing centralized support
productivity. The Company plans to continue to improve its operating performance
primarily by reducing center labor costs through improved staff scheduling by
utilizing automated information systems to match better the number of staff
personnel at work at a given time of day to the number of students in attendance
at that time in accordance with state required student/teacher ratios. The
Company also plans to continue to leverage its economies of scale and purchasing
power.
CAPITALIZE ON KINDERCARE'S STRONG BRAND IDENTITY. KinderCare's strong brand
identity plays a significant role in the Company's continued growth of its
preschool education and child care business, as management believes that, among
other benefits, this factor contributes to higher enrollment for new child care
centers. Furthermore, management believes that there are opportunities to
leverage the Company's brand identity. Possibilities include licensing of the
KinderCare name for educational materials, clothes, toys and other consumer
products, as well as potential brand extensions into other forms of educational
or child care services, such as the operation of primary and private schools.
EDUCATIONAL PROGRAMS
The Company's educational programs are designed to provide opportunities for
the development of the whole child, as embraced in the Company's slogan, The
Whole Child is the Whole Idea-Registered Trademark-. The child-centered
environment consists of classrooms that have been designed and furnished to meet
the creative and developmental needs of young children. Classrooms encourage
children to explore and learn at their own pace. The schedule of activities
provides for quiet, active, group and individual participation with
opportunities for outdoor play on specially designed Playscapes. The Company's
age-specific programs offer a wide variety of curriculum activities based upon
monthly topics and weekly themes such as transportation, seasons, colors,
numbers, pets, safety, shapes, and sizes.
Each KinderCare center is designed to function as a neighborhood operation
where the center director has the necessary autonomy to tailor the programs to
the needs of the local community. The Company emphasizes selection of staff who
are responsive to children, and each teacher is given the opportunity, training
and resources to plan active and creative programs. Opportunity for professional
growth is available through company-wide training programs, the Certification of
Excellence Program (a professional development program established by the
Company), and tuition reimbursement for employment-related college course work
in connection with obtaining a Child Development Associate certificate. The
Company also maintains an Education and Training Department in its corporate
headquarters. This department is led by two professionals with Ph.D.'s in early
childhood education/curriculum supervision and is staffed by curriculum
specialists.
In the Infant Program (ages six weeks to one year), care is individualized
with daily routines focusing on one-on-one time to build affection and trust.
Language development activities begin in the infant care program as does
fostering physical and social skills through interaction with other infants and
adults. Strict health and sanitation policies have been developed in accordance
with state licensing requirements to ensure a safe environment which permits
infants' exploration of their surroundings.
Toddlers (ages one to two years) are encouraged to learn as they explore and
master the activity areas of their classrooms. The toddler program, Look At
Me!-Registered Trademark-, has been designed to develop the toddler through play
opportunities and support the toddler as he or she gains independence and
skills. Monthly curriculum ideas and activity suggestions emphasize fun learning
and self-help skills.
The Company's program for two-year-olds, Let Me Do
It!-Registered Trademark-, recognizes that a two-year-old's life is a time of
energy, curiosity and independence. The Let Me Do It!-Registered Trademark-
program is designed to help the child grow and develop by learning at his or her
own pace through play. The program emphasizes physical
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development, including dressing, feeding and toileting, and intellectual
development encompassing learning colors, shapes, language skills and
decision-making.
The Company has two preschool programs suitable for multi-age groups (ages
three to five years). My Window On The World-Registered Trademark- is designed
to encourage inquisitive children to discover questions and formulate answers
using the world of nature. KinderCare utilizes YOUR BIG BACKYARD, the National
Wildlife Federation's magazine for preschoolers, as a resource for this program.
Through this program, children learn expression through art, dramatic play,
science, table games, books and music, as well as important language, literacy,
and math skills. The Company's Once Upon a Time . . .-TM- program based on
children's literature, both classic and modern, is the second preschool program.
The concepts developed in the stories provide a foundation for learning math
relationships, colors and shapes, language and literacy skills, comparisons,
social awareness, fine-motor skills and creative expression.
Approximately two-thirds of the Company's centers have a Kindergarten at
KinderCare program where children learn through play, as well as activities and
experiences that are hands-on and sensory in nature. Children participate
primarily in small group instruction and carefully designed free exploration
activities that promote specific skills. Language arts, math, science, physical
education, fine arts and music, health and safety, and social studies are all
curriculum components of the nationally recognized curriculum, developed by
Development Learning Materials, a division of Science Research Associates, Inc.
The Company's newest program, KC Imagination Highway-TM-, is designed to
meet the needs of school-aged children. Because six to twelve-year-olds spend
most of their school day sitting at desks and tables engaged in relatively
quiet, traditional academic activities, the new program is designed to include a
number of stimulating and challenging activities and projects, ranging from loud
and active to quiet, thoughtful, and social. The foundation of this new program
is based upon group or individual involvement in projects. The goal is for
children to use their imaginations.
TUITION
The Company determines tuition charges based upon a number of factors
including age of child, full or part-time attendance, location and competition.
Tuition is generally collected on a weekly basis in advance, and tuition rates
are generally adjusted company-wide in the first week of November each year. An
increase averaging 4.7% was implemented in November 1996. For the fiscal years
ended May 31, 1996, June 2, 1995 and June 3, 1994, the Company's average weekly
full-time tuition rates for three-year-olds were $100, $96 and $90,
respectively. The Company believes that the three-year-old weekly tuition rate
approximates the Company's average weekly tuition rate.
MARKETING, ADVERTISING AND PROMOTIONS
Management believes that its national presence and reputation for high
quality preschool educational and child care services have created valuable and
strong name recognition and parent loyalty. In an industry where personal trust
and word-of-mouth referrals play a key role in attracting new customers, the
Company's reputation and strong name recognition are important competitive
advantages.
The Company intends to continue its marketing efforts through a program
consisting of various promotional activities and customer retention and customer
referral programs. Having implemented a lower cost marketing program in late
fiscal 1996, in part by discontinuing national television and magazine
advertising, the Company's promotional activities currently include year-round
targeted direct-mailings, seasonal radio advertisements in selected markets,
regional newspaper advertisements, telephone directory yellow page listings,
billboards and free standing inserts in newspapers. New centers receive the
benefit of pre-opening direct mail support as well as local public relation
articles and newspaper advertisements. Every new center hosts an open house and
provides for center tours where parents have opportunities to talk with staff,
visit classrooms and play with educational toys and
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computers. The Company has also developed a variety of specialized services
tailored to the busy lifestyles of its customers in a program called Helping
America's Busiest Families-Registered Trademark-. Under this program, a monthly
newsletter, Small Talk-Registered Trademark-, is mailed directly to customers
and provides parents with current information regarding child development
program information, parenting tips, child care ideas and center activities.
Other aspects of the marketing programs offered by each KinderCare center
include morning coffee for parents, periodic extended evening hours and a five
o'clock snack that is provided to the children as they are picked up by their
parents. Moreover, the Company sponsors a referral program under which parents
receive free tuition for a week for every new customer referral that leads to a
new enrollment.
Center directors and staff also are trained to market to parents via
telephone, local speaking engagements and interaction with local regulatory
agencies that may then refer potential customers to the Company. A telephone
inquiry tracking system is employed, and center tours and "meet the teachers"
events are held periodically. New parent orientation meetings are given in the
fall at which center directors and staff explain educational and development
programs as well as policies and procedures. The Company is also establishing
parent forums in centers to involve parents in center activities and events. At
these events, the Company is able to build a high awareness of the center in the
local community.
SITE SELECTION
The Company seeks to identify attractive new sites for its centers in large
metropolitan markets and smaller, growth markets that meet the Company's
operating and financial goals and where the Company believes the market for
child care services will support higher tuition rates than the Company's
existing rates. The Company's real estate department performs comprehensive
studies of geographic markets to determine potential areas for new center
development. These studies include analyses of existing center areas,
competitors, tuition pricing, and demographic and marketplace data. Population,
age, household income, employment levels, growth, land prices and development
costs are all considered, as well as long-term growth opportunities for that
market. In addition, the Company reviews state and local laws, including zoning
requirements, development regulations and child care licensing regulations to
determine the timing requirements and probability of receiving the necessary
approvals to construct and operate a new child care center. The Company may
identify several new specific areas from each broader geographical market study.
KinderCare makes location decisions for new centers based upon a detailed
site analysis that includes feasibility and demographic studies as well as
comprehensive financial modeling. Within a prospective specific area, the
Company often analyzes several alternative sites. Each potential site is
evaluated against the Company's standards for location, convenience, visibility,
traffic patterns, size, layout, affordability and functionality, as well as
potential competition. The real estate and development staff, working closely
with operations, marketing and financial personnel, aims to open new centers
with the highest achievable occupancy and profitability levels.
CORPORATE CHILD CARE SERVICES
The Company organized its corporate child care services, referred to as
KinderCare at Work-Registered Trademark-, to offer businesses, including
universities and hospitals, alternatives for providing on-site
employer-sponsored child care. These alternatives include developing on-site
centers, operating employers' on-site centers through management contracts, and
providing consulting services for developing and managing centers.
The Company currently operates 39 on-site/near-site employer-sponsored child
centers for corporations such as Delco Electronics Corp., Ford Motor Co., Lego
Systems, Inc., The Walt Disney Company, Inc., several universities and various
hospitals. Of the 39 on-site centers, 35 are Company-owned or
53
<PAGE>
leased, with four operated by the Company under management fee contracts. The
management contracts for KinderCare At Work-Registered Trademark- centers
generally provide for a three-to-five-year initial period with renewal options
ranging from two to five years. The Company's compensation under such agreements
is generally based on a fixed fee with annual escalations. One KinderCare At
Work-Registered Trademark- center has been opened in fiscal 1997.
The Company also sponsors a tuition discount program, Kindustry, for over
400 companies nationwide, including several Fortune 500 corporations, city/state
governments, and health care providers. Companies that participate in Kindustry
qualify for a 10% tuition discount on the KinderCare child care services they
offer to their employees.
PERSONNEL
The Company's center operations are organized into four regions and 50 areas
reporting to a vice president of operations. Individual centers are managed by a
director and an assistant director. The Company has recently established a
position of primary teacher who supervises the teachers for all classes in a
specific age group, in order to provide proper supervision at every level, and
the Company is in the process of introducing such positions in the centers. All
center directors participate in periodic training programs or meetings and must
comply with applicable state and local licensing regulations. All center
teaching and other non-management staff are required to attend an initial
half-day training session prior to beginning work. Additionally, the Company has
developed and implemented extensive training programs to certify personnel as
teachers of various age groups in accordance with the Company's internal
standards and in connection with its age-specific educational programs. Due to
high employee turnover rates in the child care industry in general, the Company
focuses on and emphasizes recruiting and retaining qualified personnel. The
turnover of personnel experienced by the Company results in part from the fact
that a significant portion of the Company's employees earn entry-level wages.
Management believes that the turnover of the Company's employees is in line with
other companies in the industry. The Corporate Human Resources department is
organized to monitor salaries and benefits for competitiveness as well as to
develop sound human resources policies and programs. The Company also has
developed an assessment program which aids in identification of high quality
area coordinator and center director candidates.
The Company strives to ensure the care and safety of the children enrolled
in its centers. Extensive precautions are taken to ensure the safety and
well-being of all children; however, a small number of incidents of alleged
child abuse have been reported. It is the Company's policy to report any
allegation of abuse to the appropriate authorities, to investigate all
allegations of abuse, and, if appropriate, to place any accused employee on
administrative leave pending resolution of the incident. Although no assurances
can be made that allegations of abuse will not occur in the future, the
Company's procedures are designed to prevent child abuse, and the Company has
not historically experienced a material adverse impact from allegations of child
abuse.
54
<PAGE>
COMPETITION
The U.S. child care and preschool education industry is highly fragmented
and competitive. The Company's competition consists principally of local nursery
schools and day care centers, some of which are non-profit (including
church-affiliated centers), providers of services that operate out of their
homes and other for-profit companies which may operate a number of centers.
Local nursery schools and day care centers generally charge less for their
services than the Company charges. Many church-affiliated and other non-profit
child care centers have no or lower rental costs than the Company and may
receive donations or other funding to cover operating expenses. Consequently,
tuition rates at these facilities are commonly less than the Company's rates.
Additionally, fees for home-based care are normally lower than fees for
center-based care because providers of home care are not always required to
satisfy the same health, safety or operational regulations as the Company's
centers. The Company's competition also consists of other large, national,
for-profit child care companies that may have more aggressive tuition
discounting and other pricing policies than the Company. The Company competes by
offering professionally planned educational and recreational programs,
contemporary, well-equipped facilities, trained teachers and supervisory
personnel, and a range of services, including infant and toddler care, drop-in
service and the transportation of older children enrolled in the Company's
before-and after-school program between the Company's child care centers and
schools.
EMPLOYEES
As of December 13, 1996, the Company employed approximately 22,000 persons,
of whom 305 were employed at corporate headquarters, 137 were regional or area
managers and support personnel, and the remainder were employed at the centers.
Center employees include: center directors; assistant directors; primary
teachers; regular full-time and part-time teachers; temporary and substitute
teachers; teachers' aides; and non-teaching staff, including cooks and van
drivers. Approximately ten percent of the 22,000 employees, including all
management and supervisory personnel (which includes primary teachers), are
salaried; all other employees are paid on an hourly basis. The Company does not
have an agreement with any labor union and believes that its relations with its
employees are good.
GOVERNMENTAL LAWS AND REGULATION
Child care centers are subject to numerous state and local regulations and
licensing requirements, and the Company has policies and procedures in place in
order to comply with such regulations and requirements. Although these
regulations vary from jurisdiction to jurisdiction, government agencies
generally review the fitness and adequacy of buildings and equipment, the ratio
of staff personnel to enrolled children, staff training, record keeping, the
dietary program, the daily curriculum, and compliance with health and safety
standards. In most jurisdictions, these agencies conduct scheduled and
unscheduled inspections of the centers, and licenses must be renewed
periodically. Repeated failures of a center to comply with applicable
regulations can subject it to sanctions, which might include probation or, in
more serious cases, suspension or revocation of the center's license to operate.
The Company believes that its operations are in substantial compliance with all
material regulations applicable to its business.
There are certain tax incentives for child care programs. Section 21 of the
Code provides a federal income tax credit ranging from 20% to 30% of certain
child care expenses for "qualifying individuals" (as defined therein). The fees
paid to the Company for child care services by eligible taxpayers qualify for
the tax credit, subject to the limitations of Section 21. Approximately 13% of
the Company's operating revenues are generated from federal and state child care
assistance programs, primarily the Child Care and Development Block Grant and
At-Risk Programs. These programs are designed to assist low-income families with
child care expenses and are administered through various state agencies.
Although under new legislation, signed by President Clinton in August 1996,
additional funding for child care will
55
<PAGE>
be available for low income families as part of welfare reform, no assurance can
be given that the Company will benefit from any such additional funding.
The Federal Americans With Disabilities Act (the "Disabilities Act")
prohibits discrimination on the basis of disability in public accommodations and
employment. The Disabilities Act became effective as to public accommodations in
January 1992 and as to employment in July 1992. Since effectiveness of the
Disabilities Act, the Company has not experienced any material adverse impact as
a result of the legislation.
INSURANCE
The Company's insurance program currently includes the following types of
policies: workers' compensation, comprehensive general liability, automobile
liability, property, excess "umbrella" liability, and a medical payment program
for accidents which applies to each child enrolled in a Company center. The
policies provide for a variety of coverages, are subject to various limits, and
include substantial deductibles or self-insured retention. For liability
insurance purposes, the Company's policies generally have retention limits of
$1.0 million per occurrence. Property insurance policy deductibles vary,
depending upon the nature of the insured event. Special insurance is sometimes
obtained with respect to specific hazards, when and if deemed appropriate and
available at reasonable cost. As of December 13, 1996, the Company had
approximately $14.2 million of letters of credit available to secure its
obligations under retrospective and self-insurance programs. There is no
assurance that claims in excess of, or not included within, the Company's
coverage will not be asserted, the effect of which could have an adverse effect
on the Company.
COMMUNICATION AND INFORMATION SYSTEMS
The Company has a fully automated information, communication and financial
reporting system for its centers. The system uses personal computers and links
every center and regional office to the corporate headquarters. This system
provides timely information on such items as weekly revenues, expenses,
enrollments, attendance, payroll, and staff hours. The Company is also updating
its financial reporting and human resources systems to provide more
comprehensive and timely information throughout the Company.
The Company also seeks to improve its operating efficiencies by
re-engineering its support services and providing management with more timely
information through its nationwide communications network and its automated
information systems. In order to improve and increase the span of control for
field managers, the Company introduced within the past year companywide e-mail
and on-line inquiry for all managers.
KinderCare is expanding its nationwide network to include the Internet and
company-wide Intranet applications. Through the use of Netscape
Navigator-Registered Trademark- software, the Company's intranet, called
"KinderNet," allows center directors to have point and click access to corporate
information, and provides center directors with the ability to distribute
reports and questionnaires, update databases, and revise center listings on a
daily basis. The Company believes that the sophistication and scope of its
communications network and information system makes such system one of the most
advanced in the child care industry and enables it to improve further the
efficiency and quality of child care and enhance the educational experience of
KinderCare students.
TRADEMARKS
The Company has various registered and unregistered trademarks covering the
name KinderCare, its schoolhouse logo, and a number of other names, slogans and
designs, including, but not limited to: KinderCare At
Work-Registered Trademark-, My Window On The World-Registered Trademark-,
Helping America's Busiest Families-Registered Trademark-, Look At
Me!-Registered Trademark-, Let Me Do It!-Registered Trademark-, Let's Move,
Let's Play-Registered Trademark-, Small Talk-Registered Trademark-, The Whole
Child Is The Whole Idea-Registered Trademark-, Once Upon a
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Time . . .-TM-, Kid's Choice-TM- and KC Imagination Highway-TM-. A
federally-registered trademark in the United States is effective for ten years
subject only to a required filing and the continued use of the mark by the
registrant. A federally-registered trademark provides the presumption of
ownership of the mark by the registrant in connection with its goods or services
and constitutes constructive notice throughout the United States of such
ownership. In addition, the Company has registered various trademarks in certain
other countries, including Canada, Germany, Japan, the Peoples Republic of
China, and the United Kingdom. The Company believes that its name and logo are
important to its operations and intends to continue to renew the trademark
registrations thereof.
PROPERTIES
The Company's home office is located in Montgomery, Alabama, in a 60,000
square foot building owned by the Company. At December 13, 1996, the Company
owned 736 of its operating child care centers and leased or subleased 408
operating child care centers and operated four child care centers under
management fee contracts. The Company owns or leases certain other child care
centers which have not yet been opened or which are being held for disposition.
In addition, the Company owns certain real property held for future development
of centers.
A typical KinderCare community center is a one-story, air-conditioned
building located on approximately one acre of land (larger capacity centers are
situated on parcels ranging from one to four acres of land) constructed in
accordance with model designs generally developed by the Company. The community
centers contain open classroom and play areas and complete kitchen and bathroom
facilities and can accommodate from 50 to 281 children, with most centers able
to accommodate 90 to 135 children. Over the past few years, the Company opened
community centers that are larger in size with a capacity ranging from 165 to
281 children. Each center is equipped with a variety of audio and visual aids,
educational supplies, games, puzzles, toys and vehicles used for field trips and
transporting children enrolled in the Company's after-school program. All
KinderCare community centers are equipped with computers for children's
educational programs.
KinderCare at Work-Registered Trademark- provides individualized child care
programs for each corporate sponsor. Facilities are on the corporate sponsor's
site and range in capacity from 42 to 187 children. Kid's Choice-TM- centers
contain homework, computer and game rooms, and are able to accommodate from 74
to 180 children. Each provides school-age children with areas to perform
activities of interest to them.
The following table summarizes center openings and closings, for the
indicated periods:
<TABLE>
<CAPTION>
TWENTY-ONE
WEEKS
FISCAL ENDED FISCAL FISCAL
YEAR MAY 28, YEAR YEAR
1992 1993 1994 1995
----------- ----------------- ----------- -----------
<S> <C> <C> <C> <C>
Openings:
KinderCare community centers.................................... 8 1 4 29
KinderCare at Work-Registered Trademark- centers................ 5 3 4 3
Kid's Choice-TM- centers........................................ -- -- 23 13
Centers sold or closed (a)........................................ 57 34 65 40
<CAPTION>
FISCAL
YEAR
1996
-----------
<S> <C>
Openings:
KinderCare community centers.................................... 22
KinderCare at Work-Registered Trademark- centers................ 6
Kid's Choice-TM- centers........................................ 9
Centers sold or closed (a)........................................ 26
</TABLE>
- ------------------------
(a) Includes the conversion of the following number of KinderCare community
centers to Kid's Choice-TM- centers: one in fiscal 1996, three in fiscal
1995 and two in fiscal 1994.
57
<PAGE>
The KinderCare community centers, KinderCare at Work-Registered Trademark-
centers and Kid's Choice-TM- centers operated by the Company at December 13,
1996 were located as follows:
<TABLE>
<CAPTION>
KINDERCARE
AT WORK-
KINDERCARE REGISTERED KIDS
COMMUNITY TRADEMARK- CHOICE- TM-
LOCATION CENTERS CENTERS CENTERS
- -------------------------------------------------------- ------------- --------------- -------------
<S> <C> <C> <C>
Alabama................................................. 13 -- 1
Arizona................................................. 16 2 --
Arkansas................................................ 4 -- --
California.............................................. 93 -- 2
Colorado................................................ 24 -- 1
Connecticut............................................. 13 2 --
Delaware................................................ 5 -- --
Florida................................................. 67 6 2
Georgia................................................. 37 -- 2
Illinois................................................ 72 3 8
Indiana................................................. 26 1 1
Iowa.................................................... 7 2 1
Kansas.................................................. 18 -- --
Kentucky................................................ 13 1 1
Louisiana............................................... 13 2 --
Maryland................................................ 23 -- 1
Massachusetts........................................... 17 -- --
Michigan................................................ 32 2 1
Minnesota............................................... 31 -- 1
Mississippi............................................. 4 -- --
Missouri................................................ 48 -- --
Nebraska................................................ 10 1 --
Nevada.................................................. 10 -- --
New Jersey.............................................. 28 4 --
New Mexico.............................................. 7 -- --
New York................................................ 2 1 --
North Carolina.......................................... 33 -- 2
Ohio.................................................... 56 3 6
Oklahoma................................................ 10 -- --
Oregon.................................................. 13 3 --
Pennsylvania............................................ 41 -- --
Rhode Island............................................ -- 1 --
Tennessee............................................... 27 2 2
Texas................................................... 124 1 7
Utah.................................................... 6 1 --
Virginia................................................ 51 -- 2
Washington.............................................. 47 -- 2
Wisconsin............................................... 23 1 --
United Kingdom.......................................... 2 -- --
-- --
-----
Total................................................... 1,066 39 43
-- --
-- --
-----
-----
</TABLE>
Subsequent to January 1, 1993, the Company renegotiated approximately 70
leases related to underperforming centers in order to amend the terms and allow
the Company to terminate these leases
58
<PAGE>
at any time with minimal notice. In connection with the termination option, the
Company, in certain instances, prepaid rent totaling approximately $3.2 million.
Such amounts are being amortized over the termination period or over the
appropriate remaining months of the lease period. Commitments under these
amended leases totaled approximately $16.8 million over the original lease
terms. Upon giving the landlord termination notice of at least six months, the
amendments provide that the Company would be permitted to utilize the facilities
for the final six-month period rent-free, as well as relieve itself of all
future commitments remaining under the lease. As of December 13, 1996, the
Company has elected to close 32 of these centers and the remaining unamortized
prepaid balance is $2.4 million.
In 1992, the Company fully implemented a centralized maintenance program to
improve the maintenance of its facilities located across the country. The
department's maintenance technicians handle routine and preventative maintenance
functions through the central telephone dispatch and systematic checklist
system. Each technician is responsible for the support of approximately 20
centers. A level of supervision also has been added to provide guidance and
additional technical support to the technicians. These supervisors are
responsible for specific geographic areas and each manages approximately 5
technicians. In May 1996, the department completed the final phase of this
implementation and reduced the staff of technicians from 90 to 65.
The Company believes that its properties are in good condition and are
adequate to meet its current and reasonably anticipated future needs.
LEGAL PROCEEDINGS
The Company is presently, and is from time to time, subject to claims and
suits arising in the ordinary course of business, including suits alleging child
abuse. The Company believes that none of the claims or suits of which it is
currently aware will materially affect its financial position or future
operating results, although no assurance can be given with respect to the
ultimate outcome of any such actions.
59
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and positions with the Company of the
persons who will serve as directors and executive officers of the Company,
together with certain other key personnel, after the Effective Time. The Board
of Directors is subject to change from time to time. The Merger Agreement
provides that the officers of KinderCare at the Effective Time will be the
officers of the Company following the Merger until such time as may be
determined by the Board of Directors following the Merger.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --------- ------------------------------------------------------
<S> <C> <C>
David J. Johnson.......................... 50 Chief Executive Officer and Chairman of the Board
Philip L. Maslowe......................... 50 Executive Vice President and Chief Financial Officer
Rebecca S. Bryan.......................... 39 Vice President/General Counsel/Corporate Secretary
William E. Bailey......................... 37 Vice President/Corporate Controller
Joe R. Cooper............................. 39 Vice President/Finance
Robert H. Fries........................... 48 Vice President/Treasurer
Marcia P. Guddemi, Ph.D................... 43 Vice President/Education, Research, and Training
Jerry B. Hill............................. 57 Vice President/Human Resources
Mark F. Hoffman........................... 33 Vice President/Real Estate
S. Wray Hutchinson........................ 36 Vice President/Operations
Bob J. Willey............................. 56 Vice President/Information Services
Sandra W. Scarr, Ph.D. ................... 60 Director
Henry R. Kravis........................... 53 Director
George R. Roberts......................... 53 Director
Clifton S. Robbins........................ 38 Director
Nils P. Brous............................. 32 Director
Stephen A. Kaplan......................... 37 Director
</TABLE>
DAVID J. JOHNSON joined the Company as Chief Executive Officer and Chairman
of the Board at the Effective Time. Between September 1991 and November 1996,
Mr. Johnson served as President, Chief Executive Officer and Chairman of the
Board of Red Lion Hotels, Inc. (formerly a KKR affiliate) or its predecessor.
From 1989 to September 1991, Mr. Johnson was a general partner of Hellman &
Freidman, a private equity investment firm based in San Francisco. From 1986 to
1988, he served as President, Chief Operating Officer and director of Dillingham
Holdings, a diversified company headquartered in San Francisco. From 1984 to
1987, Mr. Johnson was President and Chief Executive Officer of Cal Gas
Corporation, a principal subsidiary of Dillingham Holdings.
PHILIP L. MASLOWE joined the Company as Chief Financial Officer on July 26,
1993 and was promoted to Executive Vice President in September 1995. From
February 1991 until June 1993, Mr. Maslowe served as Executive Vice President,
Chief Financial Officer, Treasurer and, beginning in
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September 1992, as a member of the Board of Directors of Thrifty Corporation, a
retail chain operating over 1,000 drug, membership discount, and sporting goods
stores located throughout the United States. Prior to joining Thrifty
Corporation, Mr. Maslowe spent over ten years at the Vons Companies, Inc., a
food/drug retail chain located primarily in Southern California and Nevada. From
1987 to 1991, he was Group Vice President of Finance at Vons.
REBECCA S. BRYAN has been Vice President and General Counsel since June 1989
and Secretary since March 1991. She joined the Company in June 1987 as Assistant
General Counsel and Assistant Secretary.
WILLIAM E. BAILEY was promoted to Vice President/Corporate Controller in
February 1993. Mr. Bailey joined the Company in August 1987 as Manager of
Financial Reporting and Senior Accountant, served as Director of Planning and
Analysis from June 1989 to October 1991 and as Corporate Controller from October
1991 to February 1993.
JOE R. COOPER joined the Company in May 1996 as Vice President of Finance.
Prior to joining the Company, he was Financial Controller for Bath & Body Works
(division of The Limited, Inc.) from 1995 to 1996 and from 1991 through 1995, he
was employed by The Limited, Inc. in the positions of Director of Financial
Reporting and Manager of Financial Reporting.
ROBERT H. FRIES was promoted to Vice President and Treasurer in April 1996.
Mr. Fries began his employment with the Company in March 1994 as Assistant
Treasurer, Debt and Income Taxes and Assistant Secretary. Prior to his joining
KinderCare, Mr. Fries served as Director of Taxes for Blount, Inc. from 1986
until 1994.
MARCIA P. GUDDEMI, PH.D. joined the Company in August 1991 as Vice President
of Education, Research, and Training. For over six years prior to joining the
Company, she was an assistant professor of early childhood education at the
University of South Florida and at the University of South Carolina.
JERRY B. HILL was named Vice President of Human Resources in October 1995.
He joined the Company in July 1987 as Director of Risk Management and was named
Vice President of Corporate Insurance and Risk Management in June 1989.
MARK F. HOFFMANN joined the Company in February 1996 as Vice President of
Real Estate. Prior to joining the Company, Mr. Hoffmann served as the Director
of Real Estate for B.C. Great Lakes, LLC, a partner of Boston Chicken, Inc.,
from 1993 until 1996 and in various real estate finance management positions
with Taco Bell Corporation from 1989 through 1993.
S. WRAY HUTCHINSON was promoted to Vice President of Operations in April of
1996. He began his employment with the Company in 1992 as a District Manager in
New Jersey and was later promoted to Region Manager for the Chicago area. From
1990 until 1992, Mr. Hutchinson was self-employed.
BOB J. WILLEY joined the Company in June 1995 as Vice President of
Information Services. From 1992 to 1995, Mr. Willey served as MIS Director for
PETSTUFF, Inc. and was Corporate Information Officer for ANCO Management
Service, Inc. from 1989 to 1992.
SANDRA W. SCARR, PH.D. served as Chief Executive Officer since June 16, 1995
and Chairman of the Board since July 1994 until her retirement from such
positions at the Effective Time. Dr. Scarr was elected a Director in June 1990
and was a Commonwealth Professor, Department of Psychology of the University of
Virginia, from September 1983 until joining the Company in June 1995. Dr. Scarr
is a past President of the Society for Research in Child Development, a past
President of the Behavior Genetics Association, a Director of the American
Psychological Society and a Fellow of the American Association for the
Advancement of Science. During 1996-1997 she is serving as President of the
American Psychological Society. She is also an elected member of the American
Academy of Arts and Sciences and the author of numerous books and journal
articles on child development.
HENRY R. KRAVIS is a Founding Partner of KKR and effective January 1, 1996
he became a managing member and member of the Executive Committee of the limited
liability company which serves as the general partner of KKR. He is also a
director of AutoZone, Inc., Borden, Inc., Bruno's, Inc., Evenflo & Spalding
Holdings Corporation, Flagstar Companies Inc., Flagstar Corporation, The
Gillette Company,
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IDEX Corporation, K-III Communications Corporation, Merit Behavioral Care
Corporation, Newsquest Capital plc, Owens-Illinois, Inc., Owens-Illinois Group,
Inc., Safeway, Inc., Sotheby's Holdings Inc., Union Texas Petroleum Holdings,
Inc., and World Color Press, Inc.
GEORGE R. ROBERTS is a Founding Partner of KKR and effective January 1, 1996
he became a managing member and member of the Executive Committee of the limited
liability company which serves as the general partner of KKR. He is also a
director of AutoZone, Inc., Borden, Inc., Bruno's, Inc., Evenflo & Spalding
Holdings Corporation, Flagstar Companies Inc., Flagstar Corporation, IDEX
Corporation, K-III Communications Corporation, Merit Behavioral Care
Corporation, Newsquest Capital plc, Owens-Illinois, Inc., Owens-Illinois Group,
Inc., Safeway, Inc., Union Texas Petroleum Holdings, Inc., and World Color
Press, Inc.
CLIFTON S. ROBBINS was a General Partner of KKR from January 1, 1995 until
January 1, 1996 when he became a member of the limited liability company which
serves as the general partner of KKR. Prior thereto, he was an executive
thereof. Mr. Robbins is a director of AEP Industries Inc., Borden Inc., Flagstar
Companies Inc., Flagstar Corporation, IDEX Corporation, Newsquest Capital plc
and Newsquest Holdings Limited.
NILS P. BROUS has been, since 1992, an executive of KKR. Prior thereto, he
was an associate at Goldman, Sachs & Co. Mr. Brous is a director of Bruno's,
Inc., and Canadian General Insurance Group Limited.
STEPHEN A. KAPLAN has served as a director since January 1996. He has been a
Principal of Oaktree since 1995. Oaktree provides investment management credit
services pursuant to a sub-advisory agreement with TCW Asset Management Company,
the general partner of TCW Special Credits Fund V--The Principal Fund. Mr.
Kaplan was a Managing Director of Trust Company of the West from 1993 to 1995.
Prior thereto, Mr. Kaplan was a partner with the law firm of Gibson, Dunn &
Crutcher. Mr. Kaplan is a director of Chief Auto Parts, Inc., Vision Hardware
Group, Inc., Stratagene Holding Corporation, and Decorative Home Accents, Inc.
Messrs. Kravis and Roberts are first cousins.
The business address of Messrs. Kravis, Robbins and Brous is 9 West 57th
Street, New York, New York 10019 and of Mr. Roberts is 2800 Sand Hill Road,
Suite 200, Menlo Park, California 94025. The business address of Mr. Kaplan is
550 South Hope Street, 22nd Floor, Los Angeles, California 90071.
BOARD COMPENSATION
All directors are reimbursed for their usual and customary expenses incurred
in attending all Board and committee meetings, and it is anticipated that all
such directors will continue to be so reimbursed after the Effective Time. The
annual fee that each director who is not an employee of the Company will receive
will be $30,000. Directors who are also employees of the Company do not receive
remuneration for serving as directors.
EXECUTIVE COMPENSATION
The following table presents certain summary information concerning
compensation paid or accrued by the Company for services rendered in all
capacities for the fiscal year ended May 31, 1996, the fiscal year ended June 2,
1995, and the fiscal year ended June 3, 1994, for (i) the CEO of the Company
during such fiscal years and (ii) each of the five other most highly compensated
executive officers of the Company, determined as of May 31, 1996 (collectively,
the "Named Executive Officers").
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION --------------
---------------------------------------- SECURITIES
NAME AND FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPLE POSITION YEAR SALARY BONUS COMPENSATION OPTIONS (#) COMPENSATION (a)
- -------------------------------- ----------- ----------- ----------- -------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
SANDRA W. SCARR, PH.D. (b)...... 1996 $ 339,242 $ 151,637(c) $ -- 100,000(d) $ 12,064
Chief Executive Officer 1995 -- -- -- -- --
and Chairman of the Board 1994 -- -- -- -- --
PHILIP L. MASLOWE............... 1996 226,923 63,000 -- -- 11,361
Executive Vice President 1995 211,288 90,000 97,683(e) 25,000(d) --
and Chief Financial Officer 1994 173,077 86,400 49,337(f) 50,000(d) --
REBECCA S. BRYAN................ 1996 98,484 24,555 -- -- --
Vice President/General 1995 90,019 20,475 -- -- --
Counsel/Corporate Secretary 1994 89,692 20,790 -- -- --
WILLIAM E. BAILEY............... 1996 84,980 20,739 -- -- --
Vice President/Controller 1995 78,057 18,225 -- -- --
1994 73,384 17,010 -- -- --
JERRY B. HILL................... 1996 90,692 20,356 -- -- --
Vice President/ 1995 85,173 19,345 -- -- --
Human Resources 1994 83,067 19,254 -- -- --
BOB J. WILLEY................... 1996 98,280 24,344 -- 10,000(d) --
Vice President/ 1995 -- -- -- -- --
Information Services 1994 -- -- -- -- --
</TABLE>
- ------------------------
(a) Term life insurance premiums paid by the Company for the benefit of the
Named Executive Officers.
(b) As of the Effective Time, Dr. Scarr retired from her position as Chief
Executive Officer and Chairman of the Board.
(c) Includes payment of a signing bonus in the amount of $29,137 (which reflects
payments made in respect of certain taxes due on such bonus) pursuant to Dr.
Scarr's employment agreement.
(d) Stock options granted under the Company's 1993 Stock Option and Incentive
Plan. All such options that remained unexercised were canceled and exchanged
for payment in the Merger.
(e) Payment of relocation expenses in the amount of $92,665 and the value of the
personal use of an automobile in the amount of $5,018.
(f) Payment of relocation expenses in the amount of $48,503 and the value of
the personal use of an automobile in the amount of $834.
STOCK OPTION PLANS
At the Effective Time, each employee or director stock option to purchase
shares of Common Stock ("Company Stock Options") granted under any stock option
or stock purchase plan, program or arrangement of the Company, including the
1993 Director Stock Option Plan or the 1993 Stock Option and Incentive Plan (the
"1993 Stock Option Plan," and together with the 1993 Director Stock Option Plan,
the "Stock Plans") outstanding immediately prior to the Effective Time, whether
or not then exercisable, was canceled, and each Company Stock Option having an
exercise price of less than $19.00 (which constitutes all outstanding Company
Stock Options) is being exchanged for a payment from the Company after the
Merger (subject to any applicable withholding taxes) equal to the product of (i)
the total number of shares of Common Stock previously subject to such Company
Stock Option and (ii) the excess of $19.00 over the exercise price per share of
Common Stock previously subject to such Company Stock Option, payable in cash
immediately following the Effective Time, representing approximately $4.7
million in the aggregate. The Stock Plans terminated as of the Effective Time.
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After the Effective Time, the Company intends to adopt a stock purchase and
option plan for key employees of the Company.
SAVINGS AND INVESTMENT PLAN
The Board of Directors of the Company adopted the Savings and Investment
Plan (the "Savings Plan") effective January 1, 1990. All full-time employees of
the Company and its subsidiaries are eligible to participate in the Savings Plan
upon completion of one year of service and the attainment of age 18.
Participants may contribute, in increments of 1%, up to 10% (6% before July 1,
1994) of their compensation to the Savings Plan. In accordance with the
provisions of the Savings Plan, the Board of Directors has elected, since April
1, 1991, not to match employee contributions. Pursuant to the Merger Agreement,
subject to certain exceptions, the Company will continue to maintain the Savings
Plan and other benefit plans of the Company, or substitute plans that are no
less favorable in the aggregate to the employees of the Company than such
existing plans, until December 31, 1997.
EMPLOYMENT CONTRACTS
SANDRA W. SCARR, PH.D. Pursuant to an agreement between KCLC Acquisition
and Dr. Sandra W. Scarr (the "Scarr Letter Agreement"), as of the Effective
Time, Dr. Scarr retired from her position as Chairman of the Board and Chief
Executive Officer of the Company. Dr. Scarr continues to serve as a director of
the Company following her retirement. In connection with the Scarr Letter
Agreement, (i) she received a lump sum payment equal to a pro rata portion of
her salary for the period from the Effective Time through June 15, 1997; (ii)
the Company purchased her residence in the Montgomery, Alabama area for an
amount up to $360,000 and reimburse her for relocation expenses of up to
$25,000; (iii) from the Effective Time until December 15, 1999, she will perform
consulting, advisory and other services for the Company and will be subject to a
non-competition covenant and (iv) in consideration of the services Dr. Scarr
will be required to provide to the Company and her obligation not to compete
with the Company, she will receive monthly payments of $36,666.67 from the
Company for a period of 30 months beginning July 15, 1997. In addition, pursuant
to the Scarr Letter Agreement, the Company will continue to provide certain
medical, disability and life insurance coverage through December 15, 1998.
Pursuant to the terms of the employment agreement entered into between the
Company and Dr. Scarr on June 16, 1995 (the "Scarr Employment Agreement"), which
terminated at the Effective Time, Dr. Scarr received an annual base salary of
$350,000 for her service as Chief Executive Officer of the Company during the
first year of the contract, which was increased to $400,000 as of June 15, 1996.
The Company also paid Dr. Scarr a $25,000 signing bonus. The Scarr Employment
Agreement also provided for an annual formula-determined incentive bonus of a
maximum of 50% of Dr. Scarr's base salary and for participation in benefits
plans, pension plans, health and accident plans or other arrangements made
generally available to senior executives of the Company. Pursuant to the Scarr
Employment Agreement, the Company also purchased life insurance, accidental
death coverage and a disability income policy in specified amounts, the payments
for each of which will terminate or be modified in accordance with the Scarr
Letter Agreement. Under the terms of the Scarr Employment Agreement, Dr. Scarr
was granted options under the Company's 1993 Stock Option Plan to purchase an
aggregate of 100,000 shares of Common Stock. All such options that remained
unexercised were canceled and exchanged for payment in the Merger.
PHILIP L. MASLOWE. On May 8, 1995, the Company entered into an employment
agreement with Mr. Maslowe, which provides for a two-year term with automatic
renewals unless (i) one party gives written notice of non-renewal to the other
at least three months prior to the expiration of the term or (ii) termination
occurs under other certain circumstances. Upon termination, Mr. Maslowe is
entitled to certain severance payments and benefits. Under the agreement, Mr.
Maslowe agrees to serve as Senior Vice President (after the signing of the
contract Mr. Maslowe was promoted to Executive Vice President) and Chief
Financial Officer of the Company at an annual base salary of $225,000. In June
of 1996, the Board approved a $25,000 base salary increase for Mr. Maslowe. In
addition, Mr. Maslowe is to receive an annual incentive bonus payment based on a
formula approved by the Board which currently provides
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for an annual incentive target bonus payment of 40% of his base salary. The
agreement further provides that Mr. Maslowe is entitled to participate in or
receive benefits under any presently existing or future benefit plans, pension
plans, health and accident plans or other arrangements made generally available
to senior executives of the Company. The Company is also required to use its
best efforts to purchase life insurance for Mr. Maslowe in an amount not less
than three times his annual base compensation, an equal amount of accidental
death coverage and a disability income policy in an amount not less than 60% of
his base compensation. In addition, the Company agreed to provide a temporary
housing allowance in the amount of $1,250 per month through May 31, 1996. Under
the terms of the employment agreement, Mr. Maslowe was granted options under the
Company's 1993 Stock Option Plan to purchase an aggregate of 25,000 shares of
Common Stock. All such options that remained unexercised were canceled and
exchanged for payment in the Merger. Upon termination of the agreement in the
event of Mr. Maslowe's death, his estate is entitled to receive any base salary
installments, any accrued incentive bonus payment and any accrued reimbursable
expenses due for a period of three months. In the case of termination of the
agreement by the Company "without cause" or if Mr. Maslowe terminates his
employment for "good reason" as those terms are defined by the agreement, which
includes certain events following a "change of control" or a "potential change
of control," as those terms are defined by the agreement, the Company is
required to pay to Mr. Maslowe an amount equal to (i) his full base salary and
any accrued annual incentive bonus payment and any accrued reimbursable
expenses, through the date of termination, plus (ii) an amount equal to two
times his annual base salary in effect on the date of termination, plus (iii) an
amount equal to two times the annual incentive bonus which would have been
payable to Mr. Maslowe for the year in which the termination occurs. Such
provisions would likely apply upon consummation of the Merger, and such
severance payments would be due upon termination of Mr. Maslowe by the Company
"without cause" or by Mr. Maslowe for "good reason." Upon termination of Mr.
Maslowe's employment under either of such circumstances, the Company is also
obligated to continue to provide certain other benefits under the contract. In
addition, the agreement contains (i) a confidentiality provision prohibiting Mr.
Maslowe during the term of the agreement and for a period of two years
thereafter from disclosing, with certain exceptions, any confidential
information obtained by him while employed by the Company and (ii) a
noncompetition clause prohibiting Mr. Maslowe during the term of the agreement
and for a period of 12 months thereafter from competing with, owning, managing,
or having any financial interest in any business which competes with the
Company.
MANAGEMENT STOCKHOLDER'S AGREEMENTS
Members of management may be offered the opportunity to become stockholders
of the Company. The Company will enter into stockholder's agreements with any
management employees that become stockholders of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following directors served on the Company's Compensation Committee
beginning February 1996 to May 31, 1996 (fiscal year 1996 end): Mr. Kaplan
(joined Compensation Committee in May of 1996) and Dr. Scarr.
The Company, from time to time, has made loans or advances to its executive
officers, primarily for relocation expenses. On August 14, 1995, the Company
loaned Dr. Scarr the amount of $125,000. No interest accrued on this loan and
$107,000 was repaid to the Company in August 1996. The balance of the loan was
forgiven by the Company pursuant to Dr. Scarr's relocation package. With the
exception of this loan, the Company believes that the above-described
transactions were on terms as favorable as those which might have been obtained
from unaffiliated parties.
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OWNERSHIP OF COMMON STOCK
The following table sets forth certain information concerning the beneficial
ownership of shares of Common Stock on February 14, 1997 (after the Effective
Time) by: (i) all persons known to the Company to own beneficially more than 5%
of the outstanding shares of Common Stock; (ii) each person who is a director of
the Company; (iii) each person who is a Named Executive Officer; and (iv) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL PERCENTAGE
OWNERSHIP OF OF CLASS
NAME OF BENEFICIAL OWNER COMMON STOCK OUTSTANDING (a)
- ------------------------------------------------------------------------------- --------------- -------------------
<S> <C> <C>
KKR-KLC L.L.C. (and certain affiliated entities) c/o Kohlberg Kravis Roberts &
Co., L.P.
9 West 57th Street
New York, NY 10019 (b)..................................................... 7,828,947 83.6%
The TCW Group, Inc. (and certain affiliated entities ("TCW"))
865 South Figueroa Street
Los Angeles, CA 90017 (c).................................................. 949,244 10.1%
Henry R. Kravis (b)............................................................ -- --
George R. Roberts (b).......................................................... -- --
Clifton S. Robbins (b)......................................................... -- --
Nils P. Brous (b).............................................................. -- --
Stephen A. Kaplan (c).......................................................... -- --
Sandra W. Scarr, Ph.D.......................................................... -- --
David J. Johnson (d)(e)........................................................ 157,895 1.7%
Philip L. Maslowe (d)(f)....................................................... 14,363 *
William E. Bailey (d).......................................................... -- --
Rebecca S. Bryan (d)........................................................... -- --
Jerry B. Hill (d).............................................................. -- --
Bob J. Willey (d).............................................................. -- --
All directors and executive officers as group (17 persons) (b)(c).............. -- --
</TABLE>
- ------------------------
* Less than one percent.
(a) The amounts and percentage of Common Stock beneficially owned are reported
on the basis of regulations of the Commission governing the determination of
beneficial ownership of securities. Under the rules of the Commission, a
person is deemed to be a "beneficial owner" of a security if that person has
or shares "voting power," which includes the power to vote or to direct the
voting of such security, or "investment power," which includes the power to
dispose of or to direct the disposition of such security. A person is also
deemed to be a beneficial owner of any securities of which that person has a
right to acquire beneficial ownership within 60 days. Under these rules,
more than one person may be deemed a beneficial owner of the same securities
and a person may be deemed to be a beneficial owner of securities as to
which he has no economic interest. The percentage of class outstanding after
the Effective Time is based on the 9,368,421 shares of
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<PAGE>
Common Stock outstanding as of February 13, 1997 following the purchase of
shares by Mr. Johnson described in note (e) below.
(b) Shares of Common Stock shown as beneficially owned by KKR-KLC L.L.C. are
held by the Partnership. KKR-KLC L.L.C. is the sole general partner of KKR
Associates (KLC). KKR Associates (KLC), a limited partnership, is the sole
general partner of the Partnership and possesses sole voting and investment
power with respect to such shares. KKR-KLC L.L.C. is a limited liability
company, the members of which are Messrs. Henry R. Kravis, George R.
Roberts, Robert I. MacDonnell, Paul E. Raether, Michael W. Michelson, James
H. Greene, Jr., Michael T. Tokarz, Perry Golkin, Clifton S. Robbins, Scott
M. Stuart and Edward A. Gilhuly. Messrs. Kravis and Roberts are members of
the Executive Committee of KKR-KLC L.L.C. Messrs. Kravis, Roberts and
Robbins are also directors of the Company. Mr. Nils P. Brous is a limited
partner of KKR Associates (KLC) and is also a director of the Company. Each
of such individuals may be deemed to share beneficial ownership of the
shares shown as beneficially owned by KKR-KLC L.L.C. Each of such
individuals disclaims beneficial ownership of such shares. KKR Partners II,
L.P. owns 1.1% of the outstanding Common Stock.
(c) As of February 14, 1997, TCW beneficially owned 949,244 shares of Common
Stock, or 10.1% of the shares of Common Stock outstanding on such date. TCW
and certain of its affiliates have voting and dispositive powers over such
shares as an investment manager on behalf of TCW Special Credits Fund V-The
Principal Fund (the "Principal Fund"). In addition, Oaktree is an investment
subadvisor with respect to the Principal Fund. Stephen A. Kaplan continues
to serve as a director of the Company following the Merger pursuant to the
terms of the Merger Agreement. To the extent Mr. Kaplan, on behalf of
Oaktree or affiliates of TCW, as applicable, participates in the process to
vote or dispose of any such shares, Mr. Kaplan may be deemed under such
circumstances for the purpose of Section 13 of the Exchange Act to be the
beneficial owner of such shares. Mr. Kaplan disclaims beneficial ownership
of all shares beneficially held by Oaktree and TCW.
(d) Does not include shares of Common Stock that may be reserved for options and
other stock purchase rights that are anticipated to be granted to management
under a stock purchase and option plan for key employees of the Company
which the Company intends to adopt after the Effective Time.
(e) Following the Effective Time, Mr. Johnson purchased 157,895 shares of Common
Stock at a purchase price of $19.00 per share. In accordance with such
purchase, Mr. Johnson has been granted options to acquire an additional
421,053 shares of Common Stock.
(f) Comprised of 1,064 shares of Common Stock held in a trust of which Mr.
Maslowe is the trustee and 13,299 shares of Common Stock held jointly with
Mr. Maslowe's spouse. Mr. Maslowe disclaims beneficial ownership of the
shares of Common Stock held in the trust.
RELATED PARTY TRANSACTIONS
KKR-KLC L.L.C. and certain affiliated entities beneficially own
approximately 83.6% of the Company's outstanding shares of Common Stock. The
members of KKR-KLC L.L.C. are Messrs. Henry R. Kravis, George R. Roberts, Robert
I. MacDonnell, Paul E. Raether, Michael W. Michelson, Michael T. Tokarz, James
H. Greene, Jr., Perry Golkin, Clifton S. Robbins, Scott M. Stuart and Edward A.
Gilhuly. Messrs. Kravis, Roberts and Robbins are also directors of the Company,
as is Mr. Nils P. Brous who is a limited partner of KKR Associates (KLC). Each
of the members of KKR-KLC L.L.C. is also a member of the limited liability
company which serves as the general partner of KKR and Mr. Brous is an executive
of KKR. KKR, an affiliate of the Partnership and KKR-KLC L.L.C., received a fee
of $8.0 million in cash for negotiating the Merger and arranging the financing
therefor, plus the reimbursement of its expenses in connection therewith, and,
from time to time in the future, KKR may receive customary investment banking
fees for services rendered to the Company in connection with divestitures,
acquisitions and certain other transactions. In addition, KKR has agreed to
render management, consulting and financial
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services to the Company for customary fees. See "Management--Directors and
Executive Officers" and "Ownership of Common Stock."
KKR-KLC L.L.C. is the general partner of KKR Associates (KLC), a Delaware
limited partnership, of which certain past and present employees of KKR and
partnerships and trusts for the benefit of the families of such past and present
employees and a former partner of KKR are the limited partners. KKR Associates
(KLC) is the general partner of the Partnership, which owns approximately 83.6%
of the outstanding Common Stock.
The Partnership has the right, under certain circumstances and subject to
certain conditions, to require the Company to register under the Securities Act
shares of Common Stock held by it pursuant to a registration rights agreement
entered into in connection with the Merger and certain stockholders' agreements.
Such registration rights will generally be available to the Partnership until
registration under the Securities Act is no longer required to enable it to
resell the Common Stock owned by it. Such registration rights agreement
provides, among other things, that the Company will pay all expenses in
connection with the first six registrations requested by the Partnership and in
connection with any registration commenced by the Company as a primary offering.
In addition, Oaktree has the right, under certain circumstances and subject to
certain conditions, to participate in any registration process, and other
stockholders besides the Partnership and Oaktree, possibly including certain
members of management, may be allowed to participate in any registration
process, subject to certain conditions and exceptions.
In addition, certain officers and key employees of the Company and its
subsidiaries, including Dr. Scarr and Mr. Maslowe, shared a transaction bonus
payment of $1 million in the aggregate in connection with consummation of the
Merger.
DESCRIPTION OF CREDIT FACILITIES
The Credit Facilities are provided by a syndicate of banks and other
financial institutions (the "Lenders") led by Chase, as administrative agent
(the "Administrative Agent"), Chase Securities Inc., as arranger, Bankers Trust
Company, as syndication agent, and Wells Fargo Bank, N.A., as documentation
agent. The Credit Facilities provide for the Term Loan Facility of up to $90.0
million and the $300.0 million Revolving Credit Facility. Any portion of the
Term Loan Facility not drawn at the Effective Time will be available in a single
additional drawing for the first six months following the Effective Time. The
Revolving Credit Facility includes borrowing capacity of up to $75.0 million for
letters of credit, and up to $25.0 million for short-term borrowings ("Swingline
Loans"). The Term Loan Facility will mature on the date that is nine years after
the Effective Time and will provide for nominal annual amortization. The
Revolving Credit Facility commitment will mature seven years after the Effective
Time.
The interest rate under the Term Loan Facility will initially be, at the
option of the Company, Adjusted LIBOR plus 3.00% or ABR plus 1.75%. The interest
rate under the Revolving Credit Facility will initially be, at the option of the
Company, Adjusted LIBOR plus 2.50% or ABR plus 1.25%. The Company may elect
interest periods of 1, 2, 3 or 6 months (or 9 or 12 months, to the extent
available from all the Lenders under the relevant Facility) for Adjusted LIBOR
borrowings. Calculation of interest shall be on the basis of actual days elapsed
in a year of 360 days (or 365 or 366 days, as the case may be, in the case of
ABR loans based on the Prime Rate) and interest shall be payable at the end of
each interest period and, in any event, at least every 3 months or 90 days, as
the case may be. ABR is the Alternate Base Rate, which is the highest of Chase's
Prime Rate, the Federal Funds Effective Rate plus 1/2 of 1% and the Base CD Rate
plus 1%. Adjusted LIBOR and the Base CD Rate will at all times include statutory
reserves to the extent actually incurred (and, in the case of the Base CD Rate,
FDIC assessment rates).
The Company will pay a commitment fee at a rate equal to 1/2 of 1% per annum
on the undrawn portion of the commitments in respect of the Credit Facilities,
commencing to accrue with respect to each Lender's commitment upon the
acceptance by the Company of such Lender's commitment,
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<PAGE>
payable at the Effective Time (but only if the Effective Time occurs) and
quarterly in arrears after the Effective Time. The commitment fees will at all
times be calculated based on the actual number of days elapsed over a 365-day
year.
The Company will pay a letter of credit fee equal to a rate per annum equal
to the margin for Adjusted LIBOR loans under the Revolving Credit Facility, less
1/8 of 1%, on the aggregate face amount of outstanding letters of credit under
the Revolving Credit Facility, payable in arrears at the end of each quarter and
upon the termination of the Revolving Credit Facility, in each case for the
actual number of days elapsed over a 365-day year. In addition, the Company will
pay to the Fronting Bank, for its own account, (a) a fronting fee of 1/8 of 1%
per annum on the aggregate face amount of outstanding letters of credit, payable
in arrears at the end of each quarter and upon the termination of the Revolving
Credit Facility, in each case for the actual number of days elapsed over a
365-day year, and (b) customary issuance, amendment and administration fees.
The Credit Facilities contain provisions under which commitment fees and
interest rates will be adjusted in increments based on the achievement of
certain performance goals.
The Term Loans will be subject to mandatory prepayment with (a) 100% of the
net cash proceeds of certain non-ordinary-course asset sales or other
dispositions of property by the Company and its subsidiaries, except to the
extent that such proceeds are reinvested in the business of the Company and its
subsidiaries (subject to the line of business covenant) within a specified time
period and subject to certain other exceptions, (b) 100% of the net cash
proceeds from certain sale leaseback transactions, asset securitizations or
mortgage financings involving the Company's existing centers as of the Effective
Time, except for up to an aggregate amount of $50,000,000 during the term of the
Credit Facilities in any such net cash proceeds from sale leaseback
transactions, asset securitizations or mortgage financings, (c) 50% of excess
cash flow, to the extent not reinvested in the business of the Company and its
subsidiaries within six months after each yearly test period and (d) 100% of the
net proceeds of certain issuances of debt obligations of the Borrower and its
subsidiaries. Voluntary prepayments and Revolving Credit Facility commitment
reductions are permitted in whole or in part at the option of the Company, in
minimum principal amounts, without premium or penalty, subject to reimbursement
of certain of the Lenders' costs under certain conditions.
The Company's obligations under the Credit Facilities are secured by a
perfected first priority pledge of and security interest in all the common stock
of each existing and subsequently acquired direct domestic subsidiary of the
Company and 65% of the common stock of each existing and subsequently acquired
direct foreign subsidiary and, in certain circumstances, non-cash consideration
received for certain sales of assets. In addition, indebtedness under the Credit
Facilities is guaranteed by each existing and subsequently acquired domestic
subsidiary of the Company. See "Description of the Exchange
Notes--Subordination" and "Risk Factors--Subordination" and "--Encumbrances on
Assets to Secure Credit Facilities."
The Credit Facilities contain customary covenants and restrictions on the
Company's ability to engage in certain activities. In addition, the Credit
Facilities provide that the Company must meet or exceed an interest coverage
ratio and must not exceed a leverage ratio.
The Credit Facilities include customary events of default.
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<PAGE>
THE EXCHANGE OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal (which
together constitute the Exchange Offer), to exchange up to $300 million
aggregate principal amount of Exchange Notes for a like aggregate principal
amount of Old Notes properly tendered on or prior to the Expiration Date and not
withdrawn as permitted pursuant to the procedures described below. The Exchange
Offer is being made with respect to all of the Old Notes.
As of the date of this Prospectus, $300 million aggregate principal amount
of the Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about , 1997, to all holders of
Old Notes known to the Company. The Company's obligation to accept Old Notes for
exchange pursuant to the Exchange Offer is subject to certain conditions set
forth under "Certain Conditions to the Exchange Offer" below. The Company
currently expects that each of the conditions will be satisfied and that no
waivers will be necessary.
PURPOSE OF THE EXCHANGE OFFER
The Old Notes were issued on February 13, 1997 in a transaction exempt from
the registration requirements of the Securities Act. Accordingly, the Old Notes
may not be reoffered, resold, or otherwise transferred unless so registered or
unless an applicable exemption from the registration and prospectus delivery
requirements of the Securities Act is available.
In connection with the issuance and sale of the Old Notes, the Company
entered into the Registration Rights Agreement, which requires the Company to
file with the Commission a registration statement relating to the Exchange Offer
not later than 45 days after the date of issuance of the Old Notes, and to use
its best efforts to cause the registration statement relating to the Exchange
Offer to become effective under the Securities Act not later than 150 days after
the date of issuance of the Old Notes and the Exchange Offer to be consummated
not later than 30 days after the date of the effectiveness of the Registration
Statement (or use its best efforts to cause to become effective by the 180th
calendar day after the Issuance Date (as defined) a shelf registration statement
with respect to resales of the Old Notes). A copy of the Registration Rights
Agreement has been filed as an exhibit to the Registration Statement.
The Exchange Offer is being made by the Company to satisfy its obligations
with respect to the Registration Rights Agreement. The term "holder," with
respect to the Exchange Offer, means any person in whose name Old Notes are
registered on the books of the Company or any other person who has obtained a
properly completed bond power from the registered holder, or any person whose
Old Notes are held of record by The Depository Trust Company. Other than
pursuant to the Registration Rights Agreement, the Company is not required to
file any registration statement to register any outstanding Old Notes. Holders
of Old Notes who do not tender their Old Notes or whose Old Notes are tendered
but not accepted would have to rely on exemptions to registration requirements
under the securities laws, including the Securities Act, if they wish to sell
their Old Notes.
The Company is making the Exchange Offer in reliance on the position of the
staff of the Commission as set forth in certain interpretive letters addressed
to third parties in other transactions. However, the Company has not sought its
own interpretive letter and there can be no assurance that the staff would make
a similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
Staff, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by a Holder (other than any Holder who is a broker-dealer
or an
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"affiliate" of the Company within the meaning of Rule 405 of the Securities Act)
without further compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such Exchange Notes are
acquired in the ordinary course of such Holder's business and that such Holder
is not participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such Exchange Notes. See "--Resale of Exchange Notes." Each broker-dealer that
receives Exchange Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. See "Plan of
Distribution."
TERMS OF THE EXCHANGE
The Company hereby offers to exchange, subject to the conditions set forth
herein and in the Letter of Transmittal accompanying this Prospectus, $1,000 in
principal amount of Exchange Notes for each $1,000 in principal amount of the
Old Notes. The terms of the Exchange Notes are identical in all material
respects to the terms of the Old Notes for which they may be exchanged pursuant
to this Exchange Offer, except that the Exchange Notes will generally be freely
transferable by holders thereof and will not be subject to any covenant
regarding registration. The Exchange Notes will evidence the same indebtedness
as the Old Notes and will be entitled to the benefits of the Indenture. See
"Description of Exchange Notes."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange.
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the
Exchange Notes issued pursuant to the Exchange Offer in exchange for the Old
Notes may be offered for sale, resold or otherwise transferred by any holder
without compliance with the registration and prospectus delivery provisions of
the Securities Act. Instead, based on an interpretation by the staff of the
Commission set forth in a series of no-action letters issued to third parties,
the Company believes that Exchange Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for sale, resold and otherwise
transferred by any holder of such Exchange Notes (other than any such holder
that is a broker-dealer or is an "affiliate" of the Company within the meaning
of Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business and
such holder has no arrangement or understanding with any person to participate
in the distribution of such Exchange Notes and neither such holder nor any other
such person is engaging in or intends to engage in a distribution of such
Exchange Notes. Since the Commission has not considered the Exchange Offer in
the context of a no-action letter, there can be no assurance that the staff of
the Commission would make a similar determination with respect to the Exchange
Offer. Any holder who is an affiliate of the Company or who tenders in the
Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes cannot rely on such interpretation by the staff of the Commission
and must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction. Each holder, other
than a broker-dealer, must acknowledge that it is not engaged in, and does not
intend to engage in, a distribution of Exchange Notes. Each broker-dealer that
receives Exchange Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. See "Plan of
Distribution."
Interest on the Exchange Notes will accrue from the last Interest Payment
Date on which interest was paid on the Old Notes so surrendered or, if no
interest has been paid on such Notes, from February 13, 1997.
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Tendering holders of the Old Notes shall not be required to pay brokerage
commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Old Notes
pursuant to the Exchange Offer.
EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENT
The Exchange Offer will expire at 5:00 p.m., New York City time, on
, 1997, unless the Company, in its sole discretion, has extended the
period of time for which the Exchange Offer is open (such date, as it may be
extended, is referred to herein as the "Expiration Date") . The Expiration Date
will be at least 20 business days after the commencement of the Exchange Offer
in accordance with Rule 14e-1(a) under the Exchange Act. The Company expressly
reserves the right, at any time or from time to time, to extend the period of
time during which the Exchange Offer is open, and thereby delay acceptance for
exchange of any Old Notes, by giving oral or written notice to the Exchange
Agent and by timely public announcement no later than 9:00 a.m. New York City
time, on the next business day after the previously scheduled Expiration Date.
During any such extension, all Old Notes previously tendered will remain subject
to the Exchange Offer unless properly withdrawn.
The Company expressly reserves the right to (i) terminate or amend the
Exchange Offer and not to accept for exchange any Old Notes not theretofore
accepted for exchange upon the occurrence of any of the events specified below
under "Certain Conditions to the Exchange Offer" which have not been waived by
the Company and (ii) amend the terms of the Exchange Offer in any manner which,
in its good faith judgment, is advantageous to the holders of the Old Notes,
whether before or after any tender of the Notes. If any such termination or
amendment occurs, the Company will notify the Exchange Agent and will either
issue a press release or give oral or written notice to the holders of the Old
Notes as promptly as practicable.
For purposes of the Exchange Offer, a "business day" means any day other
than Saturday, Sunday or a date on which banking institutions are required or
authorized by New York State law to be closed, and consists of the time period
from 12:01 a.m. through 12:00 midnight, New York City time. Unless the Company
terminates the Exchange Offer prior to 5:00 p.m., New York City time, on the
Expiration Date, the Company will exchange the Exchange Notes for the Old Notes
on the Exchange Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal.
A holder of Old Notes may tender the same by (i) properly completing and
signing the Letter of Transmittal or a facsimile thereof (all references in this
Prospectus to the Letter of Transmittal shall be deemed to include a facsimile
thereof) and delivering the same, together with the certificate or certificates
representing the Old Notes being tendered and any required signature guarantees
and any other documents required by the Letter of Transmittal, to the Exchange
Agent at its address set forth below on or prior to the Expiration Date (or
complying with the procedure for book-entry transfer described below) or (ii)
complying with the guaranteed delivery procedures described below.
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY
IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
INSURE TIMELY DELIVERY. NO OLD NOTES OR LETTERS OF TRANSMITTAL SHOULD BE SENT TO
THE COMPANY.
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If tendered Old Notes are registered in the name of the signer of the Letter
of Transmittal and the Exchange Notes to be issued in exchange therefor are to
be issued (and any untendered Old Notes are to be reissued) in the name of the
registered holder (which term, for the purposes described herein, shall include
any participant in The Depository Trust Company (also referred to as a
"book-entry transfer facility") whose name appears on a security listing as the
owner of Old Notes), the signature of such signer need not be guaranteed. In any
other case, the tendered Old Notes must be endorsed or accompanied by written
instruments of transfer in form satisfactory to the Company and duly executed by
the registered holder, and the signature on the endorsement or instrument of
transfer must be guaranteed by a bank, broker, dealer, credit union, savings
association, clearing agency or other institution (each an "Eligible
Institution") that is a member of a recognized signature guarantee medallion
program within the meaning of Rule 17Ad-15 under the Exchange Act. If the
Exchange Notes and/or Old Notes not exchanged are to be delivered to an address
other than that of the registered holder appearing on the note register for the
Old Notes, the signature in the Letter of Transmittal must be guaranteed by an
Eligible Institution.
The Exchange Agent will make a request within two business days after the
date of receipt of this Prospectus to establish accounts with respect to the Old
Notes at the book-entry transfer facility for the purpose of facilitating the
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the book-entry transfer facility's system
may make book-entry delivery of Old Notes by causing such book-entry transfer
facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the book-entry transfer facility's
procedures for such transfer. Although delivery of Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at the book-entry
transfer facility, an appropriate Letter of Transmittal with any required
signature guarantee and all other required documents must in each case be
transmitted to and received or confirmed by the Exchange Agent at its address
set forth below on or prior to the Expiration Date, or, if the guaranteed
delivery procedures described below are complied with, within the time period
provided under such procedures.
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Old Notes to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received at
its address set forth below on or prior to the Expiration Date, a letter,
telegram or facsimile transmission (receipt confirmed by telephone and an
original delivered by guaranteed overnight courier) from an Eligible Institution
setting forth the name and address of the tendering holder, the names in which
the Old Notes are registered and, if possible, the certificate numbers of the
Old Notes to be tendered, and stating that the tender is being made thereby and
guaranteeing that within three business days after the Expiration Date, the Old
Notes in proper form for transfer (or a confirmation of book-entry transfer of
such Old Notes into the Exchange Agent's account at the book-entry transfer
facility), will be delivered by such Eligible Institution together with a
properly completed and duly executed Letter of Transmittal (and any other
required documents). Unless Old Notes being tendered by the above-described
method are deposited with the Exchange Agent within the time period set forth
above (accompanied or preceded by a properly completed Letter of Transmittal and
any other required documents), the Company may, at its option, reject the
tender. Copies of the notice of guaranteed delivery ("Notice of Guaranteed
Delivery") which may be used by Eligible Institutions for the purposes described
in this paragraph are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at the book-entry transfer facility)
is received by the Exchange Agent, or (ii) a Notice of Guaranteed Delivery or
letter, telegram or facsimile transmission to similar effect (as provided above)
from an Eligible Institution is received by the Exchange Agent. Issuances of
Exchange Notes in exchange for Old Notes tendered
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pursuant to a Notice of Guaranteed Delivery or letter, telegram or facsimile
transmission to similar effect (as provided above) by an Eligible Institution
will be made only against deposit of the Letter of Transmittal (and any other
required documents) and the tendered Old Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or not to accept any
particular Old Notes which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to waive
any defects or irregularities or conditions of the Exchange Offer as to any
particular Old Notes either before or after the Expiration Date (including the
right to waive the ineligibility of any holder who seeks to tender Old Notes in
the Exchange Offer). The interpretation of the terms and conditions of the
Exchange Offer (including the Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
for exchange must be cured within such reasonable period of time as the Company
shall determine. Neither the Company, the Exchange Agent nor any other person
shall be under any duty to give notification of any defect or irregularity with
respect to any tender of Old Notes for exchange, nor shall any of them incur any
liability for failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than the
registered holder or holders of Old Notes, such Old Notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly as
the name or names of the registered holder or holders appear on the Old Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
By tendering, each holder will represent to the Company that, among other
things, the Exchange Notes acquired pursuant to the Exchange Offer are being
acquired in the ordinary course of business of the person receiving such
Exchange Notes, whether or not such person is the holder, that neither the
holder nor any such other person has an arrangement or understanding with any
person to participate in the distribution of such Exchange Notes and that
neither the holder nor any such other person is an "affiliate," as defined under
Rule 405 of the Securities Act, of the Company, or if it is an affiliate it will
comply with the registration and prospectus requirements of the Securities Act
to the extent applicable.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution."
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Notes for exchange (the "Transferor") exchanges, assigns
and transfers the Old Notes to the Company and irrevocably constitutes and
appoints the Exchange Agent as the Transferor's agent and attorney-in-fact to
cause the Old Notes to be assigned, transferred and exchanged. The Transferor
represents and warrants that it has full power and authority to tender,
exchange, assign and transfer the Old Notes and to acquire Exchange Notes
issuable upon the exchange of such tendered Notes, and that, when the same are
accepted for exchange, the Company will acquire good and unencumbered title to
the tendered Old Notes, free and clear of all liens,
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restrictions, charges and encumbrances and not subject to any adverse claim. The
Transferor also warrants that it will, upon request, execute and deliver any
additional documents deemed by the Exchange Agent or the Company to be necessary
or desirable to complete the exchange, assignment and transfer of tendered Old
Notes or transfer ownership of such Old Notes on the account books maintained by
a book-entry transfer facility. The Transferor further agrees that acceptance of
any tendered Old Notes by the Company and the issuance of Exchange Notes in
exchange therefor shall constitute performance in full by the Company of certain
of its obligations under the Registration Rights Agreement. All authority
conferred by the Transferor will survive the death or incapacity of the
Transferor and every obligation of the Transferor shall be binding upon the
heirs, legal representatives, successors, assigns, executors and administrators
of such Transferor.
The Transferor certifies that it is not an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act and that it is acquiring the
Exchange Notes offered hereby in the ordinary course of such Transferor's
business and that such Transferor has no arrangement with any person to
participate in the distribution of such Exchange Notes. Each holder, other than
a broker-dealer, must acknowledge that it is not engaged in, and does not intend
to engage in, a distribution of Exchange Notes. Each Transferor which is a
broker-dealer receiving Exchange Notes for its own account must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. By so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of Exchange
Notes received in exchange for Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. The Company will, for a period of 120 days after the Expiration
Date, make copies of this Prospectus available to any broker-dealer for use in
connection with any such resale.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal sent by
telegram, facsimile transmission (receipt confirmed by telephone) or letter must
be received by the Exchange Agent at the address set forth herein prior to the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having tendered the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) specify the principal
amount of Notes to be withdrawn, (iv) include a statement that such holder is
withdrawing his election to have such Old Notes exchanged, (v) be signed by the
holder in the same manner as the original signature on the Letter of Transmittal
by which such Old Notes were tendered or as otherwise described above (including
any required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee under the Indenture register the transfer of such
Old Notes into the name of the person withdrawing the tender and (vi) specify
the name in which any such Old Notes are to be registered, if different from
that of the Depositor. The Exchange Agent will return the properly withdrawn Old
Notes promptly following receipt of notice of withdrawal. If Old Notes have been
tendered pursuant to the procedure for book-entry transfer, any notice of
withdrawal must specify the name and number of the account at the book-entry
transfer facility to be credited with the withdrawn Old Notes or otherwise
comply with the book-entry transfer facility procedure. All questions as to the
validity of notices of withdrawals, including time of receipt, will be
determined by the Company and such determination will be final and binding on
all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the book-entry
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transfer facility pursuant to the book-entry transfer procedures described
above, such Old Notes will be credited to an account with such book-entry
transfer facility specified by the holder) as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Old Notes may be retendered by following one of the procedures
described under "Procedures for Tendering Old Notes" above at any time on or
prior to the Expiration Date.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly on the Exchange Date, all Old Notes properly
tendered and will issue the Exchange Notes promptly after such acceptance. See
"Certain Conditions to the Exchange Offer" below. For purposes of the Exchange
Offer, the Company shall be deemed to have accepted properly tendered Old Notes
for exchange when, as and if the Company has given oral or written notice
thereof to the Exchange Agent.
For each Old Note accepted for exchange, the holder of such Old Note will
receive an Exchange Note having a principal amount equal to that of the
surrendered Old Note.
In all cases, issuance of Exchange Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely book-entry
confirmation of such Old Notes into the Exchange Agent's account at the
book-entry transfer facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Notes are submitted for a greater principal amount than the
holder desires to exchange, such unaccepted or non-exchanged Old Notes will be
returned without expense to the tendering holder thereof (or, in the case of Old
Notes tendered by book-entry transfer into the Exchange Agent's account at the
book-entry transfer facility pursuant to the book-entry transfer procedures
described above, such non-exchanged Old Notes will be credited to an account
maintained with such book-entry transfer facility) as promptly as practicable
after the expiration of the Exchange Offer.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Company shall not be required to accept for exchange,
or to issue Exchange Notes in exchange for, any Old Notes and may terminate or
amend the Exchange Offer (by oral or written notice to the Exchange Agent or by
a timely press release) if at any time before the acceptance of such Old Notes
for exchange or the exchange of the Exchange Notes for such Old Notes, any of
the following conditions exist:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency or regulatory authority or any
injunction, order or decree is issued with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or have a material
adverse effect on the contemplated benefits of the Exchange Offer to the
Company; or
(b) any change (or any development involving a prospective change) shall
have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Company that is or may be adverse to the Company, or the
Company shall have become aware of facts that have or may have adverse
significance with respect to the value of the Old Notes or the Exchange
Notes or that may materially impair the contemplated benefits of the
Exchange Offer to the Company; or
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(c) any law, rule or regulation or applicable interpretations of the
staff of the Commission is issued or promulgated which, in the good faith
determination of the Company, do not permit the Company to effect the
Exchange Offer; or
(d) any governmental approval has not been obtained, which approval the
Company, in its sole discretion, deems necessary for the consummation of the
Exchange Offer; or
(e) there shall have been proposed, adopted or enacted any law, statute,
rule or regulation (or an amendment to any existing law statute, rule or
regulation) which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer or have
a material adverse effect on the contemplated benefits of the Exchange Offer
to the Company; or
(f) there shall occur a change in the current interpretation by the
staff of the Commission which permits the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Old Notes to be offered for resale,
resold and otherwise transferred by holders thereof (other than any such
holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that such
Exchange Notes are acquired in the ordinary course of such holders' business
and such holders have no arrangement with any person to participate in the
distribution of such Exchange Notes; or
(g) there shall have occurred (i) any general suspension of, shortening
of hours for, or limitation on prices for, trading in securities on any
national securities exchange or in the over-the-counter market (whether or
not mandatory), (ii) any limitation by any govermental agency or authority
which may adversely affect the ability of the Company to complete the
transactions contemplated by the Exchange Offer, (iii) a declaration of a
banking moratorium or any suspension of payments in respect of banks by
Federal or state authorities in the United States (whether or not
mandatory), (iv) a commencement of a war, armed hostilities or other
international or national crisis directly or indirectly involving the United
States, (v) any limitation (whether or not mandatory) by any governmental
authority on, or other event having a reasonable likelihood of affecting,
the extension of credit by banks or other leading institutions in the United
States, or (vi) in the case of any of the foregoing existing at the time of
the commencement of the Exchange Offer, a material acceleration or worsening
thereof.
The Company expressly reserves the right to terminate the Exchange Offer and
not accept for exchange any Old Notes upon the occurrence of any of the
foregoing conditions (which represent all of the material conditions to the
acceptance by the Company of properly tendered Old Notes). In addition, the
Company may amend the Exchange Offer at any time prior to the Expiration Date if
any of the conditions set forth above occur. Moreover, regardless of whether any
of such conditions has occurred, the Company may amend the Exchange Offer in any
manner which, in its good faith judgment, is advantageous to holders of the Old
Notes.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time. If the Company waives or amends the foregoing
conditions, it will, if required by law, extend the Exchange Offer for a minimum
of five business days from the date that the Company first gives notice, by
public announcement or otherwise, of such waiver or amendment, if the Exchange
Offer would otherwise expire within such five business-day period. Any
determination by the Company concerning the events described above will be final
and binding upon all parties.
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In addition, the Company will not accept for exchange any Old Notes
tendered, and no Exchange Notes will be issued in exchange for any such Old
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or the qualification of the Indenture under the Trust Indenture Act of
1939, as amended. In any such event the Company is required to use every
reasonable effort to obtain the withdrawal of any stop order at the earliest
possible time.
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange.
EXCHANGE AGENT
Marine Midland Bank has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal should be directed to the
Exchange Agent at one of the addresses set forth below:
<TABLE>
<S> <C>
BY HAND/OVERNIGHT COURIER: BY MAIL:
Marine Midland Bank Marine Midland Bank
Attn: Corporate Trust Operations Attn: Corporate Trust Operations
140 Broadway, Level A 140 Broadway, Level A
New York, New York 10005-1180 New York, New York 10005-1180
BY FACSIMILE:
(212) 658-2292
Attn.: Paulette Shaw
Telephone: (212) 658-5931
</TABLE>
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent at the address and
telephone number set forth in the Letter of Transmittal.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ON THE LETTER OF TRANSMITTAL,
OR TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE OR TELEX NUMBER OTHER THAN THE
ONES SET FORTH ON THE LETTER OF TRANSMITTAL, WILL NOT CONSTITUTE A VALID
DELIVERY.
SOLICITATION OF TENDERS; FEES AND EXPENSES
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith. The
Company will also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of this and other related documents to the beneficial owners of the Old
Notes and in handling or forwarding tenders for their customers.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
approximately $500,000, which includes fees and expenses of the Exchange Agent,
Trustee, registration fees, accounting, legal, printing and related fees and
expenses.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company.
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Neither the delivery of this Prospectus nor any exchange made hereunder shall,
under any circumstances, create any implication that there has been no change in
the affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Old Notes in any jurisdiction in which
the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Company may, at its
discretion, take such action as it may deem necessary to make the Exchange Offer
in any such jurisdiction and extend the Exchange Offer to holders of Old Notes
in such jurisdiction. In any jurisdiction in which the securities laws or blue
sky laws of which require the Exchange Offer to be made by a licensed broker or
dealer, the Exchange Offer is being made on behalf of the Company by one or more
registered brokers or dealers which are licensed under the laws of such
jurisdication.
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the carrying value of the Old Notes
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Company upon the exchange of Exchange Notes for Old Notes. Expenses incurred in
connection with the issuance of the Exchange Notes will be amortized over the
term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon. Old Notes not
exchanged pursuant to the Exchange Offer will continue to remain outstanding in
accordance with their terms. In general, the Old Notes may not be offered or
sold unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. The Company does not currently anticipate that it will
register the Old Notes under the Securities Act.
Participation in the Exchange Offer is voluntary, and holders of Old Notes
should carefully consider whether to participate. Holders of Old Notes are urged
to consult their financial and tax advisors in making their own decision on what
action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the terms of, this Exchange Offer, the
Company will have fulfilled a covenant contained in the Registration Rights
Agreement. Holders of Old Notes who do not tender their Old Notes in the
Exchange Offer will continue to hold such Old Notes and will be entitled to all
the rights and limitations applicable thereto under the Indenture, except for
any such rights under the Registration Rights Agreement that by their terms
terminate or cease to have further effectiveness as a result of the making of
this Exchange
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Offer. All untendered Old Notes will continue to be subject to the restrictions
on transfer set forth in the Indenture. To the extent that Old Notes are
tendered and accepted in the Exchange Offer, the trading market for untendered
Old Notes could be adversely affected.
The Company may in the future seek to acquire, subject to the terms of the
Indenture, untendered Old Notes in open market or privately negotiated
transactions, through subsequent exchange offers or otherwise. The Company has
no present plan to acquire any Old Notes which are not tendered in the Exchange
Offer.
RESALE OF EXCHANGE NOTES
The Company is making the Exchange Offer in reliance on the position of the
staff of the Commission as set forth in certain interpretive letters addressed
to third parties in other transactions. However, the Company has not sought its
own interpretive letter and there can be no assurance that the Staff would make
a similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
staff, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by a Holder (other than any Holder who is a broker-dealer
or an "affiliate" of the Company within the meaning of Rule 405 of the
Securities Act) without further compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such Holder's business and that such
Holder is not participating, and has no arrangement or understanding with any
person to participate, in a distribution (within the meaning of the Securities
Act) of such Exchange Notes. However, any holder who is an "affiliate" of the
Company or who has an arrangement or understanding with respect to the
distribution of the Exchange Notes to be acquired pursuant to the Exchange
Offer, or any broker-dealer who purchased Old Notes from the Company to resell
pursuant to Rule 144A or any other available exemption under the Securities Act
(i) could not rely on the applicable interpretations of the staff and (ii) must
comply with the registration and prospectus delivery requirements of the
Securities Act. A broker-dealer who holds Old Notes that were acquired for its
own account as a result of market-making or other trading activities may be
deemed to be an "underwriter" within the meaning of the Securities Act and must,
therefore, deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of Exchange Notes. Each such broker-dealer that
receives Exchange Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge in the Letter of
Transmittal that it will deliver a prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution."
In addition, to comply with the securities laws of certain jurisdictions, if
applicable, the Exchange Notes may not be offered or sold unless they have been
registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. The Company has
agreed, pursuant to the Registration Rights Agreement and subject to certain
specified limitations therein, to register or qualify the Exchange Notes for
offer or sale under the securities or blue sky laws of such jurisdictions as any
holder of the Exchange Notes reasonably requests. Such registration or
qualification may require the imposition of restrictions or conditions
(including suitability requirements for offerees or purchasers) in connection
with the offer or sale of any Exchange Notes.
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DESCRIPTION OF THE EXCHANGE NOTES
The Old Notes were issued and the Exchange Notes offered hereby will be
issued under an indenture dated as of February 13, 1997 (the "Indenture")
between the Company, as issuer, and Marine Midland Bank, as trustee (the
"Trustee"). The terms of the Exchange Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Exchange
Notes are subject to all such terms, and holders of the Exchange Notes are
referred to the Indenture and the Trust Indenture Act for a statement thereof.
The following summary of the material provisions of the Indenture describes the
material terms of the Indenture but does not purport to be complete and is
subject to, and qualified in its entirety by reference to, the provisions of the
Indenture, including the definitions of certain terms contained therein and
those terms made part of the Indenture by reference to the Trust Indenture Act.
For definitions of certain capitalized terms used in the following summary, see
"--Certain Definitions." The Indenture is an exhibit to the Registration
Statement of which this Prospectus is a part.
On February 13, 1997, the Company issued $300 million aggregate principal
amount of Old Notes under the Indenture. The terms of the Exchange Notes are
identical in all material respects to the Old Notes, except for certain transfer
restrictions and registration and other rights relating to the exchange of the
Old Notes for Exchange Notes. The Trustee will authenticate and deliver Exchange
Notes for original issue only in exchange for a like principal amount of Old
Notes. Any Old Notes that remain outstanding after the consummation of the
Exchange Offer, together with the Exchange Notes, will be treated as a single
class of securities under the Indenture. Accordingly, all references herein to
specified percentages in aggregate principal amount of the outstanding Exchange
Notes shall be deemed to mean, at any time after the Exchange Offer is
consummated, such percentage in aggregate principal amount of the Old Notes and
Exchange Notes then outstanding.
GENERAL
The Exchange Notes will mature on February 15, 2009, will be limited to
$300,000,000 aggregate principal amount and will be unsecured senior
subordinated obligations of the Company. Each Exchange Note will bear interest
at the rate set forth on the cover page hereof from February 13, 1997, or from
the most recent interest payment date to which interest has been paid or duly
provided for, payable on August 15, 1997, and semiannually thereafter on
February 15 and August 15 in each year until the principal thereof is paid or
duly provided for to the Person in whose name the Exchange Note (or any
predecessor Exchange Note) is registered at the close of business on the
February 1 or August 1 next preceding such interest payment date. Interest will
be computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal of, premium, if any, and interest on the Exchange Notes will be
payable, and the Exchange Notes will be exchangeable and transferable, at the
office or agency of the Company in the City of New York maintained for such
purposes (which initially will be the Trustee); PROVIDED, HOWEVER, that, at the
option of the Company, interest may be paid by check mailed to the address of
the Person entitled thereto as such address appears on the security register.
The Exchange Notes will be issued only in fully registered form without coupons
and only in denominations of $1,000 and any integral multiple thereof. No
service charge will be made for any registration of transfer or exchange or
redemption of Exchange Notes, but the Company may require payment in certain
circumstances of a sum sufficient to cover any tax or other governmental charge
that may be imposed in connection therewith.
Old Notes that remain outstanding after the consummation of the Exchange
Offer and Exchange Notes issued in connection with the Exchange Offer will be
treated as a single class of securities under the Indenture.
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SUBORDINATION
The payment of the Subordinated Note Obligations will be subordinated in
right of payment, as set forth in the Indenture, to the prior payment in full in
cash equivalents of all Senior Indebtedness, whether outstanding on the date of
the Indenture or thereafter incurred. Upon any distribution to creditors of the
Company in a liquidation or dissolution of the Company or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or its property, an assignment for the benefit of creditors or any
marshalling of the Company's assets and liabilities, the holders of Senior
Indebtedness will be entitled to receive payment in full in cash equivalents of
such Senior Indebtedness before the holders of Exchange Notes will be entitled
to receive any payment with respect to the Subordinated Note Obligations, and
until all Senior Indebtedness is paid in full in cash equivalents, any
distribution to which the holders of Exchange Notes would be entitled shall be
made to the holders of Senior Indebtedness (except that holders of Exchange
Notes may receive (i) shares of stock and any debt securities that are
subordinated at least to the same extent as the Exchange Notes to (a) Senior
Indebtedness and (b) any securities issued in exchange for Senior Indebtedness
and (ii) payments made from the trusts described under "--Legal Defeasance and
Covenant Defeasance").
The Company also may not make any payment upon or in respect of the
Subordinated Note Obligations (except in such subordinated securities or from
the trust described under "--Legal Defeasance and Covenant Defeasance") if (i) a
default in the payment of the principal of, premium, if any, or interest on, or
of unreimbursed amounts under drawn letters of credit or in respect of bankers'
acceptances or fees relating to letters of credit or bankers' acceptances
constituting, Designated Senior Indebtedness occurs and is continuing beyond any
applicable period of grace (a "payment default") or (ii) any other default
occurs and is continuing with respect to Designated Senior Indebtedness that
permits holders of the Designated Senior Indebtedness as to which such default
relates to accelerate its maturity (a "non-payment default") and the Trustee
receives a notice of such default (a "Payment Blockage Notice") from a
representative of holders of such Designated Senior Indebtedness. Payments on
the Exchange Notes, including any missed payments, may and shall be resumed (a)
in the case of a payment default, upon the date on which such default is cured
or waived or shall have ceased to exist or such Designated Senior Indebtedness
shall have been discharged or paid in full in cash equivalents and (b) in case
of a nonpayment default, the earlier of (x) the date on which such nonpayment
default is cured or waived, (y) 179 days after the date on which the applicable
Payment Blockage Notice is received (each such period, the "Payment Blockage
Period") or (z) the date such Payment Blockage Period shall be terminated by
written notice to the Trustee from the requisite holders of such Designated
Senior Indebtedness necessary to terminate such period or from their
representative. No new period of payment blockage may be commenced unless and
until 365 days have elapsed since the effectiveness of the immediately preceding
Payment Blockage Notice. However, if any Payment Blockage Notice within such
365-day period is given by or on behalf of any holders of Designated Senior
Indebtedness (other than the agent under the Senior Credit Facility), the agent
under the Senior Credit Facility may give another Payment Blockage Notice within
such period. In no event, however, may the total number of days during which any
Payment Blockage Period or Periods is in effect exceed 179 days in the aggregate
during any 365 consecutive day period. No nonpayment default that existed or was
continuing on the date of delivery of any Payment Blockage Notice to the Trustee
shall be, or be made, the basis for a subsequent Payment Blockage Notice unless
such default shall have been cured or waived for a period of not less than 90
days.
If the Company fails to make any payment on the Exchange Notes when due or
within any applicable grace period, whether or not on account of the payment
blockage provision referred to above, such failure would constitute an Event of
Default under the Indenture and would enable the holders of the Exchange Notes
to accelerate the maturity thereof.
The Indenture further requires that the Company promptly notify holders of
Senior Indebtedness if payment of the Exchange Notes is accelerated because of
an Event of Default.
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As a result of the subordination provisions described above, in the event of
insolvency, bankruptcy, administration, reorganization, receivership or similar
proceedings relating to the Company, holders of Exchange Notes may recover less
ratably than creditors of the Company who are holders of Senior Indebtedness. At
December 13, 1996, on a pro forma basis after giving effect to the Merger and
the Financings (including the Offering), the Company would have had
approximately $122.2 million of Senior Indebtedness outstanding and the Company
would have had additional availability of $251.1 million (reduced by $48.9
million of outstanding letters of credit) for borrowings under the Senior Credit
Facility, all of which would be Senior Indebtedness of the Company. In addition,
the Exchange Notes will be structurally subordinated to the liabilities of
Subsidiaries of the Company. Although the Indenture contains limitations on the
amount of additional Indebtedness that the Company and its Subsidiaries may
incur, under certain circumstances the amount of such Indebtedness could be
substantial and, in any case, such Indebtedness may be Senior Indebtedness. See
"--Certain Covenants--Limitations on Incurrence of Indebtedness and Issuance of
Disqualified Stock."
"Designated Senior Indebtedness" means (i) Senior Indebtedness under the
Senior Credit Facility and (ii) any other Senior Indebtedness permitted under
the Indenture the principal amount of which is $50 million or more and that has
been designated by the Company as Designated Senior Indebtedness.
"Senior Indebtedness" means (i) the Obligations under the Senior Credit
Facility and (ii) any other Indebtedness permitted to be incurred by the Company
under the terms of the Indenture, unless the instrument under which such
Indebtedness is incurred expressly provides that it is on a parity with or
subordinated in right of payment to the Exchange Notes, including, with respect
to (i) and (ii), interest accruing subsequent to the filing of, or which would
have accrued but for the filing of, a petition for bankruptcy, whether or not
such interest is an allowable claim in such bankruptcy proceeding.
Notwithstanding anything to the contrary in the foregoing, Senior Indebtedness
will not include (1) any liability for federal, state, local or other taxes owed
or owing by the Company, (2) any obligation of the Company to any of its
Subsidiaries, (3) any accounts payable or trade liabilities arising in the
ordinary course of business (including instruments evidencing such liabilities)
other than obligations in respect of bankers' acceptances and letters of credit
under the Senior Credit Facility, (4) any Indebtedness that is incurred in
violation of the Indenture, (5) Indebtedness which, when incurred and without
respect to any election under Section 1111(b) of Title 11, United States Code,
is without recourse to the Company, (6) any Indebtedness, guarantee or
obligation of the Company which is subordinate or junior to any other
Indebtedness, guarantee or obligation of the Company, (7) Indebtedness evidenced
by the Exchange Notes and (8) Capital Stock of the Company.
"Subordinated Note Obligations" means any principal of, premium, if any, and
interest on the Exchange Notes payable pursuant to the terms of the Exchange
Notes or upon acceleration, together with and including any amounts received
upon the exercise of rights of rescission or other rights of action (including
claims for damages) or otherwise, to the extent relating to the purchase price
of the Exchange Notes or amounts corresponding to such principal, premium, if
any, or interest on the Exchange Notes.
The Exchange Notes will rank senior in right of payment to all Subordinated
Indebtedness of the Company. At the Issuance Date the Company had no
Subordinated Indebtedness.
MANDATORY REDEMPTION
The Company will not be required to make mandatory redemptions or sinking
fund payments prior to maturity of the Exchange Notes.
OPTIONAL REDEMPTION
Except as described below, the Exchange Notes will not be redeemable at the
Company's option prior to February 15, 2002. From and after February 15, 2002,
the Exchange Notes will be subject to
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redemption at the option of the Company, in whole or in part, upon not less than
30 nor more than 60 days' written notice, at the redemption prices (expressed as
a percentage of principal amount) set forth below, plus accrued and unpaid
interest thereon, if any, to the applicable redemption date, if redeemed during
the twelve-month period beginning on February 15 of each of the years indicated
below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ------------------------------------------------------------------------------------ ------------
<S> <C>
2002................................................................................ 104.750%
2003................................................................................ 103.167%
2004................................................................................ 101.583%
2005 and thereafter................................................................. 100.000%
</TABLE>
In addition, at any time or from time to time, on or prior to February 15,
2000, the Company may, at its option, redeem up to 40% of the aggregate
principal amount of Exchange Notes originally issued under the Indenture on the
Issuance Date at a redemption price equal to 109.5% of the aggregate principal
amount thereof, plus accrued and unpaid interest thereon, if any, to the
redemption date, with the net proceeds of one or more Equity Offerings; provided
that at least 60% of the aggregate principal amount of Exchange Notes originally
issued under the Indenture on the Issuance Date remains outstanding immediately
after the occurrence of such redemption; PROVIDED FURTHER that such redemption
occurs within 60 days of the date of closing of each such Equity Offering. The
Trustee shall select the Exchange Notes to be purchased in the manner described
under "Repurchase at the Option of Holders--Selection and Notice."
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL. The Indenture provides that, upon the occurrence of a
Change of Control, the Company will make an offer to purchase all or any part
(equal to $1,000 or an integral multiple thereof) of the Exchange Notes pursuant
to the offer described below (the "Change of Control Offer") at a price in cash
(the "Change of Control Payment") equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest, if any, to the date of
purchase. The Indenture provides that within 30 days following any Change of
Control, the Company will mail a notice to each Holder of Exchange Notes issued
under the Indenture, with a copy to the Trustee, with the following information:
(1) a Change of Control Offer is being made pursuant to the covenant entitled
"Change of Control," and that all Exchange Notes properly tendered pursuant to
such Change of Control Offer will be accepted for payment; (2) the purchase
price and the purchase date, which will be no earlier than 30 days nor later
than 60 days from the date such notice is mailed, except as may be otherwise
required by applicable law (the "Change of Control Payment Date"); (3) any
Exchange Note not properly tendered will remain outstanding and continue to
accrue interest; (4) unless the Company defaults in the payment of the Change of
Control Payment, all Exchange Notes accepted for payment pursuant to the Change
of Control Offer will cease to accrue interest on the Change of Control Payment
Date; (5) Holders electing to have any Exchange Notes purchased pursuant to a
Change of Control Offer will be required to surrender the Exchange Notes, with
the form entitled "Option of Holder to Elect Purchase" on the reverse of the
Exchange Notes completed, to the paying agent and at the address specified in
the notice prior to the close of business on the third Business Day preceding
the Change of Control Payment Date; (6) Holders will be entitled to withdraw
their tendered Exchange Notes and their election to require the Company to
purchase such Exchange Notes, provided that the paying agent receives, not later
than the close of business on the last day of the offer period, a telegram,
telex, facsimile transmission or letter setting forth the name of the Holder,
the principal amount of Exchange Notes tendered for purchase, and a statement
that such Holder is withdrawing his tendered Exchange Notes and his election to
have such Exchange Notes purchased; and (7) that Holders whose Exchange Notes
are being purchased only in part will be issued new Exchange Notes equal in
principal amount to the unpurchased portion of the
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Exchange Notes surrendered, which unpurchased portion must be equal to $1,000 in
principal amount or an integral multiple thereof.
The Indenture provides that, prior to complying with the provisions of this
covenant, but in any event within 30 days following a Change of Control, the
Company will either repay all outstanding amounts under the Senior Credit
Facility or offer to repay in full all outstanding amounts under the Senior
Credit Facility and repay the Obligations held by each lender who has accepted
such offer or obtain the requisite consents, if any, under the Senior Credit
Facility to permit the repurchase of the Exchange Notes required by this
covenant.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws or regulations are applicable in connection with the repurchase
of the Exchange Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the
provisions of the Indenture, the Company will comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations described in the Indenture by virtue thereof.
The Indenture provides that on the Change of Control Payment Date, the
Company will, to the extent permitted by law, (1) accept for payment all
Exchange Notes or portions thereof properly tendered pursuant to the Change of
Control Offer, (2) deposit with the paying agent an amount equal to the
aggregate Change of Control Payment in respect of all Exchange Notes or portions
thereof so tendered and (3) deliver, or cause to be delivered, to the Trustee
for cancellation the Exchange Notes so accepted together with an Officers'
Certificate stating that such Exchange Notes or portions thereof have been
tendered to and purchased by the Company. The Indenture provides that the paying
agent will promptly mail to each Holder of Exchange Notes the Change of Control
Payment for such Exchange Notes, and the Trustee will promptly authenticate and
mail to each Holder a new Exchange Note equal in principal amount to any
unpurchased portion of the Exchange Notes surrendered, if any, provided, that
each such new Exchange Note will be in a principal amount of $1,000 or an
integral multiple thereof. The Company will publicly announce the results of the
Change of Control Offer on or as soon as practicable after the Change of Control
Payment Date.
The Senior Credit Facility does, and future credit agreements or other
agreements relating to Senior Indebtedness to which the Company becomes a party
may, prohibit the Company from purchasing any Exchange Notes as a result of a
Change of Control and/or provide that certain change of control events with
respect to the Company would constitute a default thereunder. In the event a
Change of Control occurs at a time when the Company is prohibited from
purchasing the Exchange Notes, the Company could seek the consent of its lenders
to the purchase of the Exchange Notes or could attempt to refinance the
borrowings that contain such prohibition. If the Company does not obtain such a
consent or repay such borrowings, the Company will remain prohibited from
purchasing the Exchange Notes. In such case, the Company's failure to purchase
tendered Exchange Notes would constitute an Event of Default under the
Indenture. If, as a result thereof, a default occurs with respect to any Senior
Indebtedness, the subordination provisions in the Indenture would likely
restrict payments to the Holders of the Exchange Notes.
The existence of a Holder's right to require the Company to repurchase such
Holder's Exchange Notes upon the occurrence of a Change of Control may deter a
third party from seeking to acquire the Company in a transaction that would
constitute a Change of Control.
ASSET SALES. The Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, cause, make or suffer to exist an
Asset Sale, unless (x) the Company, or its Restricted Subsidiaries, as the case
may be, receives consideration at the time of such Asset Sale at least equal to
the fair market value (as determined in good faith by the Company) of the assets
sold or otherwise disposed of and (y) at least 75% of the proceeds from such
Asset Sale when received consists of cash or Cash Equivalents; provided that the
amount of (a) any liabilities (as shown on the Company's
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or such Restricted Subsidiary's most recent balance sheet) of the Company or any
Restricted Subsidiary (other than liabilities that are by their terms
subordinated to the Exchange Notes) that are assumed by the transferee of any
such assets, (b) any notes or other obligations received by the Company or any
such Restricted Subsidiary from such transferee that are converted by the
Company or such Restricted Subsidiary into cash within 180 days after such Asset
Sale (to the extent of the cash received) and (c) any Designated Noncash
Consideration received by the Company or any of its Restricted Subsidiaries in
such Asset Sale having an aggregate fair market value, taken together with all
other Designated Noncash Consideration received pursuant to this clause (c) that
is at that time outstanding, not to exceed the greater of (x) $100 million or
(y) 20% of Total Assets at the time of the receipt of such Designated Noncash
Consideration (with the fair market value of each item of Designated Noncash
Consideration being measured at the time received and without giving effect to
subsequent changes in value), shall be deemed to be cash for the purposes of
this provision.
Within 30 months after the Company's or any Restricted Subsidiary's receipt
of the Net Proceeds of any Asset Sale, the Company or such Restricted Subsidiary
may apply the Net Proceeds from such Asset Sale, at its option, (i) to
permanently reduce Obligations under the Senior Credit Facility (and to
correspondingly reduce commitments with respect thereto) or other Senior
Indebtedness or Pari Passu Indebtedness (provided that if the Company shall so
reduce Obligations under Pari Passu Indebtedness, it will equally and ratably
reduce Obligations under the Exchange Notes if the Exchange Notes are then
prepayable or, if the Exchange Notes may not be then prepaid, the Company shall
make an offer (in accordance with the procedures set forth below for an Asset
Sale Offer) to all Holders to purchase at 100% of the principal amount thereof
the amount of Exchange Notes that would otherwise be prepaid), (ii) to an
investment in any one or more businesses, capital expenditures or acquisitions
of other assets in each case, used or useful in a Similar Business and/or (iii)
to an investment in properties or assets that replace the properties and assets
that are the subject of such Asset Sale. Pending the final application of any
such Net Proceeds, the Company or such Restricted Subsidiary may temporarily
reduce Indebtedness under a revolving credit facility, if any, or otherwise
invest such Net Proceeds in Cash Equivalents or Investment Grade Securities. The
Indenture provides that any Net Proceeds from the Asset Sale that are not
invested as provided and within the time period set forth in the first sentence
of this paragraph will be deemed to constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $15 million, the Company shall make
an offer to all Holders of Exchange Notes (an "Asset Sale Offer") to purchase
the maximum principal amount of Exchange Notes, that is an integral multiple of
$1,000, that may be purchased out of the Excess Proceeds at an offer price in
cash equal to 100% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date fixed for the closing of such offer, in accordance
with the procedures set forth in the Indenture. The Company will commence an
Asset Sale Offer with respect to Excess Proceeds within ten Business Days after
the date that Excess Proceeds exceeds $15 million by mailing the notice required
pursuant to the terms of the Indenture, with a copy to the Trustee. To the
extent that the aggregate amount of Exchange Notes tendered pursuant to an Asset
Sale Offer is less than the Excess Proceeds, the Company may use any remaining
Excess Proceeds for general corporate purposes. If the aggregate principal
amount of Exchange Notes surrendered by Holders thereof exceeds the amount of
Excess Proceeds, the Trustee shall select the Exchange Notes to be purchased in
the manner described under the caption "Selection and Notice" below. Upon
completion of any such Asset Sale Offer, the amount of Excess Proceeds shall be
reset at zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws or regulations are applicable in connection with the repurchase
of the Exchange Notes pursuant to an Asset Sale Offer. To the extent that the
provisions of any securities laws or regulations conflict with the provisions of
the Indenture, the Company will comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations described
in the Indenture by virtue thereof.
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SELECTION AND NOTICE. If less than all of the Exchange Notes are to be
redeemed at any time or if more Exchange Notes are tendered pursuant to an Asset
Sale Offer than the Company is required to purchase, selection of such Exchange
Notes for redemption or purchase, as the case may be, will be made by the
Trustee in compliance with the requirements of the principal national securities
exchange, if any, on which such Exchange Notes are listed, or, if such Exchange
Notes are not so listed, on a pro rata basis, by lot or by such other method as
the Trustee shall deem fair and appropriate (and in such manner as complies with
applicable legal requirements); provided that no Exchange Notes of $1,000 or
less shall be purchased or redeemed in part.
Notices of purchase or redemption shall be mailed by first class mail,
postage prepaid, at least 30 but not more than 60 days before the purchase or
redemption date to each Holder of Exchange Notes to be purchased or redeemed at
such Holder's registered address. If any Exchange Note is to be purchased or
redeemed in part only, any notice of purchase or redemption that relates to such
Exchange Note shall state the portion of the principal amount thereof that has
been or is to be purchased or redeemed.
A new Exchange Note in principal amount equal to the unpurchased or
unredeemed portion of any Exchange Note purchased or redeemed in part will be
issued in the name of the Holder thereof upon cancellation of the original
Exchange Note. On and after the purchase or redemption date, unless the Company
defaults in payment of the purchase or redemption price, interest shall cease to
accrue on Exchange Notes or portions thereof purchased or called for redemption.
CERTAIN COVENANTS
LIMITATION ON RESTRICTED PAYMENTS. The Indenture provides that the Company
will not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly: (i) declare or pay any dividend or make any distribution on account
of the Company's or any of its Restricted Subsidiaries' Equity Interests,
including any dividend or distribution payable in connection with any merger or
consolidation (other than (A) dividends or distributions by the Company payable
in Equity Interests (other than Disqualified Stock) of the Company or (B)
dividends or distributions by a Restricted Subsidiary so long as, in the case of
any dividend or distribution payable on or in respect of any class or series of
securities issued by a Subsidiary other than a Wholly Owned Subsidiary, the
Company or a Restricted Subsidiary receives at least its PRO RATA share of such
dividend or distribution in accordance with its Equity Interests in such class
or series of securities); (ii) purchase, redeem, defease or otherwise acquire or
retire for value any Equity Interests of the Company; (iii) make any principal
payment on, or redeem, repurchase, defease or otherwise acquire or retire for
value in each case, prior to any scheduled repayment, or maturity, any
Subordinated Indebtedness; or (iv) make any Restricted Investment (all such
payments and other actions set forth in clauses (i) through (iv) above being
collectively referred to as "Restricted Payments"), unless, at the time of such
Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b) immediately before and immediately after giving effect to such
transaction on a pro forma basis, the Company could incur $1.00 of
additional Indebtedness under the provisions of the first paragraph of
"--Limitations on Incurrence of Indebtedness and Issuance of Disqualified
Stock"; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
after the Issuance Date (including Restricted Payments permitted by clauses
(i), (ii) (with respect to the payment of dividends on Refunding Capital
Stock pursuant to clause (b) thereof), (iv) (only to the extent that amounts
paid pursuant to such clause are greater than amounts that would have been
paid pursuant to such clause if $5 million and $10 million were substituted
in such clause for $10 million and $20 million, respectively),
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(v), (viii) and (ix) of the next succeeding paragraph, but excluding all
other Restricted Payments permitted by the next succeeding paragraph), is
less than the sum of (i) 50% of the Consolidated Net Income of the Company
for the period (taken as one accounting period) from the fiscal quarter that
first begins after the Issuance Date to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, in the case such
Consolidated Net Income for such period is a deficit, minus 100% of such
deficit); PROVIDED, HOWEVER, that for the purposes of this clause (i),
Consolidated Net Income shall be deemed to include any increases during such
period to Consolidated Additional Paid-In Capital of the Company, which
increases are attributable to tax benefits from net operating losses
incurred prior to the Issuance Date and are not otherwise included in
Consolidated Net Income of the Company for such period, plus (ii) 100% of
the aggregate net cash proceeds and the fair market value, as determined in
good faith by the Board of Directors, of marketable securities received by
the Company since immediately after the closing of the Merger and the
Financings from the issue or sale of Equity Interests (including Retired
Capital Stock (as defined below), but excluding cash proceeds and marketable
securities received from the sale of Equity Interests to members of
management, directors or consultants of the Company and its Subsidiaries
after the Issuance Date to the extent such amounts have been applied to
Restricted Payments in accordance with clause (iv) of the next succeeding
paragraph) or debt securities of the Company that have been converted into
such Equity Interests of the Company (other than Refunding Capital Stock (as
defined below) or Equity Interests or convertible debt securities of the
Company sold to a Restricted Subsidiary and other than Disqualified Stock or
debt securities that have been converted into Disqualified Stock), plus
(iii) 100% of the aggregate amount of cash and marketable securities
contributed to the capital of the Company following the Issuance Date, plus
(iv) 100% of the aggregate amount received in cash and the fair market value
of marketable securities (other than Restricted Investments) received from
(A) the sale or other disposition (other than to the Company or a Restricted
Subsidiary) of Restricted Investments made by the Company and its Restricted
Subsidiaries or (B) a dividend from, or the sale (other than to the Company
or a Restricted Subsidiary) of the stock of, an Unrestricted Subsidiary
(other than an Unrestricted Subsidiary the Investment in which was made by
the Company or a Restricted Subsidiary pursuant to clauses (vi) or (x)
below).
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at the date of declaration such payment would have
complied with the provisions of the Indenture;
(ii) (a) the redemption, repurchase, retirement or other acquisition of
any Equity Interests (the "Retired Capital Stock") or Subordinated
Indebtedness of the Company in exchange for, or out of the proceeds of the
substantially concurrent sale (other than to a Restricted Subsidiary) of,
Equity Interests of the Company (other than any Disqualified Stock) (the
"Refunding Capital Stock"), and (b) if immediately prior to the retirement
of Retired Capital Stock, the declaration and payment of dividends thereon
was permitted under clause (v) of this paragraph, the declaration and
payment of dividends on the Refunding Capital Stock in an aggregate amount
per year no greater than the aggregate amount of dividends per annum that
was declarable and payable on such Retired Capital Stock immediately prior
to such retirement; PROVIDED, HOWEVER, that at the time of the declaration
of any such dividends, no Default or Event of Default shall have occurred
and be continuing or would occur as a consequence thereof;
(iii) the redemption, repurchase or other acquisition or retirement of
Subordinated Indebtedness of the Company made by exchange for, or out of the
proceeds of the substantially concurrent sale of, new Indebtedness of the
Company so long as (A) the principal amount of such new Indebtedness does
not exceed the principal amount of the Subordinated Indebtedness being so
redeemed, repurchased, acquired or retired for value (plus the amount of any
premium required to be paid under the terms of the instrument governing the
Subordinated Indebtedness being so
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redeemed, repurchased, acquired or retired), (B) such Indebtedness is
subordinated to the Senior Indebtedness and the Exchange Notes at least to
the same extent as such Subordinated Indebtedness so purchased, exchanged,
redeemed, repurchased, acquired or retired for value, (C) such Indebtedness
has a final scheduled maturity date equal to or later than the final
scheduled maturity date of the Subordinated Indebtedness being so redeemed,
repurchased, acquired or retired and (D) such Indebtedness has a Weighted
Average Life to Maturity equal to or greater than the remaining Weighted
Average Life to Maturity of the Subordinated Indebtedness being so redeemed,
repurchased, acquired or retired;
(iv) a Restricted Payment to pay for the repurchase, retirement or other
acquisition or retirement for value of common Equity Interests of the
Company held by any future, present or former employee, director or
consultant of the Company or any Subsidiary pursuant to any management
equity plan or stock option plan or any other management or employee benefit
plan or agreement; PROVIDED, HOWEVER, that the aggregate Restricted Payments
made under this clause (iv) does not exceed in any calendar year $10 million
(with unused amounts in any calendar year being carried over to succeeding
calendar years subject to a maximum (without giving effect to the following
proviso) of $20 million in any calendar year); PROVIDED FURTHER that such
amount in any calendar year may be increased by an amount not to exceed (i)
the cash proceeds from the sale of Equity Interests of the Company to
members of management, directors or consultants of the Company and its
Subsidiaries that occurs after the Issuance Date (to the extent the cash
proceeds from the sale of such Equity Interest have not otherwise been
applied to the payment of Restricted Payments by virtue of the preceding
paragraph (c)) plus (ii) the cash proceeds of key man life insurance
policies received by the Company and its Restricted Subsidiaries after the
Issuance Date less (iii) the amount of any Restricted Payments previously
made pursuant to clauses (i) and (ii) of this subparagraph (iv); and
PROVIDED FURTHER that cancellation of Indebtedness owing to the Company from
members of management of the Company or any of its Restricted Subsidiaries
in connection with a repurchase of Equity Interests of the Company will not
be deemed to constitute a Restricted Payment for purposes of this covenant
or any other provision of the Indenture;
(v) the declaration and payment of dividends to holders of any class or
series of Designated Preferred Stock (other than Disqualified Stock) issued
after the Issuance Date (including, without limitation, the declaration and
payment of dividends on Refunding Capital Stock in excess of the dividends
declarable and payable thereon pursuant to clause (ii)); PROVIDED, HOWEVER,
that for the most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date
of issuance of such Designated Preferred Stock, after giving effect to such
issuance on a pro forma basis, the Company and its Restricted Subsidiaries
would have had a Fixed Charge Coverage Ratio of at least 1.75 to 1.00;
(vi) Investments in Unrestricted Subsidiaries having an aggregate fair
market value, taken together with all other Investments made pursuant to
this clause (vi) that are at that time outstanding, not to exceed $20
million at the time of such Investment (with the fair market value of each
Investment being measured at the time made and without giving effect to
subsequent changes in value);
(vii) repurchases of Equity Interests deemed to occur upon exercise of
stock options if such Equity Interests represent a portion of the exercise
price of such options;
(viii) the payment of dividends on the Company's Common Stock, following
the first public offering of the Company's Common Stock after the Issuance
Date, of up to 6% per annum of the net proceeds received by the Company in
such public offering, other than public offerings with respect to the
Company's Common Stock registered on Form S-8;
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(ix) a Restricted Payment to pay for the repurchase, retirement or other
acquisition or retirement for value of Equity Interests of the Company in
existence on the Issuance Date and which are not held by KKR or any of their
Affiliates or the Management Group on the Issuance Date (including any
Equity Interests issued in respect of such Equity Interests as a result of a
stock split, recapitalization, merger, combination, consolidation or
otherwise, but excluding any management equity plan or stock option plan or
similar agreement), provided that the aggregate Restricted Payments made
under this clause (ix) shall not exceed $30 million, PROVIDED FURTHER that
notwithstanding the foregoing proviso, the Company shall be permitted to
make Restricted Payments under this clause (ix) only if after giving effect
thereto, the Company would be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first sentence of the covenant described under "--Limitations
on Incurrence of Indebtedness and Issuance of Disqualified Stock"; and
(x) other Restricted Payments in an aggregate amount not to exceed $20
million; PROVIDED, HOWEVER, that at the time of, and after giving effect to,
any Restricted Payment permitted under clauses (iii), (iv), (v), (vi),
(vii), (viii), (ix) and (x), no Default or Event of Default shall have
occurred and be continuing or would occur as a consequence thereof; and
PROVIDED FURTHER that for purposes of determining the aggregate amount
expended for Restricted Payments in accordance with clause (c) of the
immediately preceding paragraph, only the amounts expended under clauses
(i), (ii) (with respect to the payment of dividends on Refunding Capital
Stock pursuant to clause (b) thereof), (iv) (only to the extent that amounts
paid pursuant to such clause are greater than amounts that would have been
paid pursuant to such clause if $5 million and $10 million were substituted
in such clause for $10 million and $20 million, respectively), (v), (viii)
and (ix) shall be included.
As of the Issuance Date, all of the Company's Subsidiaries will be
Restricted Subsidiaries. The Company will not permit any Unrestricted Subsidiary
to become a Restricted Subsidiary except pursuant to the second to last sentence
of the definition of "Unrestricted Subsidiary." For purposes of designating any
Restricted Subsidiary as an Unrestricted Subsidiary, all outstanding Investments
by the Company and its Restricted Subsidiaries (except to the extent repaid) in
the Subsidiary so designated will be deemed to be Restricted Payments in an
amount determined as set forth in the last sentence of the definition of
"Investments." Such designation will only be permitted if a Restricted Payment
in such amount would be permitted at such time and if such Subsidiary otherwise
meets the definition of an Unrestricted Subsidiary. Unrestricted Subsidiaries
will not be subject to any of the restrictive covenants set forth in the
Indenture.
LIMITATIONS ON INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED
STOCK. The Indenture provides that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable with
respect to (collectively, "incur" and collectively, an "incurrence" of) any
Indebtedness (including Acquired Indebtedness) or any shares of Disqualified
Stock; PROVIDED, HOWEVER, that the Company may incur Indebtedness or issue
shares of Disqualified Stock if the Fixed Charge Coverage Ratio for the Company
and its Restricted Subsidiaries for the most recently ended four full fiscal
quarters for which internal financial statements are available immediately
preceding the date of such incurrence would have been at least 1.75 to 1.00
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if the additional Indebtedness had been incurred or the
Disqualified Stock had been issued, as the case may be, and the application of
proceeds had occurred at the beginning of such four-quarter period.
The foregoing limitations will not apply to:
(a) the incurrence by the Company of Indebtedness under the Senior
Credit Facility and the issuance and creation of letters of credit and
banker's acceptances thereunder (with letters of credit and banker's
acceptances being deemed to have a principal amount equal to the face amount
thereof) up to an aggregate principal amount of $550 million outstanding at
any one time;
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(b) any Real Estate Financing Transaction; PROVIDED, HOWEVER, that the
amount of Indebtedness outstanding under clause (a) above and this clause
(b) shall not in the aggregate exceed $550 million at any time outstanding;
(c) the incurrence by the Company of Indebtedness represented by the Old
Notes issued on the Issuance Date;
(d) Existing Indebtedness (other than Indebtedness described in clauses
(a) and (c));
(e) Indebtedness (including Capitalized Lease Obligations) incurred by
the Company or any of its Restricted Subsidiaries to finance the purchase,
lease or improvement of property (real or personal) or equipment (whether
through the direct purchase of assets or the Capital Stock of any Person
owning such assets) in an aggregate principal amount which, when aggregated
with the principal amount of all other Indebtedness then outstanding and
incurred pursuant to this clause (e) (together with any Refinancing
Indebtedness with respect thereto), does not exceed the greater of (x) $50
million or (y) 10% of Total Assets;
(f) Indebtedness incurred by the Company or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business, including without
limitation letters of credit in respect of workers' compensation claims or
self-insurance, or other Indebtedness with respect to reimbursement type
obligations regarding workers' compensation claims; PROVIDED, HOWEVER, that
upon the drawing of such letters of credit or the incurrence of such
Indebtedness, such obligations are reimbursed within 30 days following such
drawing or incurrence;
(g) Indebtedness arising from agreements of the Company or a Restricted
Subsidiary providing for indemnification, adjustment of purchase price or
similar obligations, in each case, incurred or assumed in connection with
the disposition of any business, assets or a Subsidiary, other than
guarantees of Indebtedness incurred by any Person acquiring all or any
portion of such business, assets or a Subsidiary for the purpose of
financing such acquisition; PROVIDED, HOWEVER, that (i) such Indebtedness is
not reflected on the balance sheet of the Company or any Restricted
Subsidiary (contingent obligations referred to in a footnote to financial
statements and not otherwise reflected on the balance sheet will not be
deemed to be reflected on such balance sheet for purposes of this clause
(i)) and (ii) the maximum assumable liability in respect of all such
Indebtedness shall at no time exceed the gross proceeds including noncash
proceeds (the fair market value of such noncash proceeds being measured at
the time received and without giving effect to any subsequent changes in
value) actually received by the Company and its Restricted Subsidiaries in
connection with such disposition;
(h) Indebtedness of the Company to a Restricted Subsidiary; provided
that any such Indebtedness is made pursuant to an intercompany note and is
subordinated in right of payment to the Exchange Notes; PROVIDED FURTHER
that any subsequent issuance or transfer of any Capital Stock or any other
event which results in any such Restricted Subsidiary ceasing to be a
Restricted Subsidiary or any other subsequent transfer of any such
Indebtedness (except to the Company or another Restricted Subsidiary) shall
be deemed, in each case to be an incurrence of such Indebtedness;
(i) Indebtedness of a Restricted Subsidiary to the Company or another
Restricted Subsidiary; provided that (i) any such Indebtedness is made
pursuant to an intercompany note and (ii) if a Guarantor incurs such
Indebtedness from a Restricted Subsidiary that is not a Guarantor such
Indebtedness is subordinated in right of payment to the Guarantee of such
Guarantor; PROVIDED FURTHER that any subsequent transfer of any such
Indebtedness (except to the Company or another Restricted Subsidiary) shall
be deemed, in each case to be an incurrence of such Indebtedness;
(j) Hedging Obligations that are incurred in the ordinary course of
business (1) for the purpose of fixing or hedging interest rate risk with
respect to any Indebtedness that is permitted by
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the terms of the Indenture to be outstanding or (2) for the purpose of
fixing or hedging currency exchange rate risk with respect to any currency
exchanges;
(k) obligations in respect of performance and surety bonds and
completion guarantees provided by the Company or any Restricted Subsidiary
in the ordinary course of business;
(l) Indebtedness of any Guarantor in respect of such Guarantor's
Guarantee;
(m) Indebtedness of the Company and any of its Foreign Subsidiaries not
otherwise permitted hereunder in an aggregate principal amount, which when
aggregated with the principal amount of all other Indebtedness then
outstanding and incurred pursuant to this clause (m), does not exceed $150
million at any one time outstanding; PROVIDED, HOWEVER, that Indebtedness of
Foreign Subsidiaries, which when aggregated with the principal amount of all
other Indebtedness of Foreign Subsidiaries then outstanding and incurred
pursuant to this clause (m), does not exceed $75 million (or the equivalent
thereof in any other currency) at any one time outstanding;
(n) (i) any guarantee by the Company of Indebtedness or other
obligations of any of its Restricted Subsidiaries so long as the incurrence
of such Indebtedness incurred by such Restricted Subsidiary is permitted
under the terms of the Indenture and (ii) any Excluded Guarantee (as defined
below under "--Limitation on Guarantees of Indebtedness by Restricted
Subsidiaries") of a Restricted Subsidiary;
(o) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness which serves to refund, refinance or restructure any
Indebtedness incurred as permitted under the first paragraph of this
covenant and clauses (c) and (d) above, or any Indebtedness issued to so
refund, refinance or restructure such Indebtedness including additional
Indebtedness incurred to pay premiums and fees in connection therewith (the
"Refinancing Indebtedness") prior to its respective maturity; PROVIDED,
HOWEVER, that such Refinancing Indebtedness (i) has a Weighted Average Life
to Maturity at the time such Refinancing Indebtedness is incurred which is
not less than the remaining Weighted Average Life to Maturity of
Indebtedness being refunded or refinanced, (ii) to the extent such
Refinancing Indebtedness refinances Indebtedness subordinated or pari passu
to the Exchange Notes, such Refinancing Indebtedness is subordinated or pari
passu to the Exchange Notes at least to the same extent as the Indebtedness
being refinanced or refunded and (iii) shall not include (x) Indebtedness of
a Subsidiary that refinances Indebtedness of the Company or (y) Indebtedness
of the Company or a Restricted Subsidiary that refinances Indebtedness of an
Unrestricted Subsidiary; and PROVIDED FURTHER that subclauses (i) and (ii)
of this clause (o) will not apply to any refunding or refinancing of any
Senior Indebtedness; and
(p) Indebtedness or Disqualified Stock of Persons that are acquired by
the Company or any of its Restricted Subsidiaries or merged into a
Restricted Subsidiary in accordance with the terms of the Indenture;
provided that such Indebtedness or Disqualified Stock is not incurred in
contemplation of such acquisition or merger; and PROVIDED FURTHER that after
giving effect to such acquisition, either (i) the Company would be permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first sentence of this covenant
or (ii) the Fixed Charge Coverage Ratio is greater than immediately prior to
such acquisition.
LIENS. The Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly create,
incur, assume or suffer to exist any Lien that secures obligations under any
Pari Passu Indebtedness or Subordinated Indebtedness on any asset or property of
the Company or such Restricted Subsidiary, or any income or profits therefrom,
or assign or convey any right to receive income therefrom, unless the Exchange
Notes are equally and ratably secured with the obligations so secured or until
such time as such obligations are no longer secured by a Lien.
The Indenture provides that no Guarantor will directly or indirectly create,
incur, assume or suffer to exist any Lien that secures obligations under any
Pari Passu Indebtedness or Subordinated Indebtedness of such Guarantor on any
asset or property of such Guarantor or any income or profits therefrom, or
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assign or convey any right to receive income therefrom, unless the Guarantee of
such Guarantor is equally and ratably secured with the obligations so secured or
until such time as such obligations are no longer secured by a Lien.
Notwithstanding the foregoing, no such equal and ratable security need be
provided if the Indebtedness secured is incurred pursuant to a Real Estate
Financing Transaction.
MERGER, CONSOLIDATION, OR SALE OF ALL OR SUBSTANTIALLY ALL ASSETS. The
Indenture provides that the Company may not consolidate or merge with or into or
wind up into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions (other than
pursuant to a Real Estate Financing Transaction) to, any Person unless (i) the
Company is the surviving corporation or the Person formed by or surviving any
such consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition will have been made
is a corporation organized or existing under the laws of the United States, any
state thereof, the District of Columbia, or any territory thereof (the Company
or such Person, as the case may be, being herein called the "Successor
Company"); (ii) the Successor Company (if other than the Company) expressly
assumes all the obligations of the Company under the Indenture and the Exchange
Notes pursuant to a supplemental indenture or other documents or instruments in
form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; (iv) immediately after giving
pro forma effect to such transaction, as if such transaction had occurred at the
beginning of the applicable four-quarter period, (A) the Successor Company would
be permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first sentence of the covenant
described under "--Limitations on Incurrence of Indebtedness and Issuance of
Disqualified Stock" or (B) the Fixed Charge Coverage Ratio for the Successor
Company and its Restricted Subsidiaries would be greater than such Ratio for the
Company and its Restricted Subsidiaries immediately prior to such transaction;
(v) each Guarantor, if any, unless it is the other party to the transactions
described above, shall have by supplemental indenture confirmed that its
Guarantee shall apply to such Person's obligations under the Indenture and the
Exchange Notes; and (vi) the Company shall have delivered to the Trustee an
Officers' Certificate and an opinion of counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Indenture. The Successor Company will succeed to, and be
substituted for, the Company under the Indenture and the Exchange Notes.
Notwithstanding the foregoing clause (iv), (a) any Restricted Subsidiary may
consolidate with, merge into or transfer all or part of its properties and
assets to the Company and (b) the Company may merge with an Affiliate
incorporated solely for the purpose of reincorporating the Company in another
State of the United States so long as the amount of Indebtedness of the Company
and its Restricted Subsidiaries is not increased thereby.
Each Guarantor, if any, shall not, and the Company will not permit a
Guarantor to, consolidate or merge with or into or wind up into (whether or not
such Guarantor is the surviving corporation), or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its properties or
assets in one or more related transactions to, any Person unless (i) such
Guarantor is the surviving corporation or the Person formed by or surviving any
such consolidation or merger (if other than such Guarantor) or to which such
sale, assignment, transfer, lease, conveyance or other disposition will have
been made is a corporation organized or existing under the laws of the United
States, any state thereof, the District of Columbia, or any territory thereof
(such Guarantor or such Person, as the case may be, being herein called the
"Successor Guarantor"); (ii) the Successor Guarantor (if other than such
Guarantor) expressly assumes all the obligations of such Guarantor under the
Indenture and such Guarantor's Guarantee pursuant to a supplemental indenture or
other documents or instruments in form reasonably satisfactory to the Trustee;
(iii) immediately after such transaction no Default or Event of Default exists;
and (iv) the Company shall have delivered to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that such consolidation,
merger or transfer and such supplemental indenture (if any) comply with
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the Indenture. The Successor Guarantor will succeed to, and be substituted for,
such Guarantor under the Indenture and such Guarantor's Guarantee.
TRANSACTIONS WITH AFFILIATES. The Indenture provides that the Company will
not, and will not permit any of its Restricted Subsidiaries to, sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or purchase
any property or assets from, or enter into any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (each of the foregoing, an "Affiliate Transaction") involving
aggregate consideration in excess of $5 million, unless:
(a) such Affiliate Transaction is on terms that are not materially less
favorable to the Company or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction by the Company or
such Restricted Subsidiary with an unrelated Person; and
(b) the Company delivers to the Trustee with respect to any Affiliate
Transaction involving aggregate payments in excess of $10 million, a
resolution adopted by a majority of the Board of Directors approving such
Affiliate Transaction and set forth in an Officers' Certificate certifying
that such Affiliate Transaction complies with clause (a) above.
The foregoing provisions will not apply to the following: (i) transactions
between or among the Company and/or any of its Restricted Subsidiaries; (ii)
Restricted Payments permitted by the provisions of the Indenture described above
under the covenant "--Limitation on Restricted Payments"; (iii) the payment of
customary annual management, consulting and advisory fees and related expenses
to KKR and its Affiliates; (iv) the payment of reasonable and customary fees
paid to, and indemnity provided on behalf of, officers, directors, employees or
consultants of the Company or any Restricted Subsidiary; (v) payments by the
Company or any of its Restricted Subsidiaries to KKR and its Affiliates made for
any financial advisory, financing, underwriting or placement services or in
respect of other investment banking activities, including, without limitation,
in connection with acquisitions or divestitures which payments are approved by a
majority of the Board of Directors of the Company in good faith; (vi)
transactions in which the Company or any of its Restricted Subsidiaries, as the
case may be, delivers to the Trustee a letter from an Independent Financial
Advisor stating that such transaction is fair to the Company or such Restricted
Subsidiary from a financial point of view or meets the requirements of clause
(a) of the preceding paragraph; (vii) payments or loans to employees or
consultants which are approved by a majority of the Board of Directors of the
Company in good faith; (viii) any agreement as in effect as of the Issuance Date
or any amendment thereto (so long as any such amendment is not disadvantageous
to the holders of the Exchange Notes in any material respect) or any transaction
contemplated thereby; (ix) the existence of, or the performance by the Company
or any of its Restricted Subsidiaries of its obligations under the terms of, any
stockholders agreement (including any registration rights agreement or purchase
agreement related thereto) to which it is a party as of the Issuance Date and
any similar agreements which it may enter into thereafter; PROVIDED, HOWEVER,
that the existence of, or the performance by the Company or any of its
Restricted Subsidiaries of obligations under any future amendment to any such
existing agreement or under any similar agreement entered into after the
Issuance Date shall only be permitted by this clause (ix) to the extent that the
terms of any such amendment or new agreement are not otherwise disadvantageous
to the holders of the Exchange Notes in any material respect; (x) the payment of
all fees and expenses related to the Merger and the Financings; and (xi)
transactions with customers, clients, suppliers, or purchasers or sellers of
goods or services, in each case in the ordinary course of business and otherwise
in compliance with the terms of the Indenture which are fair to the Company or
its Restricted Subsidiaries, in the reasonable determination of the Board of
Directors of the Company or the senior management thereof, or are on terms at
least as favorable as might reasonably have been obtained at such time from an
unaffiliated party.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The
Indenture provides that the Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause to
become effective any consensual encumbrance or consensual restriction on the
ability of any such Restricted Subsidiary to:
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(a) (i) pay dividends or make any other distributions to the Company or
any of its Restricted Subsidiaries on its Capital Stock or any other
interest or participation in, or measured by, its profits or (ii) pay any
Indebtedness owed to the Company or any of its Restricted Subsidiaries;
(b) make loans or advances to the Company or any of its Restricted
Subsidiaries; or
(c) sell, lease, or transfer any of its properties or assets to the
Company, or any of its Restricted Subsidiaries;
except (in each case) for such encumbrances or restrictions existing under or by
reason of:
(1) contractual encumbrances or restrictions in effect on the Issuance
Date, including pursuant to the Senior Credit Facility and its related
documentation;
(2) the Indenture, the Exchange Notes and the Old Notes;
(3) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature discussed in
clause (c) above on the property so acquired;
(4) applicable law or any applicable rule, regulation or order;
(5) any agreement or other instrument of a Person acquired by the
Company or any Restricted Subsidiary in existence at the time of such
acquisition (but not created in contemplation thereof), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of
any Person, other than the Person, or the property or assets of the Person,
so acquired;
(6) contracts for the sale of assets, including, without limitation
customary restrictions with respect to a Subsidiary pursuant to an agreement
that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Subsidiary;
(7) secured Indebtedness otherwise permitted to be incurred pursuant to
the covenants described under "Limitations on Incurrence of Indebtedness and
Issuance of Disqualified Stock" and "Liens" that limit the right of the
debtor to dispose of the assets securing such Indebtedness;
(8) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business;
(9) other Indebtedness of Foreign Subsidiaries permitted to be incurred
subsequent to the Issuance Date pursuant to the provisions of the covenant
described under "--Limitations on Incurrence of Indebtedness and Issuance of
Disqualified Stock";
(10) customary provisions in joint venture agreements and other similar
agreements entered into in the ordinary course of business;
(11) customary provisions contained in leases and other agreements
entered into in the ordinary course of business;
(12) restrictions created in connection with any Real Estate Financing
Transaction that, in the good faith determination of the Board of Directors
of the Company, are necessary or advisable to effect such Real Estate
Financing Transaction; and
(13) any encumbrances or restrictions of the type referred to in clauses
(a), (b) and (c) above imposed by any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings of the contracts, instruments or obligations referred to in
clauses (1) through (12) above, provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings are, in the good faith judgment of the
Company's Board of Directors, no more restrictive with respect to such
dividend and other payment restrictions than those contained in the dividend
or other payment restrictions prior to such amendment, modification,
restatement, renewal, increase, supplement, refunding, replacement or
refinancing.
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LIMITATION ON GUARANTEES OF INDEBTEDNESS BY RESTRICTED SUBSIDIARIES. (a)
The Indenture provides that the Company will not permit any Restricted
Subsidiary to guarantee the payment of any Indebtedness of the Company or any
Indebtedness of any other Restricted Subsidiary unless (i) such Restricted
Subsidiary simultaneously executes and delivers a supplemental indenture to the
Indenture providing for a Guarantee of payment of the Exchange Notes by such
Restricted Subsidiary except that (A) if the Exchange Notes are subordinated in
right of payment to such Indebtedness, the Guarantee under the supplemental
indenture shall be subordinated to such Restricted Subsidiary's guarantee with
respect to such Indebtedness substantially to the same extent as the Exchange
Notes are subordinated to such Indebtedness under the Indenture and (B) if such
Indebtedness is by its express terms subordinated in right of payment to the
Exchange Notes, any such guarantee of such Restricted Subsidiary with respect to
such Indebtedness shall be subordinated in right of payment to such Restricted
Subsidiary's Guarantee with respect to the Exchange Notes substantially to the
same extent as such Indebtedness is subordinated to the Exchange Notes; (ii)
such Restricted Subsidiary waives and will not in any manner whatsoever claim or
take the benefit or advantage of, any rights of reimbursement, indemnity or
subrogation or any other rights against the Company or any other Restricted
Subsidiary as a result of any payment by such Restricted Subsidiary under its
Guarantee; and (iii) such Restricted Subsidiary shall deliver to the Trustee an
opinion of counsel to the effect that (A) such Guarantee of the Exchange Notes
has been duly executed and authorized and (B) such Guarantee of the Exchange
Notes constitutes a valid, binding and enforceable obligation of such Restricted
Subsidiary, except insofar as enforcement thereof may be limited by bankruptcy,
insolvency or similar laws (including, without limitation, all laws relating to
fraudulent transfers) and except insofar as enforcement thereof is subject to
general principles of equity; provided that this paragraph (a) shall not be
applicable to any guarantee of any Restricted Subsidiary (x) that (A) existed at
the time such Person became a Restricted Subsidiary of the Company and (B) was
not incurred in connection with, or in contemplation of, such Person becoming a
Restricted Subsidiary of the Company or (y) that guarantees the payment of
Obligations of the Company or any Restricted Subsidiary under the Senior Credit
Facility or any other bank facility which is designated as Senior Indebtedness
and any refunding, refinancing or replacement thereof, in whole or in part,
provided that such refunding, refinancing or replacement thereof constitutes
Senior Indebtedness and is not incurred pursuant to a registered offering of
securities under the Securities Act or a private placement of securities
(including under Rule 144A) pursuant to an exemption from the registration
requirements of the Securities Act, which private placement provides for
registration rights under the Securities Act (any guarantee excluded by
operations of this clause (y) being an "Excluded Guarantee").
(b) Notwithstanding the foregoing and the other provisions of the Indenture,
any Guarantee by a Restricted Subsidiary of the Exchange Notes shall provide by
its terms that it shall be automatically and unconditionally released and
discharged upon (i) any sale, exchange or transfer, to any Person not an
Affiliate of the Company, of all of the Company's Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary (which sale,
exchange or transfer is not prohibited by the Indenture) or (ii) the release or
discharge of the guarantee which resulted in the creation of such Guarantee,
except a discharge or release by or as a result of payment under such guarantee.
LIMITATION ON OTHER SENIOR SUBORDINATED INDEBTEDNESS. The Indenture
provides that the Company will not, and will not permit any Guarantor to,
directly or indirectly, incur any Indebtedness (including Acquired Indebtedness)
that is subordinate in right of payment to any Indebtedness of the Company or
any Indebtedness of any Guarantor, as the case may be, unless such Indebtedness
is either (a) pari passu in right of payment with the Exchange Notes or such
Guarantor's Guarantee, as the case may be or (b) subordinate in right of payment
to the Exchange Notes, or such Guarantor's Guarantee, as the case may be, in the
same manner and at least to the same extent as the Exchange Notes are
subordinate to Senior Indebtedness or such Guarantor's Guarantee is subordinate
to such Guarantor's Senior Indebtedness, as the case may be.
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REPORTS AND OTHER INFORMATION. Notwithstanding that the Company may not be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act
or otherwise report on an annual and quarterly basis on forms provided for such
annual and quarterly reporting pursuant to rules and regulations promulgated by
the Securities and Exchange Commission (the "Commission"), the Indenture
requires the Company to file with the Commission (and provide the Trustee and
Holders with copies thereof, without cost to each Holder, within 15 days after
it files them with the Commission), (a) within 90 days after the end of each
fiscal year, annual reports on Form 10-K (or any successor or comparable form)
containing the information required to be contained therein (or required in such
successor or comparable form); (b) within 45 days after the end of each of the
first three fiscal quarters of each fiscal year, reports on Form 10-Q (or any
successor or comparable form); (c) promptly from time to time after the
occurrence of an event required to be therein reported, such other reports on
Form 8-K (or any successor or comparable form); and (d) any other information,
documents and other reports which the Company would be required to file with the
Commission if it were subject to Section 13 or 15(d) of the Exchange Act;
PROVIDED, HOWEVER, the Company shall not be so obligated to file such reports
with the Commission if the Commission does not permit such filing, in which
event the Company will make available such information to prospective purchasers
of Exchange Notes, in addition to providing such information to the Trustee and
the Holders, in each case within 15 days after the time the Company would be
required to file such information with the Commission, if it were subject to
Sections 13 or 15(d) of the Exchange Act.
EVENTS OF DEFAULT AND REMEDIES
The following events constitute Events of Default under the Indenture:
(i) default in payment when due and payable, upon redemption,
acceleration or otherwise, of principal of, or premium on, if any, the
Exchange Notes whether or not such payment shall be prohibited by the
subordination provisions relating to the Exchange Notes;
(ii) default for 30 days or more in the payment when due of interest on
or with respect to the Exchange Notes whether or not such payment shall be
prohibited by the subordination provisions relating to the Exchange Notes;
(iii) failure by the Company or any Guarantor for 30 days after receipt
of written notice given by the Trustee or the holders of at least 30% in
principal amount of the Exchange Notes then outstanding to comply with any
of its other agreements in the Indenture or the Exchange Notes;
(iv) default under any mortgage, indenture or instrument under which
there is issued or by which there is secured or evidenced any Indebtedness
for money borrowed by the Company or any of its Restricted Subsidiaries or
the payment of which is guaranteed by the Company or any of its Restricted
Subsidiaries (other than Indebtedness owed to the Company or a Restricted
Subsidiary), whether such Indebtedness or guarantee now exists or is created
after the Issuance Date, if both (A) such default either (1) results from
the failure to pay any such Indebtedness at its stated final maturity (after
giving effect to any applicable grace periods) or (2) relates to an
obligation other than the obligation to pay principal of any such
Indebtedness at its stated final maturity and results in the holder or
holders of such Indebtedness causing such Indebtedness to become due prior
to its stated maturity and (B) the principal amount of such Indebtedness,
together with the principal amount of any other such Indebtedness in default
for failure to pay principal at stated final maturity (after giving effect
to any applicable grace periods), or the maturity of which has been so
accelerated, aggregate $20 million or more at any one time outstanding;
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(v) failure by the Company or any of its Significant Subsidiaries to pay
final judgments aggregating in excess of $20 million, which final judgments
remain unpaid, undischarged and unstayed for a period of more than 60 days
after such judgment becomes final, and in the event such judgment is covered
by insurance, an enforcement proceeding has been commenced by any creditor
upon such judgment or decree which is not promptly stayed;
(vi) certain events of bankruptcy or insolvency with respect to the
Company or any of its Significant Subsidiaries; or
(vii) any Guarantee shall for any reason cease to be in full force and
effect or be declared null and void or any responsible officer of the
Company or any Guarantor denies that it has any further liability under any
Guarantee or gives notice to such effect (other than by reason of the
termination of the Indenture or the release of any such Guarantee in
accordance with the Indenture).
If any Event of Default (other than of a type specified in clause (vi)
above) occurs and is continuing under the Indenture, the Trustee or the Holders
of at least 30% in principal amount of the then outstanding Exchange Notes may
declare the principal, premium, if any, interest and any other monetary
obligations on all the then outstanding Exchange Notes to be due and payable
immediately; PROVIDED, HOWEVER, that, so long as any Indebtedness permitted to
be incurred pursuant to the Senior Credit Facility shall be outstanding, no such
acceleration shall be effective until the earlier of (i) acceleration of any
such Indebtedness under the Senior Credit Facility or (ii) five business days
after the giving of written notice to the Company and the administrative agent
under the Senior Credit Facility of such acceleration. Upon the effectiveness of
such declaration, such principal and interest will be due and payable
immediately. Notwithstanding the foregoing, in the case of an Event of Default
arising under clause (vi) of the first paragraph of this section, all
outstanding Exchange Notes will become due and payable without further action or
notice. Holders of Exchange Notes may not enforce the Indenture or the Exchange
Notes except as provided in the Indenture. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding Exchange Notes
may direct the Trustee in its exercise of any trust or power. The Indenture
provides that the Trustee may withhold from Holders of Exchange Notes notice of
any continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal, premium, if any, or interest) if it
determines that withholding notice is in their interest. In addition, the
Trustee shall have no obligation to accelerate the Exchange Notes if in the best
judgment of the Trustee acceleration is not in the best interest of the Holders
of such Exchange Notes.
The Indenture provides that the Holders of a majority in aggregate principal
amount of the then outstanding Exchange Notes issued thereunder by notice to the
Trustee may on behalf of the Holders of all of such Exchange Notes waive any
existing Default or Event of Default and its consequences under the Indenture
except a continuing Default or Event of Default in the payment of interest on,
premium, if any, or the principal of, any such Exchange Note held by a
non-consenting Holder. In the event of any Event of Default specified in clause
(iv) above, such Event of Default and all consequences thereof (including
without limitation any acceleration or resulting payment default) shall be
annulled, waived and rescinded, automatically and without any action by the
Trustee or the Holders of the Exchange Notes, if within 20 days after such Event
of Default arose (x) the Indebtedness or guarantee that is the basis for such
Event of Default has been discharged, or (y) the holders thereof have rescinded
or waived the acceleration, notice or action (as the case may be) giving rise to
such Event of Default, or (z) if the default that is the basis for such Event of
Default has been cured.
The Indenture provides that the Company is required to deliver to the
Trustee annually a statement regarding compliance with the Indenture, and the
Company is required, within five Business Days, upon becoming aware of any
Default or Event of Default or any default under any document, instrument or
agreement representing Indebtedness of the Company or any Guarantor, to deliver
to the Trustee a statement specifying such Default or Event of Default.
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NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any Guarantor shall have any liability for any obligations of the Company or
the Guarantors under the Exchange Notes, the Guarantees or the Indenture or for
any claim based on, in respect of, or by reason of such obligations or their
creation. Each Holder of the Exchange Notes by accepting an Exchange Note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the Exchange Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The obligations of the Company and the Guarantors, if any, under the
Indenture will terminate (other than certain obligations) and will be released
upon payment in full of all of the Exchange Notes. The Company may, at its
option and at any time, elect to have all of its obligations discharged with
respect to the outstanding Exchange Notes and have each Guarantor's obligation
discharged with respect to its Guarantee ("Legal Defeasance") and cure all then
existing Events of Default except for (i) the rights of Holders of outstanding
Exchange Notes to receive payments in respect of the principal of, premium, if
any, and interest on such Exchange Notes when such payments are due solely out
of the trust created pursuant to the Indenture, (ii) the Company's obligations
with respect to Exchange Notes concerning issuing temporary Exchange Notes,
registration of such Exchange Notes, mutilated, destroyed, lost or stolen
Exchange Notes and the maintenance of an office or agency for payment and money
for security payments held in trust, (iii) the rights, powers, trusts, duties
and immunities of the Trustee, and the Company's obligations in connection
therewith and (iv) the Legal Defeasance provisions of the Indenture. In
addition, the Company may, at its option and at any time, elect to have the
obligations of the Company and each Guarantor released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Exchange Notes. In the event
Covenant Defeasance occurs, certain events (not including non-payment on other
indebtedness, bankruptcy, receivership, rehabilitation and insolvency events)
described under "Events of Default" will no longer constitute an Event of
Default with respect to the Exchange Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance with
respect to the Exchange Notes:
(i) the Company must irrevocably deposit with the Trustee, in trust,
for the benefit of the Holders of the Exchange Notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium, if
any, and interest due on the outstanding Exchange Notes on the stated
maturity date or on the applicable redemption date, as the case may be, of
such principal, premium, if any, or interest on the outstanding Exchange
Notes;
(ii) in the case of Legal Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that, subject to customary assumptions
and exclusions, (A) the Company has received from, or there has been
published by, the United States Internal Revenue Service a ruling or (B)
since the Issuance Date, there has been a change in the applicable U.S.
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel in the United States shall confirm that, subject to
customary assumptions and exclusions, the Holders of the outstanding
Exchange Notes will not recognize income, gain or loss for U.S. federal
income tax purposes as a result of such Legal Defeasance and will be subject
to U.S. federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such Legal Defeasance had not
occurred;
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(iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that, subject to customary
assumptions and exclusions, the Holders of the outstanding Exchange Notes
will not recognize income, gain or loss for U.S. federal income tax purposes
as a result of such Covenant Defeasance and will be subject to such tax on
the same amounts, in the same manner and at the same times as would have
been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be
continuing with respect to certain Events of Default on the date of such
deposit;
(v) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under, any material
agreement or instrument (other than the Indenture) to which the Company or
any Guarantor is a party or by which the Company or any Guarantor is bound;
(vi) the Company shall have delivered to the Trustee an opinion of
counsel to the effect that, as of the date of such opinion and subject to
customary assumptions and exclusions following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally under
any applicable U.S. federal or state law, and that the Trustee has a
perfected security interest in such trust funds for the ratable benefit of
the Holders;
(vii) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of defeating, hindering, delaying or defrauding any creditors of the
Company or any Guarantor or others; and
(viii) the Company shall have delivered to the Trustee an Officers'
Certificate and an opinion of counsel in the United States (which opinion of
counsel may be subject to customary assumptions and exclusions) each stating
that all conditions precedent provided for or relating to the Legal
Defeasance or the Covenant Defeasance, as the case may be, have been
complied with.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect as
to all Exchange Notes issued thereunder, when either (a) all such Exchange Notes
theretofore authenticated and delivered (except lost, stolen or destroyed
Exchange Notes which have been replaced or paid and Exchange Notes for whose
payment money has theretofore been deposited in trust and thereafter repaid to
the Company) have been delivered to the Trustee for cancellation; or (b) (i) all
such Exchange Notes not theretofore delivered to such Trustee for cancellation
have become due and payable by reason of the making of a notice of redemption or
otherwise or will become due and payable within one year and the Company or any
Guarantor has irrevocably deposited or caused to be deposited with such Trustee
as trust funds in trust an amount of money sufficient to pay and discharge the
entire indebtedness on such Exchange Notes not theretofore delivered to the
Trustee for cancellation for principal, premium, if any, and accrued interest to
the date of maturity or redemption; (ii) no Default or Event of Default with
respect to the Indenture or the Exchange Notes shall have occurred and be
continuing on the date of such deposit or shall occur as a result of such
deposit and such deposit will not result in a breach or violation of, or
constitute a default under, any other instrument to which the Company or any
Guarantor is a party or by which the Company or any Guarantor is bound; (iii)
the Company or any Guarantor has paid or caused to be paid all sums payable by
it under such Indenture; and (iv) the Company has delivered irrevocable
instructions to the Trustee under such Indenture to apply the deposited money
toward the payment of such Exchange Notes at maturity or the redemption date, as
the case may be. In addition, the Company must deliver an Officers' Certificate
and an opinion of counsel to the Trustee stating that all conditions precedent
to satisfaction and discharge have been satisfied.
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AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture, any
Guarantee and the Exchange Notes issued thereunder may be amended or
supplemented with the consent of the Holders of at least a majority in principal
amount of the Exchange Notes then outstanding (including consents obtained in
connection with a tender offer or exchange offer for the Exchange Notes), and
any existing default or compliance with any provision of the Indenture or the
Exchange Notes may be waived with the consent of the Holders of a majority in
principal amount of the outstanding Exchange Notes (including consents obtained
in connection with a tender offer or exchange offer for the Exchange Notes).
The Indenture provides that without the consent of each Holder affected, an
amendment or waiver may not (with respect to any Exchange Notes held by a
nonconsenting Holder of the Exchange Notes): (i) reduce the principal amount of
the Exchange Notes whose Holders must consent to an amendment, supplement or
waiver, (ii) reduce the principal of or change the fixed maturity of any such
Exchange Note or alter or waive the provisions with respect to the redemption of
the Exchange Notes (other than provisions relating to the covenants described
under "--Repurchase at the Option of Holders"), (iii) reduce the rate of or
change the time for payment of interest on any Exchange Note, (iv) waive a
Default or Event of Default in the payment of principal of, premium, if any, or
interest on the Exchange Notes (except a rescission of acceleration of the
Exchange Notes by the Holders of at least a majority in aggregate principal
amount of such Exchange Notes and a waiver of the payment default that resulted
from such acceleration), or in respect of a covenant or provision contained in
the Indenture or any Guarantee which cannot be amended or modified without the
consent of all Holders, (v) make any Exchange Note payable in money other than
that stated in such Exchange Notes, (vi) make any change in the provisions of
the Indenture relating to waivers of past Defaults or the rights of Holders of
such Exchange Notes to receive payments of principal of, premium, if any, or
interest on such Exchange Notes, (vii) make any change in the foregoing
amendment and waiver provisions, (viii) impair the right of any Holder of the
Exchange Notes to receive payment of principal of, or interest on such Holder's
Exchange Notes on or after the due dates therefore or to institute suit for the
enforcement of any payment on or with respect to such Holder's Exchange Notes,
or (ix) make any change in the subordination provisions of the Indenture that
would adversely affect the holders of the Exchange Notes.
The Indenture provides that, notwithstanding the foregoing, without the
consent of any Holder of Exchange Notes, the Company, any Guarantor (with
respect to a Guarantee or the Indenture to which it is party) and the Trustee
together may amend or supplement the Indenture, any Guarantee or the Exchange
Notes (i) to cure any ambiguity, defect or inconsistency, (ii) to provide for
uncertificated Exchange Notes in addition to or in place of certificated
Exchange Notes, (iii) to comply with the covenant relating to mergers,
consolidations and sales of assets, (iv) to provide for the assumption of the
Company's or any Guarantor's obligations to Holders of such Exchange Notes, (v)
to make any change that would provide any additional rights or benefits to the
Holders of the Exchange Notes or that does not adversely affect the legal rights
under the Indenture of any such Holder, (vi) to add covenants for the benefit of
the Holders or to surrender any right or power conferred upon the Company, (vii)
to comply with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act or (viii) to add a
Guarantor under the Indenture.
The consent of the Holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
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transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Indenture provides that the Holders of a majority in principal amount of
the outstanding Exchange Notes issued thereunder will have the right to direct
the time, method and place of conducting any proceeding for exercising any
remedy available to the Trustee, subject to certain exceptions. The Indenture
provides that in case an Event of Default shall occur (which shall not be
cured), the Trustee will be required, in the exercise of its power, to use the
degree of care of a prudent person in the conduct of his own affairs. Subject to
such provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any Holder of such
Exchange Notes, unless such Holder shall have offered to the Trustee security
and indemnity satisfactory to it against any loss, liability or expense.
GOVERNING LAW
The Indenture, the Exchange Notes and the Guarantees, if any, are and will
be, subject to certain exceptions, governed by and construed in accordance with
the internal laws of the State of New York, without regard to the choice of law
rules thereof.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided. For
purposes of the Indenture, unless otherwise specifically indicated, the term
"consolidated" with respect to any Person refers to such Person consolidated
with its Restricted Subsidiaries, and excludes from such consolidation any
Unrestricted Subsidiary as if such Unrestricted Subsidiary were not an Affiliate
of such Person.
"Acquired Indebtedness" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Restricted Subsidiary of such specified Person,
including Indebtedness incurred in connection with, or in contemplation of, such
other Person merging with or into or becoming a Restricted Subsidiary of such
specified Person and (ii) Indebtedness encumbering any asset acquired by such
specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise, PROVIDED, HOWEVER,
that beneficial ownership of 10% or more of the voting securities of a Person
shall be deemed to be control.
"Asset Sale" means:
(i) the sale, conveyance, transfer or other disposition (whether in a
single transaction or a series of related transactions) of property or
assets (including by way of a sale and leaseback) of the Company or any
Restricted Subsidiary (each referred to in this definition as a
"disposition") or
(ii) the issuance or sale of Equity Interests of any Restricted
Subsidiary (whether in a single transaction or a series of related
transactions), in each case, other than:
(a) a disposition of Cash Equivalents or Investment Grade Securities or
obsolete equipment in the ordinary course of business;
(b) the disposition of all or substantially all of the assets of the
Company in a manner permitted pursuant to the provisions described above
under "--Merger, Consolidation or Sale of All or Substantially All Assets"
or any disposition that constitutes a Change of Control pursuant to the
Indenture;
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(c) any Restricted Payment that is permitted to be made, and is made,
under the first paragraph of the covenant described above under "Limitation
on Restricted Payments";
(d) any disposition of assets with an aggregate fair market value of
less than $1 million;
(e) any disposition of property or assets by a Restricted Subsidiary to
the Company or by the Company or a Restricted Subsidiary to a Wholly Owned
Restricted Subsidiary;
(f) any exchange of like property pursuant to Section 1031 of the
Internal Revenue Code of 1986, as amended, for use in a Similar Business;
(g) any financing transaction with respect to property built or acquired
by the Company or any Restricted Subsidiary after the Issuance Date
including, without limitation, sale-leasebacks and asset securitizations;
(h) foreclosures on assets; and
(i) any sale of Equity Interests in, or Indebtedness or other
securities of, an Unrestricted Subsidiary.
"Capital Stock" means with respect to any Person, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock of such Person, including, without limitation, if such Person is
a partnership, partnership interests (whether general or limited) and any other
interest or participation that confers on a Person the right to receive a share
of the profits and losses of, or distributions of assets of, such partnership.
"Capitalized Lease Obligation" means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized and reflected as a liability on
a balance sheet in accordance with GAAP.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof, (iii) certificates of deposit, time
deposits and eurodollar time deposits with maturities of one year or less from
the date of acquisition, bankers' acceptances with maturities not exceeding one
year and overnight bank deposits, in each case with any commercial bank having
capital and surplus in excess of $500 million, (iv) repurchase obligations for
underlying securities of the types described in clauses (ii) and (iii) entered
into with any financial institution meeting the qualifications specified in
clause (iii) above, (v) commercial paper rated A-1 or the equivalent thereof by
Moody's or S&P and in each case maturing within one year after the date of
acquisition, (vi) investment funds investing 95% of their assets in securities
of the types described in clauses (i)-(v) above, (vii) readily marketable direct
obligations issued by any state of the United States of America or any political
subdivision thereof having one of the two highest rating categories obtainable
from either Moody's or S&P and (viii) Indebtedness or preferred stock issued by
Persons with a rating of "A" or higher from S&P or "A2" or higher from Moody's.
"Change of Control" means the occurrence of any of the following:
(i) the sale, lease or transfer, in one or a series of related
transactions, of all or substantially all of the assets of the Company and
its Subsidiaries, taken as a whole (other than pursuant to a Real Estate
Financing Transaction); or
(ii) the Company becomes aware of (by way of a report or any other
filing pursuant to Section 13(d) of the Exchange Act, proxy, vote, written
notice or otherwise) the acquisition by any Person or group (within the
meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any
successor provision), including any group acting for the purpose of
acquiring, holding or disposing of securities (within the meaning of Rule
13d-5(b)(1) under the Exchange Act), other than the Permitted Holders and
their Related Parties, in a single transaction or in a related series of
transactions, by way of merger, consolidation or other business combination
or purchase of beneficial ownership (within the meaning of Rule 13d-3 under
the Exchange Act, or any successor provision) of beneficial ownership of
more of the total voting power of the Voting Stock of the Company than
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the Permitted Holders and their Related Parties beneficially own at the time
the Company so becomes aware of such acquisition and the Permitted Holders
and their Related Parties do not, at such time, have the right or the
ability by voting power, contract or otherwise to elect or designate for
election a majority of the Board of Directors of the Company.
"Consolidated Additional Paid-In Capital" means, with respect to any Person
for any period, the aggregate of the additional paid-in capital of such Person
and its Restricted Subsidiaries for such period, on a consolidated basis, and
otherwise determined in accordance with GAAP.
"Consolidated Depreciation and Amortization Expense" means with respect to
any Person for any period, the total amount of depreciation and amortization
expense and other noncash charges (excluding any noncash item that represents an
accrual, reserve or amortization of a cash expenditure for a future period) of
such Person and its Restricted Subsidiaries for such period on a consolidated
basis and otherwise determined in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any period, the sum
of: (a) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, to the extent such expense was deducted in
computing Consolidated Net Income (including amortization of original issue
discount, non-cash interest payments, the interest component of Capitalized
Lease Obligations, and net payments (if any) pursuant to Hedging Obligations,
excluding amortization of deferred financing fees) and (b) consolidated
capitalized interest of such Person and its Restricted Subsidiaries for such
period, whether paid or accrued, to the extent such expense was deducted in
computing Consolidated Net Income.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, and otherwise determined in accordance
with GAAP; PROVIDED, HOWEVER, that (i) any net after-tax extraordinary gains or
losses (less all fees and expenses relating thereto) shall be excluded, (ii) the
Net Income for such period shall not include the cumulative effect of a change
in accounting principles during such period, (iii) any net after-tax income
(loss) from discontinued operations and any net after-tax gains or losses on
disposal of discontinued operations shall be excluded, (iv) any net after-tax
gains or losses (less all fees and expenses relating thereto) attributable to
asset dispositions other than in the ordinary course of business (as determined
in good faith by the Board of Directors of the Company) shall be excluded, (v)
the Net Income for such period of any Person that is not a Subsidiary, or is an
Unrestricted Subsidiary, or that is accounted for by the equity method of
accounting, shall be included only to the extent of the amount of dividends or
distributions or other payments paid in cash (or to the extent converted into
cash) to the referent Person or a Wholly Owned Restricted Subsidiary thereof in
respect of such period, (vi) the Net Income of any Person acquired in a pooling
of interests transaction shall not be included for any period prior to the date
of such acquisition and (vii) the Net Income for such period of any Restricted
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Restricted Subsidiary of its Net
Income is not at the date of determination permitted without any prior
governmental approval (which has not been obtained) or, directly or indirectly,
by the operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable to
that Restricted Subsidiary or its stockholders, unless such restriction with
respect to the payment of dividends or in similar distributions has been legally
waived.
"Contingent Obligations" means, with respect to any Person, any obligation
of such Person guaranteeing any leases, dividends or other obligations that do
not constitute Indebtedness ("primary obligations") of any other Person (the
"primary obligor") in any manner, whether directly or indirectly, including,
without limitation, any obligation of such Person, whether or not contingent,
(i) to purchase any such primary obligation or any property constituting direct
or indirect security therefor, (ii) to advance or supply funds (A) for the
purchase or payment of any such primary obligation or (B) to maintain working
capital or equity capital of the primary obligor or otherwise to maintain the
net worth or solvency of the
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primary obligor, or (iii) to purchase property, securities or services primarily
for the purpose of assuring the owner of any such primary obligation of the
ability of the primary obligor to make payment of such primary obligation
against loss in respect thereof.
"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.
"Designated Noncash Consideration" means the fair market value of noncash
consideration received by the Company or one of its Restricted Subsidiaries in
connection with an Asset Sale that is so designated as Designated Noncash
Consideration pursuant to an Officers' Certificate, setting forth the basis of
such valuation, executed by the principal executive officer and the principal
financial officer of the Company, less the amount of cash or Cash Equivalents
received in connection with a sale of such Designated Noncash Consideration.
"Designated Preferred Stock" means preferred stock of the Company (other
than Disqualified Stock) that is issued for cash (other than to a Restricted
Subsidiary) and is so designated as Designated Preferred Stock, pursuant to an
Officers' Certificate executed by the principal executive officer and the
principal financial officer of the Company, on the issuance date thereof, the
cash proceeds of which are excluded from the calculation set forth in paragraph
(c) of the "Restricted Payments" covenant.
"Disqualified Stock" means, with respect to any Person, any Capital Stock of
such Person which, by its terms (or by the terms of any security into which it
is convertible or for which it is putable or exchangeable), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the holder
thereof, in whole or in part, in each case prior to the date 91 days after the
maturity date of the Exchange Notes; PROVIDED, HOWEVER, that if such Capital
Stock is issued to any plan for the benefit of employees of the Company or its
Subsidiaries or by any such plan to such employees, such Capital Stock shall not
constitute Disqualified Stock solely because it may be required to be
repurchased by the Company in order to satisfy applicable statutory or
regulatory obligations.
"EBITDA" means, with respect to any Person for any period, the Consolidated
Net Income of such Person for such period plus (a) provision for taxes based on
income or profits of such Person for such period deducted in computing
Consolidated Net Income, plus (b) Consolidated Interest Expense of such Person
for such period, plus (c) Consolidated Depreciation and Amortization Expense of
such Person for such period to the extent such depreciation and amortization
were deducted in computing Consolidated Net Income, plus (d) any expenses or
charges related to any Equity Offering or Indebtedness permitted to be incurred
by the Indenture (including such expenses or charges related to the Merger and
the Financings) and deducted in such period in computing Consolidated Net
Income, plus (e) the amount of any restructuring charge or reserve deducted in
such period in computing Consolidated Net Income, plus (f) without duplication,
any other non-cash charges reducing Consolidated Net Income for such period
(excluding any such charge which requires an accrual of a cash reserve for
anticipated cash charges for any future period), less (g) without duplication,
non-cash items increasing Consolidated Net Income of such Person for such period
(excluding any items which represent the reversal of any accrual of, or cash
reserve for, anticipated cash charges in any prior period).
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any public or private sale of common stock or
preferred stock of the Company (excluding Disqualified Stock), other than public
offerings with respect to the Company's Common Stock registered on Form S-8.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the Commission promulgated thereunder.
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"Existing Indebtedness" means Indebtedness of the Company or its Restricted
Subsidiaries in existence on the Issuance Date, plus interest accruing thereon,
after application of the net proceeds of the sale of the Exchange Notes as
described in this Prospectus.
"Fixed Charge Coverage Ratio" means, with respect to any Person for any
period, the ratio of EBITDA of such Person for such period to the Fixed Charges
of such Person for such period. In the event that the Company or any of its
Restricted Subsidiaries incurs, assumes, guarantees or redeems any Indebtedness
(other than in the case of revolving credit borrowings, in which case interest
expense shall be computed based upon the average daily balance of such
Indebtedness during the applicable period) or issues or redeems preferred stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the event for which the calculation of
the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed
Charge Coverage Ratio shall be calculated giving pro forma effect to such
incurrence, assumption, guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter period. For purposes of making the
computation referred to above, Investments, acquisitions, dispositions, mergers,
consolidations and discontinued operations (as determined in accordance with
GAAP) that have been made by the Company or any of its Restricted Subsidiaries
during the four-quarter reference period or subsequent to such reference period
and on or prior to or simultaneously with the Calculation Date shall be
calculated on a pro forma basis assuming that all such Investments,
acquisitions, dispositions, discontinued operations, mergers and consolidations
(and the reduction of any associated fixed charge obligations and the change in
EBITDA resulting therefrom) had occurred on the first day of the four-quarter
reference period. If since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such period) shall
have made any Investment, acquisition, disposition, discontinued operation,
merger or consolidation that would have required adjustment pursuant to this
definition, then the Fixed Charge Coverage Ratio shall be calculated giving pro
forma effect thereto for such period as if such Investment, acquisition,
disposition, discontinued operation, merger or consolidation had occurred at the
beginning of the applicable four-quarter period. For purposes of this
definition, whenever pro forma effect is to be given to a transaction, the pro
forma calculations shall be made in good faith by a responsible financial or
accounting officer of the Company. If any Indebtedness bears a floating rate of
interest and is being given pro forma effect, the interest on such Indebtedness
shall be calculated as if the rate in effect on the Calculation Date had been
the applicable rate for the entire period (taking into account any Hedging
Obligations applicable to such Indebtedness). Interest on a Capitalized Lease
Obligation shall be deemed to accrue at an interest rate reasonably determined
by a responsible financial or accounting officer of the Company to be the rate
of interest implicit in such Capitalized Lease Obligation in accordance with
GAAP. For purposes of making the computation referred to above, interest on any
Indebtedness under a revolving credit facility computed on a pro forma basis
shall be computed based upon the average daily balance of such Indebtedness
during the applicable period. Interest on Indebtedness that may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rate, shall be deemed to have been
based upon the rate actually chosen, or, if none, then based upon such optional
rate chosen as the Company may designate.
"Fixed Charges" means, with respect to any Person for any period, the sum of
(a) Consolidated Interest Expense of such Person for such period and (b) all
cash dividend payments (excluding items eliminated in consolidation) on any
series of preferred stock of such Person.
"Foreign Subsidiary" means a Restricted Subsidiary not organized or existing
under the laws of the United States, any State thereof, the District of Columbia
or any territory thereof.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and
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statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as have been approved by a
significant segment of the accounting profession, which are in effect on the
Issuance Date. For the purposes of the Indenture, the term "consolidated" with
respect to any Person shall mean such Person consolidated with its Restricted
Subsidiaries, and shall not include any Unrestricted Subsidiary.
"Government Securities" means securities that are (a) direct obligations of
the United States of America for the timely payment of which its full faith and
credit is pledged or (b) obligations of a Person controlled or supervised by and
acting as an agency or instrumentality of the United States of America the
timely payment of which is unconditionally guaranteed as a full faith and credit
obligation by the United States of America, which, in either case, are not
callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank (as defined in Section 3(a)(2) of
the Securities Act), as custodian with respect to any such Government Securities
or a specific payment of principal of or interest on any such Government
Securities held by such custodian for the account of the holder of such
depository receipt; provided that (except as required by law) such custodian is
not authorized to make any deduction from the amount payable to the holder of
such depository receipt from any amount received by the custodian in respect of
the Government Securities or the specific payment of principal of or interest on
the Government Securities evidenced by such depository receipt.
"guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness or other obligations.
"Guarantee" means any guarantee of the obligations of the Company under the
Indenture and the Exchange Notes by any Person in accordance with the provisions
of the Indenture. When used as a verb, "Guarantee" shall have a corresponding
meaning. No Guarantees will be issued in connection with the initial offering
and sale of the Exchange Notes.
"Guarantor" means any Person that incurs a Guarantee; provided that upon the
release and discharge of such Person from its Guarantee in accordance with the
Indenture, such Person shall cease to be a Guarantor. No Guarantees will be
issued in connection with the initial offering and sale of the Exchange Notes.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) currency exchange or interest rate swap agreements,
currency exchange or interest rate cap agreements and currency exchange or
interest rate collar agreements and (ii) other agreements or arrangements
designed to protect such Person against fluctuations in currency exchange or
interest rates.
"Holder" means a holder of the Exchange Notes.
"Indebtedness" means, with respect to any Person, (a) any indebtedness of
such Person, whether or not contingent (i) in respect of borrowed money, (ii)
evidenced by bonds, notes, debentures or similar instruments or letters of
credit or bankers' acceptances (or, without double counting, reimbursement
agreements in respect thereof), (iii) representing the balance deferred and
unpaid of the purchase price of any property (including Capitalized Lease
Obligations), except any such balance that constitutes a trade payable or
similar obligation to a trade creditor, in each case accrued in the ordinary
course of business or (iv) representing any Hedging Obligations, if and to the
extent of any of the foregoing Indebtedness (other than letters of credit and
Hedging Obligations) that would appear as a liability upon a balance sheet of
such Person prepared in accordance with GAAP, (b) to the extent not otherwise
included, any obligation by such Person to be liable for, or to pay, as obligor,
guarantor or otherwise, on the Indebtedness of another Person (other than by
endorsement of negotiable instruments for collection in the ordinary course of
business) and (c) to the extent not otherwise included, Indebtedness of another
Person secured by a Lien on any asset owned by such Person (whether or not such
Indebtedness is assumed by such Person); PROVIDED, HOWEVER, that Contingent
Obligations incurred in the ordinary course of business shall be deemed not to
constitute Indebtedness.
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"Independent Financial Advisor" means an accounting, appraisal, investment
banking firm or consultant to Persons engaged in Similar Businesses of
nationally recognized standing that is, in the judgment of the Company's Board
of Directors, qualified to perform the task for which it has been engaged.
"Investment Grade Securities" means (i) securities issued or directly and
fully guaranteed or insured by the United States government or any agency or
instrumentality thereof (other than Cash Equivalents), (ii) debt securities or
debt instruments with a rating of BBB- or higher by S&P or Baa3 or higher by
Moody's or the equivalent of such rating by such rating organization, or, if no
rating of S&P or Moody's then exists, the equivalent of such rating by any other
nationally recognized securities rating agency, but excluding any debt
securities or instruments constituting loans or advances among the Company and
its Subsidiaries, and (iii) investments in any fund that invests exclusively in
investments of the type described in clauses (i) and (ii) which fund may also
hold immaterial amounts of cash pending investment and/or distribution.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of loans (including
guarantees), advances or capital contributions (excluding advances to customers,
commission, travel and similar advances to officers and employees made in the
ordinary course of business), purchases or other acquisitions for consideration
of Indebtedness, Equity Interests or other securities issued by any other Person
and investments that are required by GAAP to be classified on the balance sheet
of the Company in the same manner as the other investments included in this
definition to the extent such transactions involve the transfer of cash or other
property. For purposes of the definition of "Unrestricted Subsidiary" and the
covenant described under "--Certain Covenants--Restricted Payments," (i)
"Investments" shall include the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of a
Subsidiary of the Company at the time that such Subsidiary is designated an
Unrestricted Subsidiary; PROVIDED, HOWEVER, that upon a redesignation of such
Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue
to have a permanent "Investment" in an Unrestricted Subsidiary equal to an
amount (if positive) equal to (x) the Company's "Investment" in such Subsidiary
at the time of such redesignation less (y) the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of such Subsidiary at the time of such redesignation; and (ii) any
property transferred to or from an Unrestricted Subsidiary shall be valued at
its fair market value at the time of such transfer, in each case as determined
in good faith by the Board of Directors.
"Issuance Date" means the closing date for the sale and original issuance of
the Old Notes under the Indenture.
"Letter of Credit/Bankers' Acceptance Obligations" means Indebtedness of the
Company or any of its Restricted Subsidiaries with respect to letters of credit
or bankers' acceptances constituting Senior Indebtedness or Pari Passu
Indebtedness which shall be deemed to consist of (i) the aggregate maximum
amount then available to be drawn under all such letters of credit (the
determination of such maximum amount to assume compliance with all conditions
for drawing), (ii) the aggregate face amount of all unmatured bankers'
acceptances and (iii) the aggregate amount that has then been paid by, and not
reimbursed to, the issuers under such letters of credit or creation of such
bankers' acceptances.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction); provided that in
no event shall an operating lease be deemed to constitute a Lien.
"Management Group" means the group consisting of the Officers of the
Company.
"Moody's" means Moody's Investors Service, Inc.
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"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends.
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale, net of the
direct costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and brokerage and sales commissions),
and any relocation expenses incurred as a result thereof, taxes paid or payable
as a result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to
the repayment of principal, premium (if any) and interest on Indebtedness
required (other than required by clause (i) of the second paragraph of
"--Repurchase at the Option of Holders--Asset Sales") to be paid as a result of
such transaction and any deduction of appropriate amounts to be provided by the
Company as a reserve in accordance with GAAP against any liabilities associated
with the asset disposed of in such transaction and retained by the Company after
such sale or other disposition thereof, including, without limitation, pension
and other post-employment benefit liabilities and liabilities related to
environmental matters or against any indemnification obligations associated with
such transaction.
"Oaktree" means Oaktree Capital Management, LLC, a California limited
liability company.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements (including, without limitation, reimbursement
obligations with respect to letters of credit and banker's acceptances), damages
and other liabilities payable under the documentation governing any
Indebtedness.
"Officer" means the Chairman of the Board, the President, any Executive Vice
President or Vice President, the Treasurer or the Secretary of the Company.
"Officers' Certificate" means a certificate signed on behalf of the Company
by two officers of the Company, one of whom must be the principal executive
officer, the principal financial officer, the treasurer or the principal
accounting officer of the Company that meets the requirements set forth in the
Indenture.
"Pari Passu Indebtedness" means (a) with respect to the Exchange Notes,
Indebtedness which ranks pari passu in right of payment to the Exchange Notes
and (b) with respect to any Guarantee, Indebtedness which ranks pari passu in
right of payment to such Guarantee.
"Permitted Holders" means Oaktree, KKR and any of their Affiliates and the
Management Group.
"Permitted Investments" means (a) any Investment in the Company or any
Restricted Subsidiary; (b) any Investment in cash and Cash Equivalents or
Investment Grade Securities; (c) any Investment by the Company or any Restricted
Subsidiary of the Company in a Person that is a Similar Business if as a result
of such Investment (i) such Person becomes a Restricted Subsidiary or (ii) such
Person, in one transaction or a series of related transactions, is merged,
consolidated or amalgamated with or into, or transfers or conveys substantially
all of its assets to, or is liquidated into, the Company or a Restricted
Subsidiary; (d) any Investment in securities or other assets not constituting
cash or Cash Equivalents and received in connection with an Asset Sale made
pursuant to the provisions of "--Repurchase at the Option of Holders--Asset
Sales" or any other disposition of assets not constituting an Asset Sale; (e)
any Investment existing on the Issuance Date; (f) advances to employees not in
excess of $10 million outstanding at any one time; (g) any Investment acquired
by the Company or any of its Restricted Subsidiaries (i) in exchange for any
other Investment or accounts receivable held by the Company or any such
Restricted Subsidiary in connection with or as a result of a bankruptcy,
workout, reorganization or recapitalization of the issuer of such other
Investment or accounts receivable or (ii) as a result of a foreclosure by the
Company or any of its Restricted Subsidiaries with respect to any secured
Investment or other transfer of title with respect to any secured Investment in
default; (h) Hedging Obligations permitted under clause (j) of the "Limitation
of Incurrence of Indebtedness and Issuance of Disqualified Stock" covenant; (i)
loans and advances to officers, directors and employees for business-related
travel expenses, moving expenses and other similar expenses, in each case
incurred in the ordinary course of
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business; (j) any Investment in a Similar Business (other than an Investment in
an Unrestricted Subsidiary) having an aggregate fair market value, taken
together with all other Investments made pursuant to this clause (j) that are at
that time outstanding, not to exceed the greater of (x) $80 million or (y) 15%
of Total Assets at the time of such Investment (with the fair market value of
each Investment being measured at the time made and without giving effect to
subsequent changes in value); (k) Investments the payment for which consists of
Equity Interests of the Company (exclusive of Disqualified Stock); PROVIDED,
HOWEVER, that such Equity Interests will not increase the amount available for
Restricted Payments under clause (c) of the "Restricted Payments" covenant; (l)
additional Investments having an aggregate fair market value, taken together
with all other Investments made pursuant to this clause (l) that are at that
time outstanding, not to exceed the greater of (x) $25 million or (y) 5% of
Total Assets at the time of such Investment (with the fair market value of each
Investment being measured at the time made and without giving effect to
subsequent changes in value); (m) any transaction to the extent it constitutes
an investment that is permitted by and made in accordance with the provisions of
the second paragraph of the covenant described under "--Certain
Covenants--Transactions with Affiliates" (except transactions described in
clauses (ii) and (vi) of such paragraph); (n) any Investment by Restricted
Subsidiaries in other Restricted Subsidiaries and Investments by Subsidiaries
that are not Restricted Subsidiaries in other Subsidiaries that are not
Restricted Subsidiaries; and (o) Investments in any special purpose, Wholly
Owned Subsidiary of the Company organized after the Issuance Date in connection
with a Real Estate Financing Transaction that, in the good faith determination
of the Board of Directors of the Company, are necessary or advisable to effect
such Real Estate Financing Transaction.
"Person" means 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.
"preferred stock" means any Equity Interest with preferential right of
payment of dividends or upon liquidation, dissolution, or winding up.
"Real Estate Financing Transaction" means a financing or series of
financings consisting principally of one or more mortgage financings, real
estate sale or leaseback transactions or an asset-backed program based on real
estate owned by the Company or any of its Subsidiaries (funded by the issuance
of commercial paper, medium term notes or other forms of borrowing and including
credit enhancement facilities), and which may consist of or include such other
forms of financing consistent with the foregoing as the Board of Directors of
the Company shall approve in good faith.
"Related Parties" means any Person controlled by a Permitted Holder,
including any partnership of which a Permitted Holder or its Affiliates is the
general partner.
"Repurchase Offer" means an offer made by the Company to purchase all or any
portion of a Holder's Exchange Notes pursuant to the provisions described under
the covenants entitled "--Repurchase at the Option of Holders--Change of
Control" or "--Repurchase at the Option of Holders--Asset Sales."
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" means, at any time, any direct or indirect
Subsidiary of the Company that is not then an Unrestricted Subsidiary; PROVIDED,
HOWEVER, that upon the occurrence of any Unrestricted Subsidiary ceasing to be
an Unrestricted Subsidiary, such Subsidiary shall be included in the definition
of "Restricted Subsidiary."
"S&P" means Standard and Poor's Ratings Group.
"Securities Act" means the Securities Act of 1933, as amended, and the rules
and regulations of the Commission promulgated thereunder.
"Senior Credit Facility" means that certain credit facility described in
this Prospectus among the Company and the lenders from time to time party
thereto, including any collateral documents, instruments and agreements executed
in connection therewith, and the term Senior Credit Facility shall also
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include any amendments, supplements, modifications, extensions, renewals,
restatements or refundings thereof and any credit facilities that replace,
refund or refinance any part of the loans, other credit facilities or
commitments thereunder, including any such replacement, refunding or refinancing
facility that increases the amount borrowable thereunder or alters the maturity
thereof, PROVIDED, HOWEVER, that there shall not be more than one facility at
any one time that constitutes the Senior Credit Facility and, if at any time
there is more than one facility which would constitute the Senior Credit
Facility, the Company will designate to the Trustee which one of such facilities
will be the Senior Credit Facility for purposes of the Indenture.
"Significant Subsidiary" means any Subsidiary which would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the Issuance
Date.
"Similar Business" means a business, the majority of whose revenues are
derived from preschool and child care services, or from any educational
activities, or whose revenues are derived from the licensing of the KinderCare
name, or any business or activity that is reasonably similar thereto or a
reasonable extension, development or expansion thereof or ancillary thereto,
including, without limitation, educational materials, clothes, toys, and other
similar consumer products, as well as the operation of primary and private
schools.
"Subordinated Indebtedness" means (a) with respect to the Exchange Notes,
any Indebtedness of the Company which is by its terms subordinated in right of
payment to the Exchange Notes and (b) with respect to any Guarantee, any
Indebtedness of the applicable Guarantor which is by its terms subordinated in
right of payment to such Guarantee.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association, or other business entity (other than a partnership) of which more
than 50% of the total voting power of shares of Capital Stock entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time of determination owned or
controlled, directly or indirectly, by such Person or one or more of the other
Subsidiaries of that Person or a combination thereof and (ii) any partnership,
joint venture, limited liability company or similar entity of which (x) more
than 50% of the capital accounts, distribution rights, total equity and voting
interests or general or limited partnership interests, as applicable, are owned
or controlled, directly or indirectly, by such Person or one or more of the
other Subsidiaries of that Person or a combination thereof whether in the form
of membership, general, special or limited partnership or otherwise and (y) such
Person or any Wholly Owned Restricted Subsidiary of such Person is a controlling
general partner or otherwise controls such entity.
"Total Assets" means the total consolidated assets of the Company and its
Restricted Subsidiaries, as shown on the most recent balance sheet of the
Company.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company which at
the time of determination is an Unrestricted Subsidiary (as designated by the
Board of Directors of the Company, as provided below) and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors of the Company may designate
any Subsidiary of the Company (including any existing Subsidiary and any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless
such Subsidiary or any of its Subsidiaries owns any Equity Interests of, or
owns, or holds any Lien on, any property of, the Company or any Subsidiary of
the Company (other than any Subsidiary of the Subsidiary to be so designated),
provided that (a) any Unrestricted Subsidiary must be an entity of which shares
of the capital stock or other equity interests (including partnership interests)
entitled to cast at least a majority of the votes that may be cast by all shares
or equity interests having ordinary voting power for the election of directors
or other governing body are owned, directly or indirectly, by the Company, (b)
the Company certifies that such designation complies with the covenants
described under "--Certain Covenants--Restricted Payments" and (c) each of (I)
the Subsidiary to be so designated and (II) its Subsidiaries has not at the time
of designation, and does not thereafter, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly liable with respect to any
Indebtedness pursuant to which the lender has recourse to
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any of the assets of the Company or any of its Restricted Subsidiaries. The
Board of Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that, immediately after giving effect to such designation,
the Company could incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test described under "--Certain
Covenants--Limitations on Incurrence of Indebtedness and Disqualified Stock" on
a pro forma basis taking into account such designation. Any such designation by
the Board of Directors shall be notified by the Company to the Trustee by
promptly filing with the Trustee a copy of the board resolution giving effect to
such designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"Voting Stock" means, with respect to any Person, any class or series of
capital stock of such Person that is ordinarily entitled to vote in the election
of directors thereof at a meeting of stockholders called for such purpose,
without the occurrence of any additional event or contingency.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
or Disqualified Stock, as the case may be, at any date, the quotient obtained by
dividing (i) the sum of the products of the number of years from the date of
determination to the date of each successive scheduled principal payment of such
Indebtedness or redemption or similar payment with respect to such Disqualified
Stock multiplied by the amount of such payment, by (ii) the sum of all such
payments.
"Wholly Owned Restricted Subsidiary" is any Wholly Owned Subsidiary that is
a Restricted Subsidiary.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
100% of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
BOOK-ENTRY DELIVERY AND FORM
The certificates representing the Exchange Notes will be issued in fully
registered form. Except as described in the next paragraph, the Exchange Notes
initially will be represented by a single, permanent global Exchange Note, in
definitive, fully registered form without interest coupons (the "Global Exchange
Note") and will be deposited with the Trustee as custodian for The Depository
Trust Company, New York, New York ("DTC") and registered in the name of a
nominee of DTC.
Exchange Notes held by persons who elect to take physical delivery of their
certificates instead of holding their interest through the Global Exchange Note
(collectively referred to herein as the "Non-Global Holders") will be issued in
registered certificated form (a "Certificated Exchange Note"). Upon the transfer
of any Certificated Exchange Note initially issued to a Non-Global Holder, such
Certificated Exchange Note will, unless the transferee requests otherwise or a
Global Exchange Note has previously been exchanged in whole for Certificated
Exchange Notes, be exchanged for an interest in such Global Exchange Note.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provision of Section 17A of the Exchange Act. DTC was created to hold securities
for its participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical movement
of certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and certain other organizations.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly ("indirect
participants").
Upon the issuance of the Global Exchange Note, DTC or its custodian will
credit, on its internal system, the respective principal amount of the
individual beneficial interests represented by such Global
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<PAGE>
Exchange Note to the accounts of persons who have accounts with such depositary.
Such accounts initially will be designated by or on behalf of the Initial
Purchasers. Ownership of beneficial interests in the Global Exchange Note will
be limited to persons who have accounts with DTC ("participants") or persons who
hold interests through participants. Ownership of beneficial interests in the
Global Exchange Note will be shown on, and the transfer of that ownership will
be effected only through, records maintained by DTC or its nominee (with respect
to interests of participants) and the records of participants (with respect to
interests of persons other than participants).
So long as DTC or its nominee is the registered owner or holder of the
Global Exchange Note, DTC or such nominee, as the case may be, will be
considered the sole record owner or holder of the Exchange Notes represented by
such Global Exchange Note for all purposes under the Indenture and the Exchange
Notes. No beneficial owners of an interest in the Global Exchange Note will be
able to transfer that interest except in accordance with DTC's applicable
procedures.
The Company understands that, under existing industry practices, in the
event that the Company requests any action of Holders, or an owner of a
beneficial interest in such permanent Global Exchange Note desires to give or
take any action (including a suit for repayment of principal, premium or
interest) that a Holder is entitled to give or take under the Notes, DTC would
authorize the participants holding the relevant beneficial interests to give or
take such action, and such participants would authorize beneficial owners owning
through such participants to give or take such action or would otherwise act
upon the instruction of beneficial owners owning through them.
Payments of the principal of, premium, if any, and interest on the Global
Exchange Note will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. Neither the Company, the Trustee, nor any paying agent
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in the Global
Exchange Note or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect of the Global Exchange Note
will credit participants' accounts with payments in amounts proportionate to
their respective beneficial ownership interests in the principal amount of such
Global Exchange Note, as shown on the records of DTC or its nominee. The Company
also expects that payments by participants to owners of beneficial interests in
such Global Exchange Note held through such participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers registered in the names of
nominees for such customers. Such payments will be the responsibility of such
participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules. If a Holder requires physical delivery of
Certificated Exchange Notes for any reason, including to sell Exchange Notes to
persons in states which require such delivery of such Exchange Notes or to
pledge such Exchange Notes, such holder must transfer its interest in the Global
Exchange Note, in accordance with the normal procedures of DTC and the
procedures set forth in the Indenture.
Neither the Company nor the Trustee will have any responsibility for the
performance by DTC or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
Subject to certain conditions, any person having a beneficial interest in
the Global Exchange Note may, upon request to the Trustee, exchange such
beneficial interest for Exchange Notes in the form of Certificated Exchange
Notes. Upon any such issuance, the Trustee is required to register such
Certificated Exchange Notes in the name of, and cause the same to be delivered
to, such person or persons (or the nominee of any thereof). In addition, if DTC
is at any time unwilling or unable to continue as a depositary for the Global
Exchange Note and a successor depositary is not appointed by the Company within
90 days, the Company will issue Certificated Exchange Notes in exchange for the
Global Exchange Note.
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EXCHANGE OFFER; REGISTRATION RIGHTS
EXCHANGE OFFER. The Company and the Initial Purchasers entered into the
Registration Rights Agreement on the Issuance Date, pursuant to which the
Company agreed, for the benefit of the holders of the Old Notes, that it will,
at its own expense, (i) file the Exchange Offer Registration Statement with the
Commission with respect to the Exchange Offer to exchange the Old Notes for
Exchange Notes having substantially identical terms in all material respects to
the Old Notes (except that the Exchange Notes will not contain terms with
respect to transfer restrictions or interest rate increases as described herein)
within 45 calendar days after the Issuance Date, (ii) use its best efforts to
cause the Exchange Offer Registration Statement to be declared effective by the
Commission under the Securities Act within 150 calendar days after the Issuance
Date and (iii) use its best efforts to consummate the Exchange Offer within 180
calendar days after the Issuance Date. Upon the Exchange Offer Registration
Statement being declared effective, the Company will offer the Exchange Notes in
exchange for surrender of the Old Notes. The Company will keep the Exchange
Offer open for at least 20 business days (or longer if required by applicable
law) after the date that notice of the Exchange Offer is mailed to the holders
of the Old Notes. For each Old Note surrendered to the Company pursuant to the
Exchange Offer, the holder who surrendered such Old Note will receive an
Exchange Note having a principal amount equal to that of the surrendered Old
Note. Interest on each Exchange Note will accrue from the last interest payment
date on which interest was paid on the Old Note surrendered in exchange therefor
or, if no interest has been paid on such Old Note, from the original issue date
of such Exchange Note. Under existing interpretations of the staff of the
Commission contained in several no-action letters to third parties, the Exchange
Notes would generally be freely transferable after the Exchange Offer without
further registration under the Securities Act (subject to certain
representations required to be made by each holder of Old Notes, as set forth
below). However, any purchaser of Old Notes who is an "affiliate" of the Company
or who intends to participate in the Exchange Offer for the purpose of
distributing the Exchange Notes (i) will not be able to rely on the
interpretations of the staff of the Commission, (ii) will not be able to tender
its Old Notes in the Exchange Offer and (iii) must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any sale or transfer of the Old Notes unless such sale or transfer is made
pursuant to an exemption from such requirements. In addition, in connection with
any resales of Exchange Notes, any broker-dealer (a "Participating
Broker-Dealer") which acquired the Old Notes for its own account as a result of
market making or other trading activities must deliver a prospectus meeting the
requirements of the Securities Act. The Commission has taken the position that
Participating Broker-Dealers may fulfill their prospectus delivery requirements
with respect to the Exchange Notes (other than a resale of an unsold allotment
from the original sale of the Old Notes) with the prospectus contained in the
Exchange Offer Registration Statement. The Company has agreed to make available
for a period of up to 120 days after consummation of the Exchange Offer a
prospectus meeting the requirements of the Securities Act to any Participating
Broker-Dealer and any other persons, if any, with similar prospectus delivery
requirements, for use in connection with any resale of Exchange Notes. A
Participating Broker-Dealer or any other person that delivers such a prospectus
to purchasers in connection with such resales will be subject to certain of the
civil liability provisions under the Securities Act and will be bound by the
provisions of the Registration Rights Agreement (including certain
indemnification rights and obligations thereunder).
Each holder of the Old Notes (other than certain specified holders) who
wishes to exchange Old Notes for Exchange Notes in the Exchange Offer will be
required to make certain representations, including representations that (i) any
Exchange Notes to be received by it will be acquired in the ordinary course of
its business, (ii) it has no arrangement or understanding with any person to
participate in the distribution (within the meaning of the Securities Act) of
the Exchange Notes, (iii) it is not an "affiliate" (as defined in Rule 405 under
the Securities Act) of the Company or, if it is such an affiliate, it will
comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable and (iv) it is not acting on behalf of
any person who could not truthfully make the foregoing representations.
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SHELF REGISTRATION. In the event that (i) any changes in law or the
applicable interpretations of the staff of the Commission do not permit the
Company to effect the Exchange Offer, (ii) for any other reason the Exchange
Offer is not consummated within 180 calendar days after the Issuance Date, (iii)
under certain circumstances, if the Initial Purchasers shall so request or (iv)
any holder of Old Notes (other than the Initial Purchasers) is not eligible to
participate in the Exchange Offer, the Company will, at its expense, (a) as
promptly as reasonably practicable file the Shelf Registration Statement
covering resales of the Old Notes, (b) use its best efforts to cause the Shelf
Registration Statement to be declared effective under the Securities Act by the
180th calendar day after the Issuance Date and (c) use its best efforts to keep
effective the Shelf Registration Statement until the earlier of three years from
the Issuance Date (or one year from the date the Shelf Registration Statement is
declared effective if such Shelf Registration Statement is filed upon the
request of any Initial Purchaser pursuant to clause (iii) above) or such shorter
period ending when all Old Notes covered by the Shelf Registration Statement
have been sold in the manner set forth and as contemplated in the Shelf
Registration Statement or when the Old Notes become eligible for resale pursuant
to Rule 144 under the Securities Act without volume restrictions, if any. The
Company, will, in the event of the filing of the Shelf Registration Statement,
provide to each holder of the Old Notes copies of the prospectus which is a part
of the Shelf Registration Statement, notify each such holder when the Shelf
Registration Statement has become effective and take certain other actions as
are required to permit unrestricted resales of the Old Notes. A holder of Old
Notes that sells its Old Notes pursuant to the Shelf Registration Statement
generally will be required to be named as a selling securityholder in the
related prospectus and to deliver a prospectus to purchasers, will be subject to
certain of the civil liability provisions under the Securities Act in connection
with such sales and will be bound by the provisions of the Registration Rights
Agreement that are applicable to such a holder (including certain
indemnification rights and obligations thereunder). In addition, each holder of
the Old Notes will be required to deliver information to be used in connection
with the Shelf Registration Statement and to provide comments on the Shelf
Registration Statement within the time periods set forth in the Registration
Rights Agreement in order to have their Old Notes included in the Shelf
Registration Statement and to benefit from the provisions regarding liquidated
damages set forth in the following paragraph.
Although the Company intends to file the registration statements described
above, as required, there can be no assurance that such registration statements
will be filed, or, if filed, that they will become effective. In the event that
(a) the Exchange Offer Registration Statement is not filed with the Commission
on or prior to the 45th calendar day following the Issuance Date, (b) the
Exchange Offer Registration Statement has not been declared effective on or
prior to the 150th calendar day following the Issuance Date or (c) the Exchange
Offer is not consummated or a Shelf Registration Statement is not declared
effective on or prior to the 180th calendar day following the Issuance Date, the
interest rate borne by the Old Notes shall be increased by one-quarter of one
percent per annum following such 45-day period in the case of clause (a) above,
following such 150-day period in the case of clause (b) above or following such
180-day period in the case of clause (c) above, which rate will be increased by
an additional one-quarter of one percent per annum for each 90-day period that
any additional interest continues to accrue; provided that the aggregate
increase in such annual interest rate may in no event exceed one percent. Upon
(x) the filing of the Exchange Offer Registration Statement after the 45-day
period described in clause (a) above, (y) the effectiveness of the Exchange
Offer Registration Statement after the 150-day period described in clause (b)
above or (z) the consummation of the Exchange Offer or the effectiveness of a
Shelf Registration Statement, as the case may be, after the 180-day period
described in clause (c) above, the interest rate borne by the Old Notes from the
date of such filing, effectiveness or consummation, as the case may be, will be
reduced to the original interest rate if the Company is otherwise in compliance
with this paragraph; PROVIDED, HOWEVER, that if, after any such reduction in
interest rate, a different event specified in clause (a), (b) or (c) above
occurs, the interest rate may again be increased and thereafter reduced pursuant
to the foregoing provisions. Pending the announcement of a material corporate
transaction, if the Company issues a notice that the Shelf Registration
Statement
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<PAGE>
is unusable, or such a notice is required under applicable securities laws to be
issued by the Company, and the aggregate number of days in any consecutive
twelve-month period for which all such notices are issued or required to be
issued exceeds 30 days in the aggregate, then the interest rate borne by the Old
Notes will be increased by one-quarter of one percent per annum following the
date that such Shelf Registration Statement ceases to be usable beyond the
30-day period permitted above, which rate shall be increased by an additional
one-quarter of one percent per annum at the beginning of each subsequent 90-day
period that such additional interest continues to accrue; provided that the
aggregate increase in such annual interest rate may in no event exceed one
percent per annum. Upon the Company declaring that the Shelf Registration
Statement is usable after the period of time described in the preceding
sentence, the interest rate borne by the Old Notes will be reduced to the
original interest rate if the Company is otherwise in compliance with this
paragraph; PROVIDED, HOWEVER, that if after any such reduction in interest rate
the Shelf Registration Statement again ceases to be usable beyond the period
permitted above, the interest rate may again be increased and thereafter reduced
pursuant to the foregoing provisions.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by, all the provisions of the Registration Rights Agreement. The
Registration Rights Agreement is an exhibit to the Registration Statement of
which this Prospectus is a part.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The exchange of Old Notes for Exchange Notes should not constitute
recognition events for federal income tax purposes. Consequently, no gain or
loss should be recognized by Holders upon receipt of the Exchange Notes. For
purposes of determining gain or loss upon the subsequent sale or exchange of
Exchange Notes, a Holder's basis in Exchange Notes should be the same as such
Holder's basis in the Old Notes exchanged therefor. Holders should be considered
to have held the Exchange Notes from the time of their original acquisition of
the Old Notes.
IN ANY EVENT, PERSONS CONSIDERING THE EXCHANGE OF OLD NOTES FOR EXCHANGE
NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY
CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTIONS.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of Exchange Notes received in exchange for Old Notes
where such Old Notes were acquired as a result of market-making activities or
other trading activities. To the extent any such broker-dealer participates in
the Exchange Offer and so notifies the Company, or causes the Company to be so
notified in writing, the Company has agreed that a period of 120 days after the
date of this Prospectus, it will make this Prospectus, as amended or
supplemented, available to such broker-dealer for use in connection with any
such resale, and will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Exchange Notes or a combination of such methods of
resale, at prevailing market prices at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers or any such Exchange Notes. Any broker-dealer
that resells Exchange Notes that were received by it for its own account
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such Exchange Notes may be deemed to be an "underwriter" within
the meaning of the Securities Act, and any profit on any such resale of Exchange
Notes and any commissions or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The Letter of
Transmittal states that, by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Exchange Offer
(other than commissions and concessions of any broker-dealers), subject to
certain prescribed limitations, and will indemnify the holders of the Old Notes
against certain liabilities, including certain liabilities that may arise under
the Securities Act.
By its acceptance of the Exchange Offer, any broker-dealer that receives
Exchange Notes pursuant to the Exchange Offer hereby agrees to notify the
Company prior to using the Prospectus in connection with the sale or transfer of
Exchange Notes, and acknowledges and agrees that, upon receipt of notice from
the Company of the happening of any event which makes any statement in the
Prospectus untrue in any material respect or which requires the making of any
changes in the Prospectus in order to make the statements therein not misleading
or which may impose upon the Company disclosure obligations that may have a
material adverse effect on the Company (which notice the Company agrees to
deliver promptly to such broker-dealer), such broker-dealer will suspend use of
the Prospectus until the Company has notified such broker-dealer that delivery
of the Prospectus may resume and has furnished copies of any amendment or
supplement to the Prospectus to such broker-dealer.
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LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Alston & Bird,
Atlanta, Georgia and by Simpson Thacher & Bartlett (a partnership which includes
professional corporations), New York, New York.
EXPERTS
The consolidated balance sheets as of May 31, 1996 and June 2, 1995 and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years ended May 31, 1996, June 2, 1995, and June 3, 1994 of
KinderCare Learning Centers, Inc. have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
INCORPORATION OF CERTAIN INFORMATION
BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference and shall be deemed to be a part hereof:
1. Annual Report of the Company on Form 10-K for the year ended May 31,
1996 (as amended by Form 10-K/A filed with the Commission on September 30,
1996);
2. Current Reports of the Company on Form 8-K dated October 3, 1996,
November 14, 1996, December 27, 1996, February 13, 1997 and March 14, 1997;
and
3. Quarterly Reports of the Company on Form 10-Q for the sixteen weeks
ended September 20, 1996 and for the twelve weeks ended December 13, 1996.
All documents and reports filed by the Company with the Commission pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus shall be deemed incorporated herein by reference and shall be deemed
to be a part hereof from the date of filing of such documents and reports. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any
subsequently filed document or report that also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide, without charge to each person, including any
beneficial owner, to whom a Prospectus is delivered, upon written or oral
request of such person, a copy of any or all of the documents incorporated
herein by reference (other than exhibits, unless such exhibits specifically are
incorporated by reference into such documents or this Prospectus). Requests for
such documents should be submitted in writing, addressed to the Corporate
Secretary, KinderCare Learning Centers, Inc., 2400 Presidents Drive, Montgomery,
Alabama 36116.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Financial Statements
Independent Auditors' Report....................................................... F-2
Consolidated Statements of Operations for the fiscal years ended May 31, 1996, June
2, 1995, and June 3, 1994........................................................ F-3
Consolidated Balance Sheets as of May 31, 1996 and June 2, 1995.................... F-4
Consolidated Statements of Shareholders' Equity for the fiscal years ended May 31,
1996, June 2, 1995, and June 3, 1994............................................. F-5
Consolidated Statements of Cash Flows for the fiscal years ended May 31, 1996, June
2, 1995, and June 3, 1994........................................................ F-6
Notes to Consolidated Financial Statements......................................... F-7
Unaudited Consolidated Financial Statements
Consolidated Statements of Operations for the (unaudited) twelve weeks and
twenty-eight weeks ended December 13, 1996 and December 15, 1995................. F-19
Consolidated Balance Sheet as of (unaudited) December 13, 1996..................... F-20
Consolidated Statements of Cash Flows for the (unaudited) twenty-eight weeks ended
December 13, 1996 and December 15, 1995.......................................... F-21
Notes to Unaudited Consolidated Financial Statements............................... F-22
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
KinderCare Learning Centers, Inc.:
We have audited the consolidated balance sheets of KinderCare Learning Centers,
Inc. and subsidiaries as of May 31, 1996 and June 2, 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years ended May 31, 1996, June 2, 1995, and June 3, 1994. These consolidated
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of KinderCare Learning
Centers, Inc. and subsidiaries as of May 31, 1996 and June 2, 1995, and the
results of their operations and their cash flows for the years ended May 31,
1996, June 2, 1995, and June 3, 1994, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, during the year
ended May 31, 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 121 and changed its method of accounting for the
impairment of long-lived assets and for long-lived assets to be disposed of.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
August 9, 1996
F-2
<PAGE>
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
JUNE 3, 1994 JUNE 2, 1995 MAY 31, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Operating revenues.................................................. $ 488,726 $ 506,505 $ 541,264
Operating expenses:
Salaries, wages and benefits...................................... 256,468 263,527 284,115
Depreciation...................................................... 25,148 28,071 33,972
Rent.............................................................. 22,563 26,099 26,515
Provision for allowance for doubtful accounts..................... 3,885 3,612 3,908
Other............................................................. 133,496 135,298 139,561
Litigation settlements and restructuring costs (income), net...... -- (888) 1,484
------------- ------------- -------------
Total operating expenses........................................ 441,560 455,719 489,555
------------- ------------- -------------
Operating income.................................................... 47,166 50,786 51,709
Net investment income............................................... 3,176 2,635 250
Interest expense.................................................... 17,675 17,318 16,727
------------- ------------- -------------
Income before income taxes and extraordinary item................... 32,667 36,103 35,232
Income tax expense.................................................. 12,837 14,037 13,549
------------- ------------- -------------
Income before extraordinary item.................................... 19,830 22,066 21,683
Extraordinary item -- loss on debt discharge, net of income taxes of
$1,597 in 1994.................................................... (2,397) -- --
Net income...................................................... $ 17,433 $ 22,066 $ 21,683
------------- ------------- -------------
------------- ------------- -------------
Primary income per common share:
Income before extraordinary item.................................. $ .97 $ 1.07 $ 1.10
Extraordinary item -- loss on debt discharge.................... (.12) -- --
------------- ------------- -------------
Net income...................................................... $ .85 $ 1.07 $ 1.10
------------- ------------- -------------
------------- ------------- -------------
Weighted average common shares and share equivalents................ 20,533 20,683 19,752
------------- ------------- -------------
------------- ------------- -------------
Fully-diluted income per common share:
Net income...................................................... $ 1.05
-------------
-------------
Weighted average common shares and share equivalents............ 20,683
-------------
-------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
JUNE 2,
1995 MAY 31, 1996
----------- ------------
Current assets:
Cash and cash equivalents............................................... $ 14,233 $ 15,597
Receivables:
Tuition (net of allowance for doubtful accounts of $873 and $1,884 at
June 2, 1995 and May 31, 1996, respectively)........................ 9,913 14,566
Other................................................................. 1,156 563
Prepaid expenses and supplies........................................... 8,282 9,116
Deferred income taxes................................................... 2,099 4,664
----------- ------------
Total current assets................................................ 35,683 44,506
----------- ------------
Property and equipment, at cost:
Land.................................................................... 135,965 142,856
Buildings and leasehold improvements.................................... 269,938 305,292
Equipment............................................................... 78,414 96,216
Construction in progress................................................ 13,373 16,825
----------- ------------
497,690 561,189
Less accumulated depreciation and amortization........................ 55,244 92,664
----------- ------------
Net property and equipment............................................ 442,446 468,525
----------- ------------
Investments............................................................... 1,981 --
Deferred income taxes..................................................... 9,502 4,422
Other assets.............................................................. 11,662 8,023
----------- ------------
$ 501,274 $ 525,476
----------- ------------
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 12,639 $ 14,330
Bank overdrafts......................................................... 7,017 9,768
Current portion of long-term debt....................................... 889 853
Accrued expenses and other liabilities.................................. 45,926 51,163
----------- ------------
Total current liabilities........................................... 66,471 76,114
Long-term debt............................................................ 159,505 145,764
Self insurance liabilities................................................ 17,927 17,652
Other noncurrent liabilities.............................................. 13,132 20,488
----------- ------------
Total liabilities................................................... 257,035 260,018
----------- ------------
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
20,119,818 and 19,981,807 shares at June 2, 1995 and May 31, 1996,
respectively; outstanding 20,119,818 and 19,946,807 shares at June 2,
1995 and May 31, 1996, respectively................................... 201 199
Additional paid-in capital................................................ 203,890 204,003
Retained earnings......................................................... 40,116 61,799
Cumulative translation adjustment......................................... 32 (20)
----------- ------------
244,239 265,981
Less treasury stock, at cost (35,000 common shares at May 31, 1996)....... -- (523)
----------- ------------
Total shareholders' equity.......................................... 244,239 265,458
----------- ------------
$ 501,274 $ 525,476
----------- ------------
----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
COMMON COMMON PAID-IN RETAINED TRANSLATION TREASURY
SHARES STOCK CAPITAL EARNINGS ADJUSTMENT STOCK
------------- ------------- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at May 28, 1993................... 20,000,190 200 178,670 617 --
Net income.............................. -- -- -- 17,433 --
Tax benefits of the valuation allowance
for deferred tax assets............... -- -- 9,884 -- --
Exercise of stock options and
warrants.............................. 9,327 -- 101 --
--
------------- --- ----------- ----------- ---
Balance at June 3, 1994................... 20,009,517 200 188,655 18,050 --
Net income.............................. -- -- -- 22,066 -- --
Tax benefits of the valuation allowance
for deferred tax assets............... -- -- 13,932 -- -- --
Cumulative translation adjustment....... -- -- -- -- 32 --
Exercise of stock options and
warrants.............................. 110,301 1 1,303 -- -- --
--
------------- --- ----------- ----------- ---
Balance at June 2, 1995................. 20,119,818 201 203,890 40,116 32 --
Net income.............................. -- -- -- 21,683 -- --
Tax benefits of the valuation allowance
for deferred tax assets............... -- -- 4,121 -- -- --
Cumulative translation adjustment....... -- -- -- -- (52) --
Tax benefit of option exercises......... -- -- 993 -- -- --
Repurchase and retirement of stock and
warrants.............................. (969,883) (10) (13,477) -- -- (523)
Exercise of stock options and
warrants.............................. 831,872 8 8,476 -- --
--
------------- --- ----------- ----------- ---
Balance at May 31, 1996................. 19,981,807 199 204,003 61,799 (20) (523)
--
--
------------- --- ----------- ----------- ---
------------- --- ----------- ----------- ---
<CAPTION>
TOTAL
---------
<S> <C>
Balance at May 28, 1993................... 179,487
Net income.............................. 17,433
Tax benefits of the valuation allowance
for deferred tax assets............... 9,884
Exercise of stock options and
warrants.............................. 101
---------
Balance at June 3, 1994................... 206,905
Net income.............................. 22,066
Tax benefits of the valuation allowance
for deferred tax assets............... 13,932
Cumulative translation adjustment....... 32
Exercise of stock options and
warrants.............................. 1,304
---------
Balance at June 2, 1995................. 244,239
Net income.............................. 21,683
Tax benefits of the valuation allowance
for deferred tax assets............... 4,121
Cumulative translation adjustment....... (52)
Tax benefit of option exercises......... 993
Repurchase and retirement of stock and
warrants.............................. (14,010)
Exercise of stock options and
warrants.............................. 8,484
---------
Balance at May 31, 1996................. 265,458
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
JUNE 3, JUNE 2, MAY 31,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operations:
Net income (loss)....................................................... $ 17,433 $ 22,066 $ 21,683
Operating activities not requiring (providing) cash:
Depreciation.......................................................... 25,148 28,071 33,972
Write-down of Kid's Choice-TM- property and equipment................. -- -- 5,312
Amortization of intangibles and other assets.......................... 95 1,681 1,533
Amortization of debt premium/discount................................. (165) -- --
Gain on sales and disposals of property and equipment, net............ -- -- (1,684)
Gain on sale of Sylvan Learning Corporation........................... (1,900) -- --
Deferred tax expense.................................................. 10,342 9,862 12,285
Equity in earnings of leveraged preferred stock partnerships and other
investments......................................................... (49) (24) --
Extraordinary item-loss on debt discharge............................. 2,397 -- --
Changes in operating assets and liabilities:
Receivables......................................................... (519) 4,440 (2,473)
Prepaid expenses and supplies....................................... 680 2,900 (1,354)
Other assets........................................................ 6,900 (978) 116
Accounts payable, accrued expenses and other liabilities............ 12,598 7,813 7,735
Other, net............................................................ 1,391 (2,868) (1,228)
----------- ----------- -----------
Net cash provided by operating activities................................. 74,351 72,963 75,897
----------- ----------- -----------
Cash flow from investing activities:
Purchases of property and equipment................................... (35,710) (74,376) (67,304)
Proceeds from sales of property and equipment......................... 4,253 12,454 3,883
Proceeds from sales or redemption of investments...................... 1,759 2,211 3,396
Proceeds from collection of notes receivable.......................... 2,042
Proceeds from the sale of Sylvan Learning Corporation................. 3,150 -- --
Other, net............................................................ (156) 82 --
----------- ----------- -----------
Net cash used by investing activities..................................... (26,704) (59,629) (57,983)
----------- ----------- -----------
Cash flows from financing activities:
Purchase of treasury stock and warrants............................... -- -- (14,010)
Payments on long-term borrowings...................................... (179,097) (18,298) (13,777)
Exercise of stock options and warrants................................ 101 1,303 8,484
Bank overdrafts....................................................... (11,224) 5,931 2,753
Proceeds from long-term borrowings.................................... 130,504 -- --
----------- ----------- -----------
Net cash used by financing activities..................................... (59,716) (11,064) (16,550)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents.......................... (12,069) 2,270 1,364
Cash and cash equivalents at the beginning of the period.................. 24,032 11,963 14,233
----------- ----------- -----------
Cash and cash equivalents at the end of the period........................ $ 11,963 $ 14,233 $ 15,597
----------- ----------- -----------
----------- ----------- -----------
Supplemental cash flow information:
Interest paid (net of amounts capitalized).............................. $ 19,835 $ 14,850 $ 8,944
----------- ----------- -----------
----------- ----------- -----------
Income taxes paid....................................................... $ 8,352 $ 2,551 $ 3,795
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
KinderCare Learning Centers, Inc. ("KinderCare" or the "Company") is the
largest preschool and child care company in the United States. At the end of
fiscal 1996, KinderCare operated 1,147 centers in 38 states in the United States
and one center in the United Kingdom. The consolidated financial statements
include the financial statements of the "Company" and its wholly owned
subsidiaries: Mini-Skools Limited ("Mini-Skools"); KinderCare Development
Corporation; KinderCare Real Estate; KinderCare Learning Centres, Limited; and
KinderCare Properties, Limited. All significant intercompany balances and
transactions have been eliminated in consolidation.
FISCAL YEAR
The Company's fiscal year ends on the Friday closest to May 31. The first
quarter is 16 weeks long and the second, third, and fourth quarters are each
twelve weeks long. The fiscal year ended June 3, 1994 ("fiscal 1994") was a
53-week fiscal year. The fiscal years ended June 2, 1995 ("fiscal 1995") and May
31, 1996 ("fiscal 1996") were 52-week fiscal years.
REVENUE RECOGNITION
The Company recognizes revenue for child care services as earned.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed Of"(SFAS No. 121). SFAS No. 121 requires that,
when certain conditions are present, the carrying value of long-lived assets be
reviewed for impairment and be reported at the lower of carrying amount or fair
value less costs to dispose. SFAS No. 121 also establishes the procedures for
review of recoverability, and measurement of impairment if necessary, of
long-lived assets used by an entity. The Company adopted SFAS No. 121 during the
first quarter of fiscal 1996, evaluated the recoverability of long-lived assets,
and, recorded a one-time, non-recurring expense of $5.3 million for the
impairment of certain long-lived assets utilized in operating its Kid's
Choice-TM- child care format (primarily leasehold improvements, which were
valued based on anticipated discounted cash flows).
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash held in banks and liquid
investments with original maturities not exceeding 90 days.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on buildings and
equipment is provided on the straight-line basis over the estimated useful lives
of the assets. Leasehold improvements are amortized over the shorter of the
estimated useful life of the improvements or the lease term, including expected
lease renewal options where the Company has the unqualified right to exercise
the option.
F-7
<PAGE>
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company's property and equipment is depreciated using the following
estimated useful lives:
<TABLE>
<CAPTION>
LIFE
--------------
<S> <C>
Buildings..................................................................... 10-40 years
Building renovations.......................................................... 5-10 years
Leasehold improvements........................................................ 5-10 years
Computer equipment............................................................ 3 years
All other equipment........................................................... 5-10 years
</TABLE>
INVESTMENTS
Investments are accounted for under the specific identification method.
For years prior to fiscal 1996, the Company accounted for its investments in
leveraged preferred stock partnerships under the equity method. All of the
Company's holdings in leveraged preferred stock partnerships were liquidated in
fiscal 1996.
PRE-OPENING COSTS
Costs incurred prior to a center's opening are deferred and amortized over
one year. Pre-opening costs include training salaries, grand opening and
promotion expenses, and the initial purchase of forms and supplies needed to
operate the center.
SELF INSURANCE PROGRAMS
The Company is self-insured for certain levels of general liability,
workers' compensation, property and employee medical coverage. Estimated costs
of these self-insurance programs are accrued at the undiscounted value of
projected settlements for known and anticipated claims.
INCOME TAXES
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current year's presentation.
F-8
<PAGE>
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. LITIGATION SETTLEMENTS AND RESTRUCTURING COSTS (INCOME), NET
On July 3, 1995, the Company received a cash distribution of $11.3 million
from The Enstar Group, Inc., the Company's former parent, in connection with a
settlement of the Company's claim against Enstar in the U.S. Bankruptcy Court in
Montgomery.
On June 15, 1995, the Board of Directors appointed Dr. Sandra Scarr,
Chairman of the Board, to be Chief Executive Officer ("CEO"), replacing the
former CEO whose resignation was effective on the same date. Subsequent to the
appointment, the Company made substantial changes to its field operations
management and support functions. As a result of these changes, the Company
provided $4.0 million for restructuring costs, primarily severance, during the
quarter ending September 22, 1995 ("first quarter 1996").
On April 16, 1996, the Company implemented further organization changes in
both field and facilities management, redefining the roles and responsibilities
of Center Directors and the other field management positions. These changes are
resulting in increased management span of control, increased empowerment at the
center director level, and increased operating efficiencies. One-time costs of
$2.5 million were charged against earnings during the fourth quarter of fiscal
1996, primarily to cover severance arrangements.
In connection with the above, less than 100 positions were eliminated. The
Company is continuing to evaluate certain other support functions and systems in
an effort to improve future operating effectiveness and efficiencies as well as
to improve the quality of services.
Management has limited Kid's Choice-TM- development to contracts in process
until the concept is more fully developed, and recorded an impairment loss of
$6.3 million in first quarter 1996, consisting of a writedown of $5.3 million
for the recoverability of certain long lived assets, primarily leasehold
improvements, and $1.0 million for anticipated lease termination costs.
Information relating to the reserves recorded for the changes in management
organization and anticipated Kid's Choice-TM- lease termination costs are as
follows (dollars in thousands):
<TABLE>
<S> <C>
Restructuring charges and lease termination costs recorded in fiscal 1996.......... $ 7,531
Cash payments primarily severance and lease termination costs...................... (4,440)
---------
Remaining liabilities at May 31, 1996.............................................. $ 3,091
---------
---------
</TABLE>
In the third quarter of 1995, the Company received approximately $0.9
million in connection with litigation settlements with Enstar and KinderCare's
former Chairman of the Board.
3. PREPAID EXPENSES AND SUPPLIES
Prepaid expenses and supplies are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
JUNE 2, 1995 MAY 31, 1996
------------- -------------
<S> <C> <C>
Prepaid rent.................................................... $ 3,847 $ 3,676
Inventories..................................................... 2,350 2,491
Other........................................................... 2,085 2,949
------------- -------------
$ 8,282 $ 9,116
------------- -------------
------------- -------------
</TABLE>
F-9
<PAGE>
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS
Net investment income is summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 3, 1994 JUNE 2, 1995 MAY 31, 1996
------------- ------------- ---------------
<S> <C> <C> <C>
Interest income..................................................... $ 1,241 $ 612 $ 199
Gain on sale of leveraged preferred stock partnerships.............. 215
Gain on sale of Securities.......................................... -- 2,000 --
Gain on sale of Sylvan.............................................. 1,900 -- --
Equity in earnings of leveraged preferred stock partnerships........ 48 23 --
Other............................................................... (13) -- (164)
------------- ------------- ------
$ 3,176 $ 2,635 $ 250
------------- ------------- ------
------------- ------------- ------
</TABLE>
During fiscal 1996, the Company sold all of its holdings in leveraged
preferred stock partnerships at a gain of $0.2 million.
During fiscal 1995, the Company sold investment securities with a carrying
value of $0.2 million resulting in a gain of $2.0 million.
On January 29, 1993, the Company sold 100% of the outstanding common stock
of Sylvan, a wholly-owned subsidiary, for $8.0 million. The Company received
$4.5 million in cash and a promissory note in the amount of $3.5 million. A gain
of approximately $3.0 million was recognized at the time of the sale. The
remaining gain of approximately $2.3 million was deferred to be recognized under
the installment method. On July 15, 1993, the Company accepted prepayment of the
$3.5 million note at a discounted amount of $3.2 million. In connection with the
early retirement, the Company recognized a $1.9 million gain in fiscal 1994.
5. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
JUNE 2, 1995 MAY 31, 1996
------------- -------------
<S> <C> <C>
Accrued compensation and related taxes.......................... $ 18,219 $ 17,282
Self insurance.................................................. 6,457 6,707
Deferred revenue................................................ 5,132 6,451
Accrued property taxes.......................................... 5,712 5,633
Accrued interest................................................ 165 5,585
Accrued restructuring and lease termination costs............... -- 3,091
Accrued income taxes............................................ 6,967 2,402
Other........................................................... 3,274 4,012
------------- -------------
$ 45,926 $ 51,163
------------- -------------
------------- -------------
</TABLE>
F-10
<PAGE>
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT
Long-term debt is as follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 2, 1995 MAY 31, 1996
------------- -------------
<S> <C> <C>
Secured:
Borrowings under Revolving Credit Facility at LIBOR plus 1.25%.................... $ 13,000 $ --
Industrial refunding revenue bonds at variable rates of interest from 3.85% to
5.57% at May 31, 1996, and 3.95% to 6.25% at June 2, 1995 supported by letters
of credit, maturing 1999 to 2009................................................ 33,025 33,025
Industrial revenue bonds secured by real property with maturities to 2005 at rates
of 4.20% to 12.75%.............................................................. 5,939 5,738
Obligations secured by mortgages on real and personal property payable in monthly
installments through 2004 at rates of 8.75% to 12.25%........................... 8,430 7,854
Unsecured:
Senior Notes due 2001 at 10 3/8%.................................................. 100,000 100,000
------------- -------------
160,394 146,617
Less current portion of long-term debt.............................................. 889 853
------------- -------------
$ 159,505 $ 145,764
------------- -------------
------------- -------------
</TABLE>
REVOLVING CREDIT FACILITY
The Company has an agreement with a number of participating banks providing
for: (i) a $115.0 million secured three-year Revolving Credit Facility which may
be used for general corporate purposes, including construction of new facilities
and permitted acquisitions, and (ii) a letter of credit facility of
approximately $35.0 million used to replace letters of credit securing
obligations of the Company to various issuers of industrial revenue bonds. (See
"Industrial Revenue Bonds" below.) Additionally, up to $25.0 million of the
Revolving Credit Facility is available for the issuance of letters of credit
required in the ordinary course of business.
Obligations outstanding under the Revolving Credit Facility mature on May
15, 1998, with up to two annual extensions remaining. Outstanding advances bear
interest at a rate equal to, at the option of the Company, either the base rate
or LIBOR, plus the applicable margins, each as defined in the agreement. The
base rate is the higher of the federal funds rate plus 0.5% or the agent bank's
prime rate. The applicable margin is 1.25% and may be increased or decreased by
0.25% based upon the Company's debt/cash flow ratio. The Company must pay an
annual commitment fee equal to 0.5% (and may be increased or decreased by
0.125%) of the unused portion of the Revolving Credit Facility. The Company, at
its option, may prepay the outstanding indebtedness under the New Credit
Facility at any time, in whole or in part, without penalty.
The Revolving Credit Facility is secured by a first priority lien on
substantially all of the assets of the Company and Mini-Skools, except for
certain leasehold interests and approximately 163 centers (22 of which have been
previously closed) and 12 other real estate sites owned by the Company. In
addition, the Company has pledged the stock of all its subsidiaries as security.
At May 31, 1996, the Company had approximately $13.7 million committed on
outstanding letters of credit and $101.3 million of available credit under the
Revolving Credit Facility.
F-11
<PAGE>
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
The Revolving Credit Facility contains several covenants which are customary
in similar agreements, including, but not limited to, restrictions on incurrence
of additional indebtedness, creation of liens, asset or subsidiary sales,
transactions with affiliates, investments and guarantees.
INDUSTRIAL REVENUE BONDS
SERIES A THROUGH E INDUSTRIAL REVENUE BONDS--The Company is obligated to
various issuers of industrial revenue bonds (the "Refunded IRBs") in an amount
totaling approximately $33.0 million outstanding as of May 31, 1996 and June 2,
1995. The Refunded IRBs were issued to provide funds for refunding an equal
principal amount of industrial revenue bonds which were used to finance the cost
of acquiring, constructing and equipping certain child care facilities and the
Company's Montgomery, Alabama corporate headquarters. Each of these Refunded
IRBs is secured by a letter of credit obtained under the Letter of Credit
Facility.
OTHER IRBS--The Company also is obligated to various issuers of other
industrial revenue bonds (the "IRBs") in the aggregate principal amount of
approximately $5.7 million and $5.9 million as of May 31, 1996 and June 2, 1995,
respectively. The principal amount of such IRBs was used to finance the cost of
acquiring, constructing and equipping certain child care facilities and the IRBs
are secured by these facilities.
SENIOR NOTES
On June 2, 1994, the Company issued $100 million in unsecured senior notes
due June 1, 2001. The Notes were issued under an indenture (the "Indenture")
between the Company and AmSouth Bank N.A. as trustee.
The Notes bear interest at a fixed rate of 10 3/8% per annum, payable
semi-annually on December 1 and June 1 of each year, and are effectively
subordinated to the secured indebtedness of the Company, including indebtedness
under the Revolving Credit Facility.
The Notes are callable by the Company at 105 3/16% of par from June 1, 1998
through June 1, 1999. On June 1, 1999, the redemption price is reduced to 102%
of par, and on June 1, 2000, until maturity, the Notes may be redeemed at par.
Upon a change of control, as defined in the Indenture, each holder of the Notes
may require the Company to repurchase all or a portion of such holder's Notes at
a purchase price in cash equal to 101% of par, together with accrued and unpaid
interest to the date of repurchase.
The Indenture contains a number of covenants similar to those in the
Revolving Credit Facility. Certain limitations exist with respect to payment of
dividends, incurrence of additional indebtedness, creation of liens, asset or
subsidiary sales, transactions with affiliates, investments and guarantees, all
of which are defined in the Indenture.
F-12
<PAGE>
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
PRINCIPAL PAYMENTS
The aggregate minimum annual maturities of long-term debt for the five
fiscal years subsequent to May 31, 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
- --------------------------------------------------------------------------------- -----------
<S> <C>
1997............................................................................. $ 853
1998............................................................................. 1,200
1999............................................................................. 1,274
2000............................................................................. 12,203
2001............................................................................. 114,075
Thereafter....................................................................... 17,012
-----------
Total........................................................................ $ 146,617
-----------
-----------
</TABLE>
7. INCOME TAXES
The provision (benefit) for income taxes attributable to income before
income taxes and extraordinary item is as follows (dollars in thousands):
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED JUNE 3, 1994 JUNE 2, 1995 MAY 31, 1996
- -------------------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal........................................................... $ 1,217 $ 2,909 $ 832
State............................................................. 604 662 (132)
Foreign........................................................... 674 604 564
------------- ------------- -------------
2,495 4,175 1,264
------------- ------------- -------------
Deferred:
Federal........................................................... 8,370 8,293 10,292
State............................................................. 1,972 1,859 2,137
Foreign........................................................... -- (290) (144)
------------- ------------- -------------
10,342 9,862 12,285
------------- ------------- -------------
$ 12,837 $ 14,037 $ 13,549
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
A reconciliation between the statutory federal income tax rate and the
effective income tax rates on continuing operations is as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED JUNE 3, 1994 JUNE 2, 1995 MAY 31, 1996
- -------------------------------------------------------------------- --------------- --------------- ---------------
<S> <C> <C> <C>
% % %
Expected tax rate on income before income taxes and extraordinary
item at federal rate.............................................. 35.0 35.0 35.0
State income taxes, net of federal tax benefit...................... 5.1 4.5 3.7
Other, net.......................................................... (0.8) (0.6) (0.2)
--- --- ---
39.3 38.9 38.5
--- --- ---
--- --- ---
</TABLE>
F-13
<PAGE>
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 2, 1995
and May 31, 1996 are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 2, 1995 MAY 31, 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Self-insurance reserves....................................... $ 8,871 $ 9,099
Net operating loss carryforwards.............................. 13,354 7,895
Capital loss carryforwards.................................... 12,732 4,818
Tax credits................................................... 3,200 3,172
Property and equipment, basis differences..................... 8,498 2,458
Other......................................................... 3,597 6,098
------------- -------------
Total gross deferred tax assets............................. 50,252 33,540
Less valuation allowance.................................... (27,929) (10,310)
------------- -------------
Net deferred tax assets..................................... 22,323 23,230
------------- -------------
Deferred tax liabilities:
Property and equipment, basis differences of foreign
subsidiary.................................................. (9,232) (9,088)
Stock basis of foreign subsidiary............................. -- (3,622)
Other......................................................... (1,490) (1,434)
------------- -------------
Total gross deferred tax liabilities........................ (10,722) (14,144)
------------- -------------
Financial statement net deferred tax asset (liability)...... $ 11,601 $ 9,086
------------- -------------
------------- -------------
</TABLE>
The valuation allowance decreased by $17.6 million during the year ended May
31, 1996. Deferred tax assets have been recognized to the extent of existing
deferred tax liabilities and income taxes paid that are subject to recovery
through carryback. Future recognized tax benefits relating to the valuation
allowance for deferred tax assets at May 31, 1996 will be recorded as direct
additions to additional paid-in capital.
At May 31, 1996, the Company had $20.0 million of net operating losses
available for carryforward which expire in 2008. Utilization of the net
operating losses is subject to an annual limitation of $19.1 million. The
Company also has capital losses of $8.7 million, which are available to offset
future capital gains, and expire in varying amounts through 2000. Additionally,
the Company has tax credits available for carryforward for federal income tax
purposes of $3.2 million which are available to offset future federal income
taxes through 2010.
8. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLANS
On February 9, 1993, the Company adopted the KinderCare Learning Centers,
Inc. 1993 Stock Option and Incentive Plan (the "1993 Stock Option Plan"). This
plan authorizes a committee of the Board of Directors of the Company to grant or
award to eligible employees of the Company and its subsidiaries and affiliates,
stock options and restricted stock and related warrants of the Company beginning
on March 31, 1993 and expiring on the tenth anniversary of such date. In
connection with the 1993 Stock Option Plan, the Company reserved approximately
1.9 million shares of Common Stock for issuance to
F-14
<PAGE>
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
employees of the Company upon exercise of options available for grant by the
Board of Directors of the Company.
A summary of option transactions under the 1993 Stock Option Plan is as
follows (dollars in thousands):
<TABLE>
<CAPTION>
OPTION PRICE NUMBER OF TOTAL OPTION
PER SHARE SHARES PRICE
------------------- ----------- ------------
<S> <C> <C> <C>
Granted in connection with the Plan............................. $ 7.50 to $10.00 1,311,500 $ 12,740
Canceled........................................................ 10.00 (5,960) (60)
----------- ------------
Outstanding May 28, 1993........................................ 1,305,540 12,680
Granted......................................................... $ 10.76 51,600 555
Exercised....................................................... 10.00 (6,512) (65)
Canceled........................................................ 10.00 (55,620) (556)
----------- ------------
Outstanding June 3, 1994........................................ 1,295,008 12,614
----------- ------------
Granted......................................................... $ 12.50 to $13.75 196,500 2,487
Exercised....................................................... 10.00 to 12.50 (108,110) (1,083)
Canceled........................................................ 10.00 to 12.50 (75,760) (801)
----------- ------------
Outstanding June 2, 1995........................................ 1,307,638 13,217
----------- ------------
Granted......................................................... $ 12.88 to $13.63 256,700 3,345
Exercised....................................................... 7.50 to 12.88 (746,560) (7,164)
Canceled........................................................ 10.00 to 12.88 (73,640) (856)
----------- ------------
Outstanding May 31, 1996........................................ 744,138 $ 8,542
----------- ------------
----------- ------------
</TABLE>
At May 31, 1996, options for a total of 358,978 shares of stock were
exercisable with a total option price of approximately $3.9 million.
SAVINGS AND INVESTMENT PLAN
The Board of Directors of the Company adopted the KinderCare Learning
Centers, Inc. Savings and Investment Plan (the "Savings Plan") effective January
1, 1990. All full-time employees of the Company and its subsidiaries are
eligible to participate in the Savings Plan upon completion of one year of
service and the attainment of age 18. Participants may contribute, in increments
of 1%, up to 10% (6% before July 1, 1994) of their compensation to the Savings
Plan. In accordance with the provisions of the Savings Plan, the Board of
Directors has elected, since April 1, 1991, not to match employee contributions.
9. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires the Company to disclose estimated fair
values for its financial instruments. Fair value estimates, methods, and
assumptions are set forth below for the Company's financial instruments as of
May 31, 1996 and June 2, 1995.
CASH AND CASH EQUIVALENTS, SHORT TERM INVESTMENTS, TRADE RECEIVABLES AND TRADE
PAYABLES
Fair value approximates cost as reflected in the consolidated balance sheets
at May 31, 1996 and June 2, 1995 because of the short term maturity of these
instruments.
F-15
<PAGE>
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
LONG-TERM DEBT
The carrying value and the fair value for the Company's 10 3/8 Senior Notes
are $100.0 million and $105.0 million at May 31, 1996, respectively, based on
current market activity, while the carrying value of $100.0 million at June 2,
1995 approximated fair value due to the recent refinancing. The carrying values
for the Company's remaining long-term debt of $46.6 million and $60.4 million at
May 31, 1996, and June 2, 1995, respectively, approximates market value based on
current rates that management believes could be obtained for similar debt.
10. QUARTERLY RESULTS (UNAUDITED)
A summary of results of operations for the years ended May 31, 1996 and June
2, 1995 are as follows (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER(a) QUARTER(b) QUARTER(b) QUARTER(b)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Year ended May 31, 1996:
Operating Revenues......................................... $ 161,313 $ 124,079 $ 123,641 $ 132,231
Operating income........................................... 11,141 11,222 13,514 15,832
Net income................................................. 3,565 4,551 5,868 7,699
Net income per share (primary)............................. $ .17 $ .23 $ .30 $ .39
Net income per share (fully-diluted)....................... N/C N/C N/C $ .37
Year ended June 2, 1995:
Operating Revenues......................................... $ 151,502 $ 116,765 $ 115,696 $ 122,542
Operating income........................................... 10,352 11,394 12,120 16,920
Net income................................................. 3,091 4,511 5,604 8,860
Net income per share....................................... $ .15 $ .22 $ .28 $ .43
</TABLE>
- ------------------------
N/C -- Not calculated
(a) Sixteen week quarters
(b) Twelve week quarters
The computation of fully-diluted earnings per share is based on the higher
of the average or year-end market price of the Company's common stock.
Fully-diluted earnings per share need not be presented for 1995 since further
dilution from primary earnings per share was less than 3 percent.
11. COMPUTATION OF EARNINGS PER SHARE
Earnings per share amounts are computed based on the weighted average number
of shares actually outstanding for the fiscal years ended May 31, 1996 and June
2, 1995, plus the shares that would be outstanding assuming the exercise of
dilutive stock options and the Warrants, all of which are considered common
stock equivalents. The number of shares that would be issued from the exercise
of the stock options and the Warrants has been reduced by the number of shares
that could have been purchased from the proceeds at the average market price of
the Company's stock, up to 20% of the
F-16
<PAGE>
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMPUTATION OF EARNINGS PER SHARE (CONTINUED)
outstanding shares. A reconciliation of the actual weighted average shares to
the shares used in the computation of earnings per share for the periods
indicated is as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 3, 1994 JUNE 2, 1995 MAY 31, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Primary
Weighted average common shares outstanding........................ 20,004 20,093 19,752
Dilutive effect of common stock equivalents....................... 529 590 --
------------- ------------- -------------
Weighted average common and common equivalent shares
outstanding..................................................... 20,533 20,683 19,752
------------- ------------- -------------
Fully Diluted
Dilutive effect of common stock equivalents....................... N/A N/A 931
------------- ------------- -------------
Adjusted outstanding.............................................. N/A N/A 20,683
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- ------------------------
N/A -- Not applicable
Fully diluted earnings were not required to be reported for the years ended
June 2, 1995 and June 3, 1994 since dilution was less than 3 percent.
12. COMMITMENTS AND CONTINGENCIES
The Company conducts a portion of its operations from leased or subleased
day care centers. Additionally, the Company leases its fleet vehicles under a 12
month non-cancelable master lease. The lease may be renewed on a month-to-month
basis after 12 months. The vehicle leases require that the Company guarantee
specified residual values upon cancellation. All of the leases are classified as
operating leases. In most cases, management expects that in the normal course of
business substantially all of the leases will be renewed or replaced by other
leases.
Subsequent to January 1, 1993, the Company re-negotiated certain day care
center leases to amend the terms to allow the Company the right to terminate the
lease at any time with minimal notice. In connection with the termination
option, the Company, in certain instances, prepaid up to 12 months rent. Such
amounts, totaling approximately $3.2 million, will be amortized over the
termination transition period or over the appropriate remaining months of the
lease period. As of May 31, 1996, the remaining unamortized balance of the
prepaid amount was $2.6 million. In addition, several leases were re-negotiated
to decrease the monthly fixed rental payments.
Following is a schedule of future minimum lease payments under operating
leases, that have initial or remaining non-cancelable lease terms in excess of
one year as of May 31, 1996 (dollars in thousands):
<TABLE>
<S> <C>
FISCAL YEAR:
1997.............................................. $ 15,695
1998.............................................. 15,034
1999.............................................. 13,512
2000.............................................. 11,744
2001.............................................. 9,559
Subsequent years.................................. 37,239
</TABLE>
F-17
<PAGE>
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company was a co-defendant to a stockholder suit filed in the Circuit
Court of Montgomery County, Montgomery, Alabama styled Peter N. Zachary, et al.
v. Richard Grassgreen, Perry Mendel, and KinderCare Learning Centers, Inc. in
the Circuit Court for Montgomery, Alabama, Case No. CV-91-2801-G. The suit was
for $20 million in compensatory damages and $20 million in punitive damages in
each of seven counts. The Company was named as a defendant in five of those
seven counts. In December 1995, the other defendants settled with the
shareholders. The plaintiffs have dismissed all charges against the Company.
On July 7, 1992, KinderCare filed a Proof of Claim in the United States
District Court for the Southern District of New York in a pending action brought
by Presidential Life Insurance Company against Michael R. Milken, et al. styled
Presidential Life Insurance Co., v. Michael R. Milken, et al., Class Action in
District Court, Southern District of New York, 92 Civ. 1151 (MP). The claim
alleges that, but for the defendants' wrongful conduct as described in the
claim, the Company would not have made the junk bond purchases outlined in the
claim. The total amount of damages claimed by the Company is approximately $37.1
million. The claim has been evaluated at $15.6 million by the Presidential Life
Executive Committee and reviewed and submitted to the Court for approval by the
SEC representative. This amount is subject to final approval by the Court and to
available distribution. The Company estimates it will receive approximately 5%
of this amount based on available distribution funds; however, there are no
assurances that the Company will receive this or any other amount pursuant to
the claim.
The Company is presently, and is from time to time, subject to additional
claims and suits arising in the ordinary course of business, including suits
alleging child abuse. In certain of such actions, plaintiffs request damages
that are covered by insurance. The Company believes that none of the additional
actions of which it is currently aware will materially affect its financial
position or future operating results, although no assurance can be given with
respect to the ultimate outcome of any such actions.
13. STOCK REPURCHASE PROGRAMS AND SUBSEQUENT EVENTS
On February 15, 1995 the Board of Directors of KinderCare authorized the
repurchase of up to $10 million of the Company's Common Stock. This repurchase
was completed and all shares retired during the second quarter ending December
15, 1995. On May 2, 1996, the Board of Directors authorized another repurchase
of $10 million and increased it to $23.0 million on June 3, 1996. As of May 31,
1996, under the second stock buyback program, 259,000 shares and 120,000
warrants had been repurchased for $4.2 million. As of July 27, 1996, under the
second stock buyback program, 1,111,500 shares and 435,000 warrants had been
repurchased for $18.3 million.
On June 3, 1996, the Board of Directors of KinderCare authorized the
purchase of up to $30 million par of the Company's 10 3/8% Senior Notes due
2001. As of July 26, 1996, the Company had purchased $30 million par of the
Notes at an aggregate price of $31.5 million. This transaction results in
recording an extraordinary loss of $1.2 million, net of $0.8 million in tax
benefits, in the first quarter of fiscal 1997.
F-18
<PAGE>
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED TWENTY-EIGHT WEEKS ENDED
------------------------------ ------------------------------
DECEMBER 15, DECEMBER 13, DECEMBER 15, DECEMBER 13,
1995 1996 1995 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operating revenues............................... $ 124,079 $ 128,324 $ 285,392 $ 299,751
-------------- -------------- -------------- --------------
Operating expenses:
Salaries, wages and benefits................... 65,003 68,875 150,814 162,215
Depreciation................................... 7,864 7,351 18,053 19,208
Rent........................................... 6,032 5,857 14,367 14,507
Provision for allowance for doubtful
accounts..................................... 1,030 811 1,792 1,851
Other.......................................... 32,928 32,591 79,022 79,380
Litigation settlements and restructuring costs
(income), net................................ -- (1,527) (1,019) (1,527)
-------------- -------------- -------------- --------------
Total operating expenses................... 112,857 113,958 263,029 275,634
-------------- -------------- -------------- --------------
Operating income................................. 11,222 14,366 22,363 24,117
Net investment income............................ 50 15 161 86
Interest expense................................. 3,811 3,201 9,219 8,141
-------------- -------------- -------------- --------------
Income before income taxes and extraordinary
item........................................... 7,461 11,180 13,305 16,062
Income tax expense............................... 2,910 4,360 5,189 6,264
-------------- -------------- -------------- --------------
Income before extraordinary item................. 4,551 6,820 8,116 9,798
Extraordinary item--loss on early extinguishment
of debt, net of income tax benefit............. -- 5,251 -- 6,480
-------------- -------------- -------------- --------------
Net income $ 4,551 $ 1,569 $ 8,116 $ 3,318
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Income per share:
Income before extraordinary item............... $ 0.23 $ 0.33 $ 0.40 $ 0.48
Extraordinary item--loss on early
extinguishment of debt....................... -- (0.25) -- (0.32)
-------------- -------------- -------------- --------------
Net Income....................................... $ 0.23 $ 0.08 $ 0.40 $ 0.16
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Weighted average common shares and share
equivalents.................................... 19,939 20,599 20,285 20,334
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-19
<PAGE>
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
MAY 31, DECEMBER 13,
1996 1996
----------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 15,597 $ 10,426
Receivables:
Tuition (net of allowance for doubtful accounts of $2,234 and $1,884 at December
13, 1996 and May 31, 1996, respectively)....................................... 14,566 14,728
Other............................................................................ 563 439
Prepaid expenses and supplies...................................................... 9,116 10,240
Deferred income taxes.............................................................. 4,664 4,664
----------- --------------
Total current assets........................................................... 44,506 40,497
----------- --------------
Property and equipment, at cost.................................................... 561,189 580,349
Less accumulated depreciation and amortization................................... 92,664 103,803
----------- --------------
Net property and equipment..................................................... 468,525 476,546
----------- --------------
Deferred income taxes................................................................ 4,422 4,454
Other assets......................................................................... 8,023 7,941
----------- --------------
$ 525,476 $ 529,438
----------- --------------
----------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 14,330 $ 9,221
Bank overdrafts.................................................................... 9,768 11,328
Current portion of long-term debt.................................................. 853 1,095
Accrued expenses and other liabilities............................................. 51,163 40,482
----------- --------------
Total current liabilities...................................................... 76,114 62,126
Long-term debt....................................................................... 145,764 167,668
Self-insurance liabilities........................................................... 17,652 20,210
Other noncurrent liabilities......................................................... 20,488 23,983
----------- --------------
Total liabilities.............................................................. 260,018 273,987
----------- --------------
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 19,414,367 and
19,981,807 shares at December 13, 1996 and May 31, 1996, respectively;
outstanding 19,414,367 and 19,946,807 at December 13, 1996 and May 31, 1996,
respectively..................................................................... 199 191
Additional paid-in capital........................................................... 204,003 190,119
Retained earnings.................................................................... 61,799 65,117
Cumulative translation adjustment.................................................... (20) 24
Less treasury stock, at cost (35,000 shares at May 31, 1996)......................... (523) --
----------- --------------
Total shareholders' equity..................................................... 265,458 255,451
----------- --------------
$ 525,476 $ 529,438
----------- --------------
----------- --------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-20
<PAGE>
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
TWENTY-EIGHT WEEKS ENDED
------------------------------
DECEMBER 15, DECEMBER 13,
1995 1996
-------------- --------------
<S> <C> <C>
Cash flows from operations:
Net income...................................................................... $ 8,116 $ 3,318
Operating activities not requiring (providing) cash:
Depreciation.................................................................. 18,053 19,208
Amortization of intangibles and other assets.................................. 734 783
Writedown of Kid's Choice-TM- property and equipment.......................... 5,312 --
Gain on sales and disposals of property and equipment......................... (1,178) (34)
Extraordinary item--loss on early extinguishment of debt........................ -- 6,480
Changes in operating assets and liabilities:
Receivables................................................................... (2,446) 97
Prepaid expenses and supplies................................................. (2,388) (1,124)
Other assets.................................................................. (166) (2,393)
Accounts payable, accrued expenses and other liabilities...................... 1,393 (9,676)
Other, net...................................................................... (603) (48)
-------------- --------------
Net cash provided by operating activities......................................... $ 26,827 $ 16,611
-------------- --------------
Cash flows from investing activities:
Purchases of property and equipment............................................. $ (38,933) $ (27,849)
Proceeds from sales of property and equipment................................... 3,366 518
Proceeds from collection of notes receivable.................................... 2,029 12
Proceeds from sale of investment................................................ 3,396 --
Other, net...................................................................... -- (22)
-------------- --------------
Net cash used by investing activities............................................. (30,142) (27,341)
-------------- --------------
Cash flows from financing activities:
Borrowings on revolving credit facility......................................... -- 122,500
Payments on long-term borrowings................................................ (538) (105,133)
Purchase and retirement of treasury stock....................................... (10,000) (14,251)
Bank overdrafts................................................................. 8,970 1,560
Exercise of stock options and warrants.......................................... 1,207 883
-------------- --------------
Net cash provided (used) by financing activities.................................. (361) 5,559
-------------- --------------
Decrease in cash and cash equivalents............................................. (3,676) (5,171)
Cash and cash equivalents at the beginning of the period.......................... 14,237 15,597
-------------- --------------
Cash and cash equivalents at the end of the period................................ $ 10,561 $ 10,426
-------------- --------------
-------------- --------------
Supplemental cash flow information:
Interest paid................................................................... $ 7,601 $ 11,774
-------------- --------------
-------------- --------------
Income taxes paid............................................................... $ 2,134 $ 920
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-21
<PAGE>
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) GENERAL
The consolidated financial statements of KinderCare Learning Centers, Inc.
(the "Company") are unaudited and, in the opinion of management, include all
adjustments necessary to fairly state the Company's financial condition and
results of operations for the interim period. The results of operations for the
twenty-eight weeks ended December 13, 1996 are not necessarily indicative of the
results to be expected for the full year. These statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-K for the year ended May 31, 1996, and in conjunction with the
Company's Form S-4 Registration Statement under the Securities Act of 1933 as
filed with the Securities and Exchange Commission on January 7, 1997.
(2) 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 1997 and 1996 fiscal years are each 52 weeks long.
(3) AGREEMENT AND PLAN OF MERGER
On October 3, 1996, the Company entered into an Agreement and Plan of Merger
("Agreement") whereby, on the effective date, ownership of approximately 85% of
the Company will be acquired by an entity organized at the direction of Kohlberg
Kravis Roberts & Co., L.P. ("KKR"). On December 27, 1996, the Agreement was
amended to revise the consideration to be paid in connection with the Merger
("Amended Agreement"). Subject to certain provisions of the Amended Agreement,
each issued and outstanding share of Common Stock will be 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. Under the terms
of the Amended Agreement, approximately $122.5 million of existing debt will be
retired and approximately $367.2 million will be paid by the Company to redeem
Common Stock, warrants, and options. The acquisition will be financed by the
issuance of approximately $376.0 million in new debt and approximately $148.8
million of equity will be invested by a KKR affiliate. The total value of the
transaction, including equity, debt and fees, is approximately $524.7 million.
Among other conditions, the transaction is contingent upon approval of a
majority of the outstanding shares of Common Stock of the Company and the
obtaining of the required financing. Holders of approximately 51.4% of the
shares of Common Stock outstanding as of January 8, 1997 have agreed to vote in
favor of the transaction. In connection with the merger, the Company also has
secured commitments for a $490.0 million senior secured facility to complete the
Merger and to fund future growth and acquisitions. Effective with and subject to
the closing of the Merger, Dr. Sandra Scarr, Chairman of the Board and Chief
Executive Officer ("CEO"), will retire from her positions with the Company,
while agreeing to remain on the Board of Directors. David J. Johnson, most
recently Chairman and Chief Executive Officer of Red Lion Hotels, Inc. (formerly
a KKR affiliate) or its predecessor, will succeed Dr. Scarr as CEO.
(4) EXTRAORDINARY LOSS
During the first quarter of fiscal 1997, the Company purchased $30.0 million
principal aggregate amount of its 10 3/8% Senior Notes due 2001 at an aggregate
price of $31.5 million. This transaction resulted in an extraordinary loss of
$1.2 million, net of income taxes, in the first quarter of fiscal 1997.
F-22
<PAGE>
KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
On October 16, 1996, the Company announced the commencement of a tender
offer and consent solicitation for its outstanding 10 3/8% Senior Notes due 2001
seeking the elimination of substantially all of the restrictive covenants. On
November 14, 1996, 99.7% of the outstanding Notes were purchased at an aggregate
price of $76.8 million. This second transaction resulted in an extraordinary
loss of $5.3 million, net of income taxes, recorded in second quarter 1997. The
Company increased its existing revolving credit facility by $50.0 million to
$200.0 million to finance the tender offer.
(5) STOCK REPURCHASE PROGRAM
In 1996, the Company repurchased 745,883 shares of its Common Stock for
$10.0 million, at an average cost of $13.41 per common share. During first
quarter 1997, the Board of Directors authorized the repurchase of $23.0 million
of the Company's Common Stock. As of the end of first quarter 1997, 1,111,500
shares and 435,000 warrants had been repurchased for $18.3 million. All shares
repurchased have been retired. No shares or warrants have been purchased since
July 22, 1996.
(6) COMPUTATION OF INCOME PER SHARE
Income per share amounts are computed based on the weighted average number
of shares actually outstanding for the respective periods, plus the shares that
would be outstanding assuming the exercise of dilutive stock options and
warrants, all of which are considered common stock equivalents. The number of
shares that would be issued from the exercise of the stock options and the
warrants has been reduced by the number of shares that could have been purchased
from the proceeds at the average market price (period end market price, if
higher, for fully diluted computations) of the Company's stock. A reconciliation
of the actual weighted average shares to the number of shares used in the
computation of earnings per share for the periods indicated is as follows (in
thousands):
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED TWENTY-EIGHT WEEKS ENDED
------------------------------ ------------------------------
DECEMBER 15, DECEMBER 13, DECEMBER 15, DECEMBER 13,
1995 1996 1995 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding....... 19,504 19,245 19,781 19,255
Dilutive effect of common stock equivalents.... 435 1,354 504 1,079
------- ------- ------- -------
Primary shares outstanding....................... 19,939 20,599 20,285 20,334
Fully dilutive effect of common stock
equivalents.................................. -- 79 -- 447
------- ------- ------- -------
Fully diluted shares outstanding................. 19,939 20,678 20,285 20,781
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
(7) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
presentation.
F-23
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information................. 2
Prospectus Summary.................... 3
Risk Factors.......................... 17
The Merger............................ 23
Use of Proceeds....................... 24
Capitalization........................ 25
Pro Forma Consolidated Financial
Statements.......................... 26
Selected Historical Consolidated
Financial and Other Data............ 32
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 36
Business.............................. 47
Management............................ 60
Ownership of Common Stock............. 66
Related Party Transactions............ 67
Description of Credit Facilities...... 68
The Exchange Offer.................... 70
Description of the Exchange Notes..... 81
Exchange Offer; Registration Rights... 114
Certain U.S. Federal Income Tax
Consequences........................ 116
Plan of Distribution.................. 117
Legal Matters......................... 118
Independent Auditors.................. 118
Incorporation of Certain Information
by Reference........................ 118
Index to Financial Statements......... F-1
</TABLE>
-------------------------------------------
PRELIMINARY PROSPECTUS
$300,000,000
KINDERCARE LEARNING
CENTERS, INC.
[LOGO]
OFFER TO EXCHANGE $300,000,000 OF ITS 9 1/2% SERIES B SENIOR SUBORDINATED NOTES
DUE 2009, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT, FOR $300,000,000
OF ITS OUTSTANDING 9 1/2% SENIOR SUBORDINATED NOTES DUE 2009.
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
for, among other things:
a. permissive indemnification for expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by designated persons, including directors and officers of a
corporation, in the event such persons are parties to litigation other than
stockholder derivative actions if certain conditions are met;
b. permissive indemnification for expenses (including attorneys' fees)
actually and reasonably incurred by designated persons, including directors
and officers of a corporation, in the event such persons are parties to
stockholder derivative actions if certain conditions are met;
c. mandatory indemnification for expenses (including attorneys' fees)
actually and reasonably incurred by designated persons, including directors
and officers of a corporation, in the event such persons are successful on
the merits or otherwise in defense of litigation covered by a. and b. above;
and
d. that the indemnification provided for by Section 145 is not deemed
exclusive of any other rights which may be provided under any by-law,
agreement, stockholder or disinterested director vote, or otherwise.
In addition to the indemnification provisions of the DGCL described above,
the Registrant's restated certificate of incorporation (the "Restated
Certificate of Incorporation") authorizes indemnification of the Registrant's
officers and directors, subject to a case-by-case determination that they acted
in good faith and in a manner they reasonably believed to be in or not opposed
to the best interests of the Company, and in the case of any criminal
proceeding, they had no reasonable cause to believe their conduct was unlawful.
In the event that a Change in Control (as defined in the Restated Certificate of
Incorporation) shall have occurred, the proposed indemnitee director or officer
may require that the determination of whether he met the standard of conduct be
made by special legal counsel selected by him. In addition, whereas the DGCL
would require court-ordered indemnification, if any, in cases in which a person
has been adjudged to be liable to the Registrant, the Restated Certificate of
Incorporation also permits indemnification in such cases if and to the extent
that the Reviewing Party determines that such indemnity is fair and reasonable
under the circumstances.
The Restated Certificate of Incorporation requires the advancement of
expenses to an officer or director (without a determination as to his conduct)
in advance of the final disposition of a proceeding if such person furnishes a
written affirmation of his good faith belief that he has met the applicable
standard of conduct and furnishes a written undertaking to repay any advances if
it is ultimately determined that he is not entitled to indemnification. In
connection with proceedings by or in the right of the Registrant, the Restated
Certificate of Incorporation provides that indemnification shall include not
only reasonable expenses, but also penalties, fines and amounts paid in
settlement. Unless ordered by a court, such indemnification shall not include
judgments. Under the Restated Certificate of Incorporation, no officer or
director is entitled to indemnification or advancement of expenses with respect
to a proceeding brought by him against the Registrant other than a Proceeding
seeking or defending such officer's or director's right to indemnification or
advancement of expenses. Finally, the Restated Certificate of Incorporation
provides that the Company may, subject to authorization on a case by case basis,
indemnify and advance expenses to employees or agents to the same extent as a
director or to a lesser extent (or greater, as permitted by law) as determined
by the Board of Directors.
II-1
<PAGE>
The Restated Certificate of Incorporation purports to confer upon officers
and directors contractual rights to indemnification and advancement of expenses
as provided therein. In addition, as permitted by the DGCL, the Registrant has
entered into Indemnity Agreements with its directors and selected officers that
provide contract rights substantially identical to the rights to indemnification
and advancement of expenses set forth in the Restated Certificate of
Incorporation, as described above.
The Restated Certificate of Incorporation limits the personal liability of
directors to the Registrant or its stockholders for monetary damages for breach
of the duty as a director, other than liability as a director (i) for breach of
duty of loyalty to the Registrant or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL (certain illegal
distributions), or (iv) for any transaction for which the director derived an
improper personal benefit.
The Registrant maintains officers' and directors' insurance covering certain
liabilities that may be incurred by officers and directors in the performance of
their duties.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
See the Exhibit Index included immediately preceding the exhibits to this
Registration Statement.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereto, which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial BONA FIDE offering thereof.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable
II-2
<PAGE>
registration form with respect to reofferings by persons who may be deemed to be
underwriters, in addition to the information called for by the other Items of
the applicable form.
The Registrant undertakes that every prospectus (i) that is filed pursuant
to the immediately preceding undertaking or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, on April 8, 1997.
KINDERCARE LEARNING CENTERS, INC.
BY: *
-----------------------------------------
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF
THE BOARD OF DIRECTORS
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed on the 8th day of April, 1997 by the following persons
in the capacities indicated:
SIGNATURE TITLE
- ------------------------------ ---------------------------
Chief Executive Officer,
* and Chairman of the Board
- ------------------------------ of Directors (Principal
David J. Johnson Executive Officer)
Executive Vice President/
/s/ PHILIP L. MASLOWE Chief Financial Officer
- ------------------------------ (Principal Financial and
Philip L. Maslowe Accounting Officer)
* Director
- ------------------------------
Henry R. Kravis
* Director
- ------------------------------
George R. Roberts
* Director
- ------------------------------
Clifton S. Robbins
* Director
- ------------------------------
Nils P. Brous
* Director
- ------------------------------
Sandra W. Scarr, Ph.D.
* Director
- ------------------------------
Stephen Kaplan
*BY: /s/ PHILIP L. MASLOWE
.........................
Philip L. Maslowe,
ATTORNEY-IN-FACT
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
<CAPTION>
***2.1 (a) Agreement and Plan of Merger dated as of October 3, 1996, between KinderCare Learning Centers, Inc.
("KinderCare") and KCLC Acquisition Corp. ("KCLC Acquisition") (incorporated by reference to
Exhibit 2.1(a) to KinderCare's Form S-4, filed January 7, 1997, File no. 333-19345).
<C> <S>
(b) Merger Agreement Amendment dated as of December 27, 1996 between KinderCare and KCLC Acquisition
(incorporated by reference to Exhibit 2.1(b) to KinderCare's Form S-4, filed January 7, 1997, File
no. 333-19345).
***2.2 (a) Voting Agreement, dated as of October 3, 1996, among KCLC Acquisition and the stockholders parties
thereto (incorporated by reference to Exhibit 2.2(a) to KinderCare's Form S-4, filed January 7,
1997, File no. 333-19345).
(b) Voting Agreement Amendment, dated as of December 27, 1997 among KCLC Acquisition and the
stockholders parties thereto (incorporated by reference to Exhibit 2.2(b) to KinderCare's Form S-4,
filed January 7, 1997, File no. 333-19345).
*2.3 Stockholders' Agreement between KinderCare Learning Centers, Inc. and the stockholders parties thereto.
*3.1 Certificate of Merger of KCLC Acquisition Corp. into KinderCare Learning Centers, Inc.
*3.2 By-Laws of KinderCare Learning Centers, Inc.
*4.1 Indenture dated as of February 13, 1997 between KinderCare Learning Centers, Inc. and Marine Midland
Bank, as Trustee.
*4.2 Form of 9 1/2% Senior Subordinated Note due 2009.
**4.3 Form of 9 1/2% Series B Senior Subordinated Note due 2009.
*4.4 Registration Rights Agreement dated February 13, 1997 among KinderCare Learning Centers, Inc., Chase
Securities Inc., BT Securities Corporation, Salomon Brothers Inc and Smith Barney Inc.
**5 Opinion of Simpson Thacher & Bartlett.
*10.1 Credit Agreement, dated as of February 13, 1997, among KinderCare Learning Centers, Inc., the several
lenders from time to time parties thereto, and The Chase Manhattan Bank, as administrative agent.
*10.2 Registration Rights Agreement, dated as of February 13, 1997, among KCLC Acquisition Corp., KLC
Associates L.P. and KKR Partners II, L.P.
*10.3 Purchase Agreement, dated as of February 13, 1997, among KinderCare Learning Centers, Inc. Chase
Securities Inc., BT Securities Corporation, Salomon Brothers Inc and Smith Barney Inc.
**12 Computation of Ratio of Earnings to Fixed Charges
**23.1 Consent of Simpson Thacher & Bartlett (included as part of its opinion filed as Exhibit 5 hereto).
**23.2 Consent of KPMG Peat Marwick LLP, independent certified public accountants.
*24 Powers of Attorney (included on page II-5).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
*25 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of Marine Midland Bank, as
Trustee.
**99.1 Form of Letter of Transmittal.
**99.2 Form of Notice of Guaranteed Delivery.
</TABLE>
- ------------------------
* Previously filed.
** Filed herewith.
*** Incorporated by reference.
<PAGE>
Exhibit 4.3
KINDERCARE LEARNING CENTERS, INC.
9-1/2% Series B Senior Subordinated Note due 2009
No. CUSIP No.
$__________
KINDERCARE LEARNING CENTERS, INC., a Delaware corporation (herein
called the "Company", which term includes any successor Person under the
Indenture hereinafter referred to), for value received, hereby promises to pay
to Cede & Co. or registered assigns, the principal sum of $__________ Dollars on
February 15, 2009, at the office or agency of the Company referred to below, and
to pay interest thereon on August 15, 1997 and semi-annually thereafter, on
February 15 and August 15 in each year, from February 13, 1997, or from the most
recent Interest Payment Date to which interest has been paid or duly provided
for, at the rate of 9-1/2% per annum, until the principal hereof is paid or duly
provided for, and (to the extent lawful) to pay on demand interest on any
overdue interest at the rate borne by the Notes from the date on which such
overdue interest becomes payable to the date payment of such interest has been
made or duly provided for. The interest so payable, and punctually paid or duly
provided for, on any Interest Payment Date will, as provided in such Indenture,
be paid to the Person in whose name this Note (or one or more Predecessor Notes)
is registered at the close of business on the Regular Record Date for such
interest, which shall be the February 1 or August 1 (whether or not a Business
Day), as the case may be, next preceding such Interest Payment Date. Any such
interest not so punctually paid or duly provided for shall forthwith cease to be
payable to the Holder on such Regular Record Date, and such defaulted interest,
and (to the extent lawful) interest on such defaulted interest at the rate borne
by the Notes, may be paid to the Person in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on a Special Record
Date for the payment of such Defaulted Interest to be fixed by the Trustee,
notice whereof shall be given to Holders of Notes not less than 10 days prior to
such Special Record Date, or may be paid at any time in any other lawful manner
not inconsistent with the requirements of any securities exchange on which the
Notes may be listed, and upon such notice as may be required by such exchange,
all as more fully provided in said Indenture.
Payment of the principal of (and premium, if any, on) and interest on
this Note will be made at the office or agency of the Company maintained for
that purpose in The City of New York, or at such other office or agency of the
Company as may be maintained for such purpose, in such coin or currency of the
United States of America as at the time of payment is legal tender for payment
of public and private debts; PROVIDED, HOWEVER, that payment of interest may be
made at the option of the Company (i) by check mailed to the address of the
Person entitled thereto as such address shall appear on the Note
<PAGE>
2
Register or (ii) by wire transfer to an account maintained by the payee located
in the United States.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been duly executed
by the Trustee or the Authenticating Agent referred to on the reverse hereof by
manual signature, this Note shall not be entitled to any benefit under the
Indenture, or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
KINDERCARE LEARNING CENTERS,
INC.
By: ________________________
Name:
Title:
Attest: [SEAL]
_______________________
Authorized Officer
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Notes referred to in the within-mentioned
Indenture.
MARINE MIDLAND BANK,
as Trustee
By: ________________________
Authorized Signatory
Dated:
<PAGE>
3
REVERSE SIDE OF SECURITY
This Note is one of a duly authorized issue of securities of the
Company designated as its 9-1/2% Series B Senior Subordinated Notes due 2009
(the "Notes"), limited (except as otherwise provided in the Indenture referred
to below) in aggregate principal amount to $300,000,000, which may be issued
under an indenture (the "Indenture") dated as of February 13, 1997 between the
Company and Marine Midland Bank, as trustee (the "Trustee", which term includes
any successor trustee under the Indenture), to which Indenture and all
indentures supplemental thereto reference is hereby made for a statement of the
respective rights, limitations of rights, duties, obligations and immunities
thereunder of the Company, the Trustee and the Holders of the Notes, and of the
terms upon which the Notes are, and are to be, authenticated and delivered.
The indebtedness evidenced by the Notes is, to the extent and in the
manner provided in the Indenture, subordinate and subject in right of payment to
the prior payment in full of all Senior Indebtedness as defined in the
Indenture, and this Note is issued subject to such provisions. Each Holder of
this Note, by accepting the same, (a) agrees to and shall be bound by such
provisions, (b) authorizes and directs the Trustee on his behalf to take such
action as may be necessary or appropriate to effectuate the subordination as
provided in the Indenture and (c) appoints the Trustee his attorney-in-fact for
such purpose.
On or before each payment date, the Company shall deliver or cause to
be delivered to the Trustee or the Paying Agent an amount in dollars sufficient
to pay the amount due on such payment date.
The Notes are subject to redemption upon not less than 30 nor more
than 60 days', written notice, at any time on and after February 15, 2002, as a
whole or in part, at the election of the Company, at a Redemption Price equal to
the percentage of the principal amount set forth below, plus, in each case,
accrued and unpaid interest, if any, to the applicable Redemption Date, if
redeemed during the twelve month period beginning February 15, of the years
indicated below:
Redemption
Year Price
---- ----------
2002.................................................. 104.750%
2003................................................ 103.167%
2004.................................................. 101.583%
2005 and thereafter................................... 100.000%
In addition, at any time or from time to time, on or prior to
February 15, 2000, the Company may, at its option, redeem up to 40% of the
aggregate principal amount of Notes
<PAGE>
4
originally issued under the Indenture on the Issuance Date at a Redemption Price
equal to 109.5% of the aggregate principal amount thereof, plus accrued and
unpaid interest thereon, if any, to the Redemption Date, with the net proceeds
of one or more Equity Offerings; provided that at least 60% of the aggregate
principal amount of Notes originally issued under the Indenture on the Issuance
Date remains outstanding immediately after the occurrence of such redemption;
and PROVIDED FURTHER that such redemption shall occur within 60 days of the date
of the closing of any such Equity Offering.
If less than all the Notes are to be redeemed pursuant to the
preceding two paragraphs, the Trustee shall select the Notes or portions thereof
to be redeemed in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes being redeemed are listed, or if
the Notes are not so listed, on a pro rata basis, by lot or by such other method
the Trustee shall deem fair and appropriate; provided that no such partial
redemption shall reduce the portion of the principal amount of a Note not
redeemed to less than $1,000.
In the case of any redemption of Notes, interest installments whose
Stated Maturity is on or prior to the Redemption Date will be payable to the
Holders of such Notes, or one or more Predecessor Notes, of record at the close
of business on the relevant Regular Record Date or Special Record Date, as the
case may be, referred to on the face hereof. Notes (or portions thereof) for
whose redemption and payment provision is made in accordance with the Indenture
shall cease to bear interest from and after the Redemption Date.
In the event of redemption or repurchase of this Note in part only, a
new Note or Notes for the unredeemed portion hereof shall be issued in the name
of the Holder hereof upon the cancellation hereof.
Upon the occurrence of a Change of Control, the Company will be
required to make an offer to purchase on the Change of Control Payment Date all
outstanding Notes at a purchase price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon, if any, to
the date of purchase, in accordance with the Indenture. Holders of Notes that
are subject to an offer to purchase will receive a Change of Control Offer from
the Company prior to any related Change of Control Payment Date.
Under certain circumstances, in the event the Net Proceeds received by
the Company from an Asset Sale, which proceeds are not used (i) to permanently
reduce Obligations under the Senior Credit Facility (and to correspondingly
reduce commitments with respect thereto) or other Senior Indebtedness or Pari
Passu Indebtedness (provided that if the Company shall so reduce Obligations
under Pari Passu Indebtedness, it will equally
<PAGE>
5
and ratably reduce Obligations under the Notes if the Notes are then prepayable
or, if the Notes may not be then prepaid, the Company shall make an offer (in
accordance with the procedures set forth below for an Asset Sale Offer) to all
Holders to purchase 100% of the principal amount thereof the amount of Notes
that would otherwise be prepaid), (ii) to make an investment in any one or more
businesses, capital expenditures or acquisitions of other assets in each case,
used or useful in a Similar Business and/or (iii) to make an investment in
properties or assets that replace the properties and assets that are the subject
of such Asset Sale, equal or exceeds a specified amount, the Company will be
required to make an offer to all Holders to purchase the maximum principal
amount of Notes, in an integral multiple of $1,000, that may be purchased out of
such amount at a purchase price in cash equal to 100% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of purchase, in
accordance with the Indenture. Holders of Notes that are subject to any offer
to purchase will receive an Asset Sale Offer from the Company prior to any
related Asset Sale Purchase Date.
In the case of any redemption or repurchase of Notes, interest
installments whose Stated Maturity is on or prior to the Redemption Date will be
payable to the Holders of such Notes, or one or more Predecessor Notes, of
record at the close of business on the relevant Regular Record Date or Special
Record Date, as the case may be, referred to on the face hereof. Notes (or
portions thereof) for whose redemption and payment provision is made in
accordance with the Indenture shall cease to bear interest from and after the
Redemption Date.
If an Event of Default shall occur and be continuing, the principal of
all the Notes may be declared due and payable in the manner and with the effect
provided in the Indenture.
The Indenture contains provisions for defeasance at any time of
(a) the entire indebtedness of the Company on this Note and (b) certain
restrictive covenants and the related Defaults and Events of Default, upon
compliance by the Company with certain conditions set forth therein, which
provisions apply to this Note.
The Indenture permits, with certain exceptions as therein provided,
the amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders under the Indenture and the Notes and the
Guarantees, if any, at any time by the Company and the Trustee with the consent
of the Holders of a specified percentage in aggregate principal amount of the
Notes at the time Outstanding. Additionally, the Indenture permits that,
without notice to or consent of any Holder, the Company, any Guarantor and the
Trustee together may amend or supplement the Indenture, any Guarantee or this
Note (i) to cure any ambiguity, defect or inconsistency, (ii) to provide for
uncertificated Notes in addition to or in place of
<PAGE>
6
certificated Notes, (iii) to comply with the covenant relating to mergers,
consolidations and sales of assets, (iv) to provide for the assumption of the
Company's obligations to Holders of such Notes, (v) to make any change that
would provide any additional rights or benefits to the Holders of the Notes or
that does not adversely affect the legal rights under the Indenture of any such
Holder, (vi) to add covenants for the benefit of the Holders or to surrender any
right or power conferred upon the Company, (vii) to comply with the
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act, (viii) to evidence and provide
for the acceptance of appointment under the Indenture by a successor Trustee
pursuant to the requirements of Section 610 thereof, (ix) to make any change
that does not adversely affect the legal rights of any Holder or (x) to add a
Guarantor under the Indenture. The Indenture also contains provisions
permitting the Holders of specified percentages in aggregate principal amount of
the Notes at the time Outstanding, on behalf of the Holders of all the Notes, to
waive compliance by the Company with certain provisions of the Indenture the
Notes and the Guarantees, if any, and certain past Defaults under the Indenture
and the Notes and the Guarantees, if any, and their consequences. Any such
consent or waiver by or on behalf of the Holder of this Note shall be conclusive
and binding upon such Holder and upon all future Holders of this Note and of any
Note issued upon the registration of transfer hereof or in exchange herefor or
in lieu hereof whether or not notation of such consent or waiver is made upon
this Note.
No reference herein to the Indenture and no provision of this Note or
of the Indenture shall alter or impair the obligation of the Company, any
Guarantor or any other obligor on the Notes (in the event such Guarantor or
other obligor is obligated to make payments in respect of the Notes), which is
absolute and unconditional, to pay the principal of (and premium, if any) and
interest on this Note at the times, place, and rate, and in the coin or
currency, herein prescribed, subject to the subordination provisions of the
Indenture.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Note is registerable on the Note
Register of the Company, upon surrender of this Note for registration of
transfer at the office or agency of the Company maintained for such purpose in
The City of New York, duly endorsed by, or accompanied by a written instrument
of transfer in form satisfactory to the Company and the Note Registrar duly
executed by, the Holder hereof or his attorney duly authorized in writing, and
thereupon one or more new Notes, of authorized denominations and for the same
aggregate principal amount, will be issued to the designated transferee or
transferees.
The Notes are issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple
<PAGE>
7
thereof. As provided in the Indenture and subject to certain limitations
therein set forth, the Notes are exchangeable for a like aggregate principal
amount of Notes of a different authorized denomination, as requested by the
Holder surrendering the same.
No service charge shall be made for any registration of transfer or
exchange or redemption of Notes, but the Company may require payment of a sum
sufficient to pay all documentary, stamp or similar issue or transfer taxes or
other governmental charge payable in connection therewith.
Prior to the time of due presentment of this Note for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name this Note is registered as the owner hereof
for all purposes, whether or not this Note be overdue, and neither the Company,
the Trustee nor any agent shall be affected by notice to the contrary.
THIS NOTE AND THE INDENTURE SHALL BE GOVERNED BY THE LAW OF THE STATE
OF NEW YORK EXCLUDING (TO THE GREATEST EXTENT PERMISSIBLE BY LAW) ANY RULE OF
LAW THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN
THE STATE OF NEW YORK.
Interest on this Note shall be computed on the basis of a 360-day year
of twelve 30-day months.
All terms used in this Note which are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
<PAGE>
8
TRANSFER NOTICE
FOR VALUE RECEIVED the undersigned registered holder hereby sell(s),
assign(s) and transfer(s) unto
______________________________________________
(insert Taxpayer Identification No.)
________________________________________________________________________________
________________________________________________________________________________
(please print or typewrite name and address including zip code of assignee)
the within Note and all rights thereunder, hereby
irrevocably constituting and appointing
________________________________________________________________________________
attorney to transfer said Note on the books of the Company with full power of
substitution in the premises.
<PAGE>
9
In connection with any transfer of this Note occurring prior to the
date that is the earlier of the date of an effective Registration Statement, as
defined in the Registration Rights Agreement dated as of February 13, 1997, or
February 15, 1999, the undersigned confirms that without utilizing any general
solicitation or general advertising that:
[CHECK ONE]
[ ] (a) this Note is being transferred in compliance with the exemption
from registration under the Securities Act of 1933, as amended,
provided by Rule 144A thereunder.
OR
[ ] (b) this Note is being transferred other than in accordance with (a)
above and documents are being furnished that comply with the
conditions of transfer set forth in this Note and the Indenture.
If neither of the foregoing boxes is checked, the Trustee or other Registrar
shall not be obligated to register this Note in the name of any Person other
than the Holder hereof unless and until the conditions to any such transfer of
registration set forth herein and in Section 307 of the Indenture shall have
been satisfied.
Date: _______________ ___________________________________
NOTICE: The signature must correspond with the name
as written upon the face of the
within-mentioned instrument in every
particular, without alteration or any change
whatsoever.
Signature Guarantee: _________________________
TO BE COMPLETED BY PURCHASER IF (A) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing this
Note for its own account or an account with respect to which it exercises sole
investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act of
1933, as amended, and is aware that the sale to it is being made in reliance on
Rule 144A and acknowledges that it has received such information regarding the
Company as the undersigned has requested pursuant to Rule 144A or has determined
not to request such information and that it is aware that the transferor is
relying upon the undersigned's foregoing representations in order to claim the
exemption from registration provided by Rule 144A.
<PAGE>
10
Dated: _______________________ NOTICE: To be executed by an executive
officer.
<PAGE>
11
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company pursuant to
Section 1016 of the Indenture, check the Box: [ ].
If you wish to have a portion of this Note purchased by the Company
pursuant to Section 1016 of the Indenture, state the amount (in original
principal amount) below:
$_____________________
Date: ___________________
Your Signature: ________________________________________
(Sign exactly as your name appears on the
other side of this Note)
Signature Guarantee: _____________________
<PAGE>
EXHIBIT 5
April 8, 1997
KinderCare Learning Centers, Inc.
2400 Presidents Drive
Montgomery, Alabama 36116
Ladies and Gentlemen:
We have acted as special counsel for KinderCare Learning Centers, Inc., a
Delaware corporation (the "Company"), in connection with the Registration
Statement on Form S-4 (the "Registration Statement") filed by the Company with
the Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933, as amended (the "Securities Act"), relating to the issuance by the
Company of $300,000,000 aggregate principal amount of its 9 1/2% Series B Senior
Subordinated Notes due 2009 (the "Exchange Notes"). The Exchange Notes are to be
offered by the Company in exchange for (the "Exchange") $300,000,000 aggregate
principal amount of its outstanding 9 1/2% Senior Subordinated Notes due 2009
(the "Notes"). The Notes have been, and the Exchange Notes will be, issued under
an Indenture dated as of February 13, 1997 (the "Indenture") between the Company
and Marine Midland Bank, as Trustee (the "Trustee").
We have examined the Registration Statement and the Indenture which has been
filed with the Commission as an Exhibit to the Registration Statement. In
addition, we have examined, and have relied as to matters of fact upon, the
originals or copies, certified or otherwise identified to our satisfaction, of
such corporate records, agreements, documents and other instruments and such
certificates or comparable documents of public officials and of officers and
representatives of the Company, and have made such other and further
investigations, as we have deemed relevant and necessary as a basis for the
opinion hereinafter set forth.
In such examination, we have assumed the genuineness of all signatures, the
legal capacity of natural persons, the authenticity of all documents submitted
to us as originals and the conformity to original documents of all documents
submitted to us as certified or photostatic copies, and the authenticity of the
originals of such latter documents.
Based upon the foregoing, and subject to the qualifications and limitations
stated herein, assuming the Indenture has been duly authorized and validly
executed and delivered by the parties thereto, when (i) the Indenture has been
duly qualified under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"), (ii) the Board of Directors of the Company, a duly constituted
and acting committee thereof or duly authorized officers thereof has taken all
necessary corporate action to approve the issuance and terms of the Exchange
Notes, the terms of the Exchange and related matters, and (iii) the Exchange
Notes have been duly executed, authenticated, issued and delivered in accordance
with the provisions of the Indenture upon the Exchange, we are of the opinion
that the Exchange Notes will constitute valid and legally binding obligations of
the Company, enforceable against the Company in accordance with their terms.
Our opinion set forth in the preceding sentence is subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally, general
equitable principles (whether considered in a proceeding in equity or at law)
and an implied covenant of good faith and fair dealing.
We are members of the Bar of the State of New York and we do not express any
opinion herein concerning any law other than the law of the State of New York
and the federal law of the United States.
We hereby consent to the use of this opinion as an Exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Prospectus included therein.
Very truly yours,
SIMPSON THACHER & BARTLETT
<PAGE>
EXHIBIT 12
KINDERCARE LEARNING CENTERS, INC.
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
PRE-CONFIRMATION POST-CONFIRMATION
---------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
FISCAL YEAR
FISCAL YEAR ENDED ENDED
------------------------ -----------
<CAPTION>
THIRTEEN EIGHT
JANUARY 3, WEEKS ENDED YEAR ENDED WEEKS ENDED JUNE 3,
1992 JANUARY 1, APRIL 2, MAY 28, MAY 28, 1994
(53 WEEKS) 1993 1993 1993 1993 (53 WEEKS)
----------- ----------- -------------- ----------- --------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Income (loss) before income taxes and
extraordinary items....................... $ (49,053) $ (10,968) $ (88,957) $ (96,104) $ 890 $ 32,667
Interest expense............................ 46,578 38,400 692 24,709 3,253 17,675
Rent expense................................ 10,041 8,838 1,650 7,796 1,206 7,521
----------- ----------- -------------- ----------- ------- -----------
$ 7,566 $ 36,270 $ (86,615) $ (63,599) $ 5,349 $ 57,863
----------- ----------- -------------- ----------- ------- -----------
----------- ----------- -------------- ----------- ------- -----------
Fixed Charges:
Interest expense............................ $ 46,578 $ 38,400 $ 692 $ 24,709 $ 3,253 $ 17,675
Rent expense................................ 10,041 8,838 1,650 7,796 1,206 7,521
----------- ----------- -------------- ----------- ------- -----------
$ 56,619 $ 47,238 $ 2,342 $ 32,505 $ 4,459 $ 25,196
----------- ----------- -------------- ----------- ------- -----------
----------- ----------- -------------- ----------- ------- -----------
Ratios of earnings to fixed charges......... -- -- -- -- 1.2 2.3
----------- ----------- -------------- ----------- ------- -----------
----------- ----------- -------------- ----------- ------- -----------
Deficiency of earnings to fixed charges..... $ 49,053 $ 10,968 $ 88,957 $ 96,104
----------- ----------- -------------- -----------
----------- ----------- -------------- -----------
<CAPTION>
<S> <C> <C> <C> <C> <C>
TWENTY-EIGHT WEEKS ENDED
--------------------------------
PRO FORMA PRO FORMA
JUNE 2, MAY 31, MAY 31, DECEMBER 13, DECEMBER 13,
1995 1996 1996 1996 1996
--------- ----------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Earnings:
Income (loss) before income taxes and
extraordinary items....................... $ 36,103 $ 35,232 $ 10,515 $ 16,062 $ 2,299
Interest expense............................ 17,318 16,727 41,444 8,141 21,904
Rent expense................................ 8,700 8,838 8,838 4,836 4,836
--------- ----------- ----------- --------------- ---------------
$ 62,121 $ 60,797 $ 60,797 $ 29,039 $ 29,039
--------- ----------- ----------- --------------- ---------------
--------- ----------- ----------- --------------- ---------------
Fixed Charges:
Interest expense............................ $ 17,318 $ 16,727 $ 41,444 $ 8,141 $ 21,904
Rent expense................................ 8,700 8,838 8,838 4,836 4,836
--------- ----------- ----------- --------------- ---------------
$ 26,018 $ 25,565 $ 50,282 $ 12,977 $ 26,740
--------- ----------- ----------- --------------- ---------------
--------- ----------- ----------- --------------- ---------------
Ratios of earnings to fixed charges......... 2.4 2.4 1.2 2.2 1.1
--------- ----------- ----------- --------------- ---------------
--------- ----------- ----------- --------------- ---------------
Deficiency of earnings to fixed charges.....
</TABLE>
<PAGE>
Exhibit 23.2
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
KinderCare Learning Centers, Inc.:
We consent to the use of our reports included herein and to the
reference to our firm under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
April 8, 1997
<PAGE>
LETTER OF TRANSMITTAL
FOR
9 1/2% SENIOR SUBORDINATED NOTES
DUE 2009
OF
KINDERCARE LEARNING CENTERS, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1997 (THE "EXPIRATION DATE") UNLESS EXTENDED BY KINDERCARE LEARNING CENTERS,
INC.
EXCHANGE AGENT:
MARINE MIDLAND BANK
<TABLE>
<S> <C>
BY HAND: BY MAIL:
Marine Midland Bank (INSURED OR REGISTERED RECOMMENDED)
140 Broadway, Level A Marine Midland Bank
New York, New York 10005-1180 140 Broadway, Level A
Attention: Paulette Shaw New York, New York 10005-1180
Attention: Paulette Shaw
BY OVERNIGHT EXPRESS:
Marine Midland Bank
140 Broadway, Level A
New York, New York 10005-1180
Attention: Paulette Shaw
</TABLE>
BY FACSIMILE:
(212) 658-2292
(For Eligible Institutions Only)
BY TELEPHONE:
(212) 658-5931
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION VIA A FACSIMILE TRANSMISSION TO A NUMBER OTHER THAN AS SET
FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges receipt of the Prospectus dated ,
1997 (the "Prospectus") of KinderCare Learning Centers, Inc. (the "Company"),
and this Letter of Transmittal (the "Letter of Transmittal"), which together
describe the Company's offer (the "Exchange Offer") to exchange $1,000 in
principal amount of its new 9 1/2% Series B Senior Subordinated Notes due 2009
(the "Exchange Notes") for each $1,000 in principal amount of outstanding 9 1/2%
Senior Subordinated Notes due 2009 (the "Old Notes"). The terms of the Exchange
Notes are identical in all material respects (including principal amount,
interest rate and maturity) to the terms of the Old Notes for which they may be
exchanged pursuant to the Exchange Offer, except that the Exchange Notes are
freely transferable by holders thereof (except as provided herein or in the
Prospectus) and are not subject to any covenant regarding registration under the
Securities Act of 1933, as amended (the "Securities Act").
The undersigned has checked the appropriate boxes below and signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS
CAREFULLY BEFORE CHECKING ANY BOX BELOW
<PAGE>
YOUR BANK OR BROKER CAN ASSIST YOU IN COMPLETING THIS FORM. THE INSTRUCTIONS
INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED. QUESTIONS AND
REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS AND THIS
LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT.
List below the Old Notes to which this Letter of Transmittal relates. If the
space provided below is inadequate, the Certificate Numbers and Principal
Amounts should be listed on a separate signed schedule affixed hereto.
<TABLE>
<CAPTION>
DESCRIPTION OF OLD NOTES TENDERED HEREWITH
AGGREGATE
NAME(S) AND ADDRESS(ES) OF PRINCIPAL AMOUNT PRINCIPAL
REGISTERED HOLDER(S) CERTIFICATE REPRESENTED AMOUNT
(PLEASE FILL IN) NUMBER(S)* BY OLD NOTES* TENDERED**
<S> <C> <C> <C>
Total
</TABLE>
* Need not be completed by book-entry holders.
** Unless otherwise indicated, the holder will be deemed to have tendered the
full aggregate principal amount represented by such Old Notes. See
instruction 2.
This Letter of Transmittal is to be used either if certificates representing
Old Notes are to be forwarded herewith or if delivery of Old Notes is to be made
by book-entry transfer to an account maintained by the Exchange Agent at The
Depository Trust Company, pursuant to the procedures set forth in "The Exchange
Offer--Procedures for Tendering Old Notes" in the Prospectus. Delivery of
documents to the book-entry transfer facility does not constitute delivery to
the Exchange Agent.
Holders whose Old Notes are not immediately available or who cannot deliver
their Old Notes and all other documents required hereby to the Exchange Agent on
or prior to the Expiration Date must tender their Old Notes according to the
guaranteed delivery procedure set forth in the Prospectus under the caption "The
Exchange Offer-- Procedures for Tendering Old Notes."
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO AN ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution ______________________________________________
/ / The Depository Trust Company
Account Number _____________________________________________________________
Transaction Code Number ____________________________________________________
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s) _______________________________________________
Name of Eligible Institution that Guaranteed Delivery ______________________
Date of Execution of Notice of Guaranteed Delivery _________________________
<PAGE>
If Delivered by Book-Entry Transfer:
Account Number _____________________________________________________________
/ / CHECK HERE IF EXCHANGE NOTES ARE TO BE DELIVERED TO PERSON OTHER THAN PERSON
SIGNING THE LETTER OF TRANSMITTAL:
Name _________________________________________________________________________
(Please Print)
Address ______________________________________________________________________
(Including Zip Code)
/ / CHECK HERE IF EXCHANGE NOTES ARE TO BE DELIVERED TO ADDRESS DIFFERENT FROM
THAT LISTED ELSEWHERE IN THIS LETTER OF TRANSMITTAL:
Address ______________________________________________________________________
(Including Zip Code)
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THIS PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO:
Name _______________________________________________________________________
Address ____________________________________________________________________
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of
Exchange Notes. If the undersigned is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Old Notes that were acquired as result
of market-making activities or other trading activities, it acknowledges that it
will deliver a prospectus in connection with any resale of such Exchange Notes;
however, by so acknowledging and by delivering a prospectus, the undersigned
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. Any holder who is an "affiliate" of the Company or who has
an arrangement or understanding with respect to the distribution of the Exchange
Notes to be acquired pursuant to the Exchange Offer, or any broker-dealer who
purchased Old Notes from the Company to resell pursuant to Rule 144A under the
Securities Act or any other available exemption under the Securities Act must
comply with the registration and prospectus delivery requirements under the
Securities Act.
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the above-described principal amount
of the Old Notes indicated above. Subject to, and effective upon, the acceptance
for exchange of the Old Notes tendered herewith, the undersigned hereby
exchanges, assigns and transfers to, or upon the order of, the Company all
right, title and interest in and to such Old Notes. The undersigned hereby
irrevocably constitutes and appoints the Exchange Agent the true and lawful
agent and attorney-in-fact of the undersigned (with full knowledge that said
Exchange Agent acts as the agent of the Company, in connection with the Exchange
Offer) to cause the Old Notes to be assigned, transferred and exchanged. The
undersigned represents and warrants that it has full power and authority to
tender, exchange, assign and transfer the Old Notes and to acquire Exchange
Notes issuable upon the exchange of such tendered Old Notes, and that, when the
same are accepted for exchange, the Company will acquire good and unencumbered
title to the tendered Old Notes, free and clear of all liens, restrictions,
charges and encumbrances and not subject to any adverse claim. The undersigned
also warrants that it will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be necessary or
desirable to complete the exchange, assignment and transfer of tendered Old
Notes or transfer ownership of such Old Notes on the account books maintained by
the book-entry transfer facility. The undersigned further agrees that acceptance
of any and all validly tendered Old Notes by the Company and the issuance of
Exchange Notes in exchange therefor shall constitute performance in full by the
Company of its obligations under the Registration Rights Agreement (as defined
in the Prospectus) and that the Company shall have no further obligations or
liabilities thereunder except as provided in the first paragraph of Section 2 of
said agreement.
The Exchange Offer is subject to certain conditions as set forth in the
Prospectus under the caption "The Exchange Offer--Certain Conditions to the
Exchange Offer." The undersigned recognizes that as a result of these conditions
(which may be waived, in whole or in part, by the Company), as more particularly
set forth in the Prospectus, the Company may not be required to exchange any of
the Old Notes tendered hereby and, in such event, the Old Notes not exchanged
will be returned to the undersigned at the address shown above. In addition, the
Company may amend the Exchange Offer at any time prior to the Expiration Date if
any of the conditions set forth under "The Exchange Offer--Certain Conditions to
the Exchange Offer" occur.
By tendering, each holder of Old Notes represents that the Exchange Notes
acquired in the exchange will be obtained in the ordinary course of such
holder's business, that such holder has no arrangement with any person to
participate in the distribution of such Exchange Notes, that such holder is not
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act and that such holder is not engaged in, and does not intend to
engage in, a distribution of the Exchange Notes. Any holder of Old Notes using
the Exchange Offer to participate in a distribution of the Exchange Notes (i)
cannot rely on the position of the staff of the Securities and Exchange
Commission (the "Commission") enunciated in its interpretive letter with respect
to Exxon Capital Holdings Corporation (available April 13, 1989) or similar
letters and (ii) must comply with the registration and prospectus requirements
of the Securities Act in connection with a secondary resale transaction.
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of
Exchange Notes. If the undersigned is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Old Notes that were acquired as a
result of market-making activities or other trading activities, it acknowledges
that it will deliver a prospectus in connection with any resale of such Exchange
Notes, however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
<PAGE>
All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned and every obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors
and assigns of the undersigned. Tendered Old Notes may be withdrawn at any time
prior to the Expiration Date in accordance with the terms of this Letter of
Transmittal. See Instruction 2.
Certificates for all Exchange Notes delivered in exchange for tendered Old
Notes and any Old Notes delivered herewith but not exchanged, and registered in
the name of the undersigned, shall be delivered to the undersigned at the
address shown below the signature of the undersigned.
TENDER HOLDER(S) SIGN HERE
(Complete accompanying substitute Form W-9)
________________________________________________________________________________
________________________________________________________________________________
Signature(s) of Holder(s)
Dated ___________________ Area Code and Telephone Number ___________________
(MUST BE SIGNED BY REGISTERED HOLDER(S) EXACTLY AS NAME(S) APPEAR(S) ON
CERTIFICATE(S) FOR OLD NOTES. IF SIGNATURE IS BY A TRUSTEE, EXECUTOR,
ADMINISTRATOR, GUARDIAN, ATTORNEY-IN-FACT, OFFICER OF A CORPORATION OR OTHER
PERSON ACTING IN A FIDUCIARY OR REPRESENTATIVE CAPACITY, PLEASE SET FORTH THE
FULL TITLE OF SUCH PERSON.) SEE INSTRUCTION 3.
Name(s) ________________________________________________________________________
________________________________________________________________________________
(Please Print)
Capacity (full title) __________________________________________________________
Address ________________________________________________________________________
(Including Zip Code)
Area Code and Telephone No. ____________________________________________________
Taxpayer Identification No. ____________________________________________________
GUARANTEE OF SIGNATURE(S)
(IF REQUIRED--SEE INSTRUCTION 3)
Authorized Signature ___________________________________________________________
Name ___________________________________________________________________________
Title __________________________________________________________________________
Address ________________________________________________________________________
Name of Firm ___________________________________________________________________
Area Code and Telephone No. ____________________________________________________
Dated __________________________________________________________________________
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES.
A holder of Old Notes may tender the same by (i) properly completing and
signing this Letter of Transmittal or a facsimile hereof (all references in the
Prospectus to the Letter of Transmittal shall be deemed to include a facsimile
thereof) and delivering the same, together with the certificate or certificates
representing the Old Notes being tendered and any required signature guarantees
and any other document required by this Letter of Transmittal, to the Exchange
Agent at its address set forth above on or prior to the Expiration Date (or
complying with the procedure for book-entry transfer described below) or (ii)
complying with the guaranteed delivery procedures described below.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE OLD NOTES AND ANY
OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER, AND EXCEPT
AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY
RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. IF SUCH DELIVERY IS BY MAIL, IT IS
SUGGESTED THAT REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED,
BE USED. IN ALL CASES SUFFICIENT TIME SHOULD BE ALLOWED TO PERMIT TIMELY
DELIVERY. NO OLD NOTES OR LETTERS OF TRANSMITTAL SHOULD BE SENT TO THE COMPANY.
If tendered Old Notes are registered in the name of the signer of the Letter
of Transmittal and the Exchange Notes to be issued in exchange therefor are to
be issued (and any untendered Old Notes are to be reissued) in the name of the
registered holder (which term, for the purposes described herein, shall include
any participant in The Depository Trust Company (also referred to as a
"book-entry transfer facility") whose name appears on a security listing as the
owner of Old Notes), the signature of such signer need not be guaranteed. In any
other case, the tendered Old Notes must be endorsed or accompanied by written
instruments of transfer in form satisfactory to the Company and duly executed by
the registered holder, and the signature on the endorsement or instrument of
transfer must be guaranteed by a bank, broker, dealer, credit union, savings
association, clearing agency or other institution (each an "Eligible
Institution") that is a member of a recognized signature guarantee medallion
program within the meaning of Rule 17Ad-15 under the Securities Exchange Act of
1934, as amended. If the Exchange Notes and/or Old Notes not exchanged are to be
delivered to an address other than that of the registered holder appearing on
the note register for the Old Notes, the signature on the Letter of Transmittal
must be guaranteed by an Eligible Institution.
The Exchange Agent will make a request within two business days after the
date of receipt of this Prospectus to establish accounts with respect to the Old
Notes at the book-entry transfer facility for the purpose of facilitating the
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the book-entry transfer facility's system
may make book-entry delivery of Old Notes by causing such book-entry transfer
facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the book-entry transfer facility's
procedures for such transfer. Although delivery of Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at the book-entry
transfer facility, an appropriate Letter of Transmittal with any required
signature guarantee and all other required documents must in each case be
transmitted to and received or confirmed by the Exchange Agent on or prior to
the Expiration Date, or, if the guaranteed delivery procedures described below
are complied with, within the time period provided under such procedures.
<PAGE>
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Old Notes to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received on
or prior to the Expiration Date, a letter, telegram or facsimile transmission
(receipt confirmed by telephone and an original delivered by guaranteed
overnight courier) from an Eligible Institution setting forth the name and
address of the tendering holder, the names in which the Old Notes are registered
and, if possible, the certificate numbers of the Old Notes to be tendered, and
stating that the tender is being made thereby and guaranteeing that within three
business days after the Expiration Date, the Old Notes in proper form for
transfer (or a confirmation of book-entry transfer of such Old Notes into the
Exchange Agent's account at the book-entry transfer facility), will be delivered
by such Eligible Institution together with a properly completed and duly
executed Letter of Transmittal (and any other required documents). Unless Old
Notes being tendered by the above-described method are deposited with the
Exchange Agent within the time period set forth above (accompanied or preceded
by a properly completed Letter of Transmittal and any other required documents),
the Company may, at its option, reject the tender. Copies of the notice of
guaranteed delivery ("Notice of Guaranteed Delivery") which may be used by
Eligible Institutions for the purposes described in this paragraph are available
from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at the book-entry transfer facility)
is received by the Exchange Agent, or (ii) a Notice of Guaranteed Delivery or
letter, telegram or facsimile transmission to similar effect (as provided above)
from an Eligible Institution is received by the Exchange Agent. Issuances of
Exchange Notes in exchange for Old Notes tendered pursuant to a Notice of
Guaranteed Delivery or letter, telegram or facsimile transmission to similar
effect (as provided above) by an Eligible Institution will be made only against
deposit of the Letter of Transmittal (and any other required documents) and the
tendered Old Notes.
If the Letter of Transmittal is signed by a person or persons other than the
registered holder or holders of Old Notes, such Old Notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly as
the name or names of the registered holder or holders appear on the Old Notes.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders, by execution of this Letter of Transmittal (or
facsimile thereof), shall waive any right to receive notice of the acceptance of
the Old Notes for exchange.
2. PARTIAL TENDERS; WITHDRAWALS.
If less than the entire principal amount of Old Notes evidenced by a
submitted certificate is tendered, the tendering holder should fill in the
principal amount tendered in the box entitled "Principal Amount Tendered." A
newly issued certificate for the principal amount of Old Notes submitted but not
tendered will be sent to such holder as soon as practicable after the Expiration
Date. All Old Notes delivered to the Exchange Agent will be deemed to have been
tendered unless otherwise clearly indicated.
<PAGE>
For a withdrawal to be effective, a written notice of withdrawal sent by
telegram, facsimile transmission (receipt confirmed by telephone) or letter must
be received by the Exchange Agent at the address set forth herein prior to the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having tendered the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) specify the principal
amount of Old Notes to be withdrawn, (iv) include a statement that such holder
is withdrawing his election to have such Old Notes exchanged, (v) be signed by
the holder in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered or as otherwise described
above (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee under the Indenture
register the transfer of such Old Notes into the name of the person withdrawing
the tender and (vi) specify the name in which any such Old Notes are to be
registered, if different from that of the Depositor. The Exchange Agent will
return the properly withdrawn Old Notes promptly following receipt of notice of
withdrawal. If Old Notes have been tendered pursuant to the procedure for
book-entry transfer, any notice of withdrawal must specify the name and number
of the account at the book-entry transfer facility to be credited with the
withdrawn Old Notes or othewise comply with the book-entry transfer facility
procedure. All questions as to the validity of notices of withdrawals, including
time of receipt, will be determined by the Company and such determination will
be final and binding on all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the book-entry transfer facility pursuant to the book-entry transfer procedures
described above, such Old Notes will be credited to an account with such
book-entry transfer facility specified by the holder) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Old Notes may be retendered by following one of the
procedures described under the caption "Procedures for Tendering Old Notes" in
the Prospectus at any time on or prior to the Expiration Date.
3. SIGNATURE ON THIS LETTER OF TRANSMITTAL; WRITTEN INSTRUMENTS AND
ENDORSEMENTS; GUARANTEE OF SIGNATURES.
If this Letter of Transmittal is signed by the registered holder(s) of the
Old Notes tendered hereby, the signature must correspond with the name(s) as
written on the face of the certificates without alteration, enlargement or any
change whatsoever.
If any of the Old Notes tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal.
If a number of Old Notes registered in different names are tendered, it will
be necessary to complete, sign and submit as many separate copies of this Letter
of Transmittal as there are different registrations of Old Notes.
When this Letter of Transmittal is signed by the registered holder or
holders (which term, for the purposes described herein, shall include the
book-entry transfer facility whose name appears on a security listing as the
owner of the Old Notes) of Old Notes listed and tendered hereby, no endorsements
of certificates or separate written instruments of transfer or exchange are
required.
If this Letter of Transmittal is signed by a person other than the
registered holder or holder of the Old Notes listed, such Old Notes must be
endorsed or accompanied by separate written instruments of transfer or exchange
in form satisfactory to the Company and duly executed by the registered holder,
in either case signed exactly as the name or names of the registered holder or
holders appear(s) on the OldNotes.
<PAGE>
If this Letter of Transmittal, any certificates or separate written
instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority so to act must be submitted.
Endorsements on certificates or signatures on separate written instruments
of transfer or exchange required by this Instruction 3 must be guaranteed by an
Eligible Institution.
Signatures on this Letter of Transmittal need not be guaranteed by an
Eligible Institution, provided the Old Notes are tendered: (i) by a registered
holder of such Old Notes, for the holder of such Old Notes; or (ii) for the
account of an Eligible Institution.
4. TRANSFER TAXES.
The Company shall pay all transfer taxes, if any, applicable to the transfer
and exchange of Old Notes to it or its order pursuant to the Exchange Offer. If,
however, certificates representing Exchange Notes or Old Notes for principal
amounts not tendered or accepted for exchange are to be delivered to, or are to
be issued in the name of, any person other than the registered holder of the Old
Notes tendered, or if tendered Old Notes are registered in the name of any
person other than the person signing the Letter of Transmittal, or if a transfer
tax is imposed for any reason other than the exchange of Old Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exception therefrom
is not submitted herewith the amount of such transfer taxes will be billed
directly to such tendering holder.
Except as provided in this Instruction 4, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
5. WAIVER OF CONDITIONS.
The Company reserves the right to waive in its reasonable judgment, in whole
or in part, any of the conditions to the Exchange Offer set forth in the
Prospectus.
6. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES.
Any holder whose Old Notes have been mutilated, lost, stolen or destroyed,
should contact the Exchange Agent at the address indicated above for further
instructions.
7. SUBSTITUTE FORM W-9.
Each holder of Old Notes whose Old Notes are accepted for exhange (or other
payee) is required to provide a correct taxpayer identification number ("TIN"),
generally the holder's Social Security or federal employer identification
number, and with certain other information, on Substitute Form W-9, which is
provided under "Important Tax Information" below, and to certify that the holder
(or other payee) is not subject to backup withholding. Failure to provide the
information on the Substitute Form W-9 may subject the holder (or other payee)
to a $50 penalty imposed by the Internal Revenue Service and 31% federal income
tax backup withholding on payments made in connection with the Exchange Notes.
The box in Part 3 of the Substitute Form W-9 may be checked if the holder (or
other payee) has not been issued a TIN and has applied for a TIN or intends to
apply for a TIN in the near future. If the box in Part 3 is checked and a TIN is
not provided by the time any payment is made in connection with the Exchange
Notes, 31% of all such payments will be withheld until a TIN is provided.
<PAGE>
8. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering, as well as requests for
additional copies of the Prospectus and this Letter of Transmittal, may be
directed to the Exchange Agent at the address and telephone number set forth
above. In addition, all questions relating to the Exchange Offer, as well as
requests for assistance or additional copies of the Prospectus and this Letter
of Transmittal, may be directed to KinderCare Learning Centers, Inc., 2400
Presidents Drive, Montgomery, Alabama 36116, attention: Corporate Secretary
(telephone: 334-277-5090).
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE HEREOF (TOGETHER WITH
CERTIFICATES FOR OLD NOTES OR CONFIRMATION OF BOOK-ENTRY TRANSFER AND ALL OTHER
REQUIRED DOCUMENTS) OR A NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE
EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE.
<PAGE>
IMPORTANT TAX INFORMATION
Under U.S. Federal income tax law, a holder of Old Notes whose Old Notes are
accepted for exchange may be subject to backup withholding unless the holder
provides Marine Midland Bank (as payor) (the "Paying Agent"), through the
Exchange Agent, with either (i) such holder's correct taxpayer identification
number ("TIN") on Substitute Form W-9 attached hereto, certifying that the TIN
provided on Substitute Form W-9 is correct (or that such holder of Old Notes is
awaiting a TIN) and that (A) the holder of Old Notes has not been notified by
the Internal Revenue Service that he or she is subject to backup withholding as
a result of a failure to report all interest or dividends or (B) the Internal
Revenue Service has notified the holder of Old Notes that he or she is no longer
subject to backup withholding; or (ii) an adequate basis for exemption from
backup withholding. If such holder of Old Notes is an individual, the TIN is
such holder's social security number. If the Paying Agent is not provided with
the correct taxpayer identification number, the holder of Old Notes may be
subject to certain penalties imposed by the Internal Revenue Service.
Certain holders of Old Notes (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. Exempt holders of Old Notes should indicate their exempt
status on Substitute Form W-9. In order for a foreign individual to qualify as
an exempt receipient, the holder must submit a Form W-8, signed under penalties
of perjury, attesting to that individual's exempt status. A Form W-8 can be
obtained from the Paying Agent. See the enclosed "Guidelines for Certification
of Taxpayer Identification Number on Substitute Form W-9" for more instructions.
If backup withholding applies, the Paying Agent is required to withhold 31%
of any such payments made to the holder of Old Notes or other payee. Backup
withholding is not an additional tax. Rather, the tax liability of persons
subject to backup withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund may be obtained from
the Internal Revenue Service.
The box in Part 3 of the Substitute Form W-9 may be checked if the
surrendering holder of Old Notes has not been issued a TIN and has applied for a
TIN or intends to apply for a TIN in the near futue. If the box in Part 3 is
checked, the holder of Old Notes or other payee must also complete the
Certificate of Awaiting Taxpayer Identification Number below in order to avoid
backup withholding . Notwithstanding that the box in Part 3 is checked and the
Certificate of Awaiting Taxpayer Identification Number is completed, the Paying
Agent will withhold 31% of all payments made prior to the time a properly
certified TIN is provided to the Paying Agent.
The holder of Old Notes is required to give the Paying Agent the TIN (e.g.,
social security number or employer identification number) of the record owner of
the Old Notes. If the Old Notes are in more than one name or are not in the name
of the actual owner, consult the enclosed "Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9" for additional guidance
on which number to report.
<PAGE>
<TABLE>
<S> <C> <C>
PAYOR'S NAME: MARINE MIDLAND BANK, AS PAYING AGENT
SUBSTITUTE PART I--PLEASE PROVIDE YOUR Social Security number(s) or
TIN IN THE BOX AT RIGHT AND Employer Identification
CERTIFY BY SIGNING AND Number(s)
DATING BELOW.
PART 2--CERTIFICATION--Under penalties of perjury, I
certify that:
(1) The number shown on this form is my correct taxpayer
identification number (or I am waiting for a number to be
issued for me), and
FORM W-9 (2) I am not subject to backup withholding because: (a) I
DEPARTMENT OF THE TREASURY am exempt form backup withholding, or (b) I have not been
INTERNAL REVENUE SERVICE notified by the Internal Revenue Service (IRS) that I
am subject to backup withholding as a result of a
failure to report all interest or dividends, or (c)
the IRS has notified me that I am no longer subject
to backup withholding.
PAYOR'S REQUEST FOR CERTIFICATION INSTRUCTIONS--You must cross out item (2)
TAXPAYER IDENTIFICATION above if you have been notified by the IRS that you are
NUMBER ("TIN") currently subject to backup withholding because of
underreporting interest or dividends on your tax return.
Signature PART 3--Awaiting TIN / /
Date
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN A $50 PENALTY
IMPOSED BY THE INTERNAL REVENUE SERVICE AND BACKUP WITHHOLDING OF 31% OF
ANY CASH PAYMENTS MADE TO YOU. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR
CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR
ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART
3 OF THE SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (1) I have mailed or delivered
an application to receive a taxpayer identification number to the
appropriate Internal Revenue Service Center or Social Security
Administration Office or (2) I intend to mail or deliver an application in
the near future. I understand that if I do not provide a taxpayer
identification number by the time of payment, 31% of all reportable cash
payments made to me thereafter will be withheld until I provide a taxpayer
identification number.
<TABLE>
<S> <C>
-------------------------------------------- ----------------------------
Signature Date
</TABLE>
<PAGE>
NOTICE OF GUARANTEED DELIVERY
FOR
TENDER OF ALL OUTSTANDING
9 1/2% SENIOR SUBORDINATED NOTES
DUE 2009
IN EXCHANGE FOR NEW
9 1/2% SERIES B SENIOR SUBORDINATED NOTES DUE 2009
OF
KINDERCARE LEARNING CENTERS, INC.
Registered holders of outstanding 9 1/2% Senior Subordinated Notes due 2009
(the "Old Notes") who wish to tender their Old Notes in exchange for a like
principal amount of new 9 1/2% Series B Senior Subordinated Notes due 2009 (the
"Exchange Notes") and whose Old Notes are not immediately available or who
cannot deliver their Old Notes and Letter of Transmittal (and any other
documents required by the Letter of Transmittal) to Marine Midland Bank (the
"Exchange Agent") prior to the Expiration Date, may use this Notice of
Guaranteed Delivery or one substantially equivalent hereto. This Notice of
Guaranteed Delivery may be delivered by hand or sent by facisimile transmission
(receipt confirmed by telephone and an original delivered by guaranteed
overnight courier) or mail to the Exchange Agent. See "The Exchange
Offer--Procedure for Tendering Old Notes" in the Prospectus.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
MARINE MIDLAND BANK
<TABLE>
<S> <C>
BY HAND: BY MAIL:
Marine Midland Bank (INSURED OR REGISTERED RECOMMENDED)
140 Broadway, Level A Marine Midland Bank
New York, New York 10005-1180 140 Broadway, Level A
Attention: Paulette Shaw New York, New York 10005-1180
Attention: Paulette Shaw
BY OVERNIGHT EXPRESS:
Marine Midland Bank
140 Broadway, Level A
New York, New York 10005-1180
Attention: Paulette Shaw
</TABLE>
BY FACSIMILE:
(212) 658-2292
(For Eligible Institutions Only)
BY TELEPHONE:
(212) 658-5931
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION VIA A FACSIMILE TRANSMISSION TO A NUMBER OTHER
THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
This Notice of Guaranteed Delivery is not to be used to guarantee
signatures. If a signature on a Letter of Transmittal is required to be
guaranteed by an Eligible Institution (as defined in the Prospectus), such
signature guarantee must appear in the applicable space provided on the Letter
of Transmittal for Guarantee of Signatures.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders the principal amount of Old Notes indicated
below, upon the terms and subject to the conditions contained in the Prospectus
dated , 1997 of KinderCare Learning Centers, Inc. (the "Prospectus"),
receipt of which is hereby acknowledged.
DESCRIPTION OF SECURITIES TENDERED
<TABLE>
<CAPTION>
NAME AND ADDRESS OF
REGISTERED HOLDER AS IT CERTIFICATE NUMBER(S) PRINCIPAL AMOUNT
APPEARS ON THE OLD NOTES OF OLD NOTES OF OLD NOTES
NAME OF TENDERING HOLDER (PLEASE PRINT) TENDERED TENDERED
<S> <C> <C> <C>
- --------------------- --------------------- --------------------- ---------------------
- --------------------- --------------------- --------------------- ---------------------
- --------------------- --------------------- --------------------- ---------------------
- --------------------- --------------------- --------------------- ---------------------
- --------------------- --------------------- --------------------- ---------------------
</TABLE>
THE FOLLOWING GUARANTEE MUST BE COMPLETED
GUARANTEE OF DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member of a recognized signature guarantee medallion
program within the meaning of Rule 17Ad-15 under the Securities Exchange Act of
1934, as amended, hereby guarantees to deliver to the Exchange Agent at one of
its addresses set forth above, the certificates representing the Old Notes (or a
confirmation of book-entry transfer of such Old Notes into the Exchange Agent's
account at the book-entry transfer facility), together with a properly completed
and duly executed Letter of Transmittal (or facsimile thereof), with any
required signature guarantees, and any other documents required by the Letter of
Transmittal within three business days after the Expiration Date (as defined in
the Prospectus and the Letter of Transmittal).
<TABLE>
<S> <C>
Name of Firm:
Address: (Authorized Signature)
Title:
(Zip Code) Name:
Area Code and Telephone No.: (Please type or print)
Date:
</TABLE>
NOTE: DO NOT SEND OLD NOTES WITH THIS NOTICE OF GUARANTEED DELIVERY. OLD
NOTES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL.
