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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 29, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-17098
KINDERCARE LEARNING CENTERS, INC.
(Exact name of registrant as specified in its charter)
Delaware 63-0941966
(State or other (I.R.S. Employer
jurisdiction of incorporation) Identification No.)
650 NE Holladay, Suite 1400
Portland, OR 97232
(Address of principal executive offices)
(503) 872-1300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing required for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's known information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant (assuming for purposes of this calculation, without conceding,
that all executive officers and directors are "affiliates") at July 20, 1998 was
$9,944,000.
The number of shares of Registrant's common stock, $.01 par value per
share, outstanding at July 20, 1998 was 9,474,197.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmation by the court. Yes [X] No [ ]
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PART 1
ITEM 1. BUSINESS
General
KinderCare Learning Centers, Inc. ("KinderCare" or the "Company"), founded
in 1969, is the largest for-profit provider of preschool educational and child
care services in the United States based upon number of centers operated,
children served and net revenues. The Company provides center-based preschool
educational and child care services five days a week throughout the year to
children between the ages of six weeks and twelve years. At July 24, 1998, the
Company operated a total of 1,144 child care centers, of which 726 were owned,
415 were leased and three were operated under management contracts. The centers
are located in 38 states in the United States and two centers are located in the
United Kingdom. For the twelve months ended July 24, 1998, average enrollment in
all centers was approximately 122,000 full-time and part-time children. The
Company's total center licensed capacity, at July 24, 1998, was approximately
142,000 full-time children.
KinderCare seeks to differentiate its educational and other child care
services through its emphasis on the importance of quality care and education
during a child's earliest years. KinderCare focuses on Whole Child Development
with professionally planned, developmentally appropriate educational programs
provided in a caring, nurturing and safe environment which focus on physical,
intellectual, emotional and social development. New programs are developed and
existing programs are frequently enhanced by the Company's education department,
under the leadership of a professional with a Ph.D. in early childhood
education.
The Company operates three types of child care and early education centers:
KinderCare community centers, KinderCare At Work(R) centers and Kid's Choice(TM)
centers. KinderCare community centers, which comprise approximately 94% of the
Company's centers, and KinderCare At Work(R) centers typically provide
educational and child care services to children between the ages of six weeks
and 12 years. Kid's Choice(TM) centers are for school age children and are
provided in separate facilities designed specifically for this age group. The
Company has limited the future development of its Kids Choice(TM) centers. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations."
The Company's centers are open throughout the year, generally Monday
through Friday from 6:30 a.m. to 6:00 p.m., although hours vary by location.
Children are usually enrolled on a weekly basis for either full-day or half-day
sessions and are accepted, where capacity permits, on an hourly basis. The
Company's tuition rates vary for children of different ages and by location.
On October 3, 1996, the Company and KCLC Acquisition Corp. ("KCLC") entered
into an Agreement and Plan of Merger (the "Merger Agreement"). KCLC was a wholly
owned subsidiary of KLC Associates, L.P. (the "Partnership"), a partnership
formed at the direction of Kohlberg Kravis Roberts & Co., a private investment
firm ("KKR"). Pursuant to the Merger Agreement, on February 13, 1997, KCLC was
merged with and into the Company (the "Merger"), with the Company continuing as
the surviving corporation. Upon completion of the Merger, the Partnership owned
7,828,947 shares, or 83.6%, of the 9,368,421 shares of common stock outstanding
after the Merger. At July 24, 1998, the Partnership owned 82.6% of the
outstanding common stock of the Company.
The principal executive offices of the Company are located at 650 N.E.
Holladay, Suite 1400, Portland, Oregon 97232 and its telephone number is (503)
872-1300.
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Forward Looking Statements
When used in this report, press releases and elsewhere by management or the
Company from time to time, the words "believes," "anticipates," "expects," and
similar expressions are intended to identify forward-looking statements, within
the meaning of federal securities law, concerning the Company's operations,
economic performance and financial condition, including, in particular, the
number of centers expected to be added in future years, planned transactions and
changes in operating systems and policies and their intended results, and
similar statements concerning anticipated future events and expectations that
are not historical facts.
The forward-looking statements are based on a number of assumptions and
estimates which are inherently subject to significant uncertainties and
contingencies, many of which are beyond the control of the Company, and reflect
future business decisions which are subject to change. A variety of factors
could cause actual results to differ materially from those anticipated in the
Company's forward-looking statements, including: the effects of economic
conditions; federal and state legislation regarding welfare reform,
transportation safety and minimum wage increases; competitive conditions in the
child care and early education industries; availability of a qualified labor
pool, the impact of labor organization efforts and the impact of government
regulations concerning labor and employment issues; various factors affecting
occupancy levels; availability of sites and/or licensing or zoning requirements
affecting new center development; the impact of Year 2000 compliance by the
Company or those entities with which the Company does business; and other risk
factors that are discussed in this report and, from time to time, in other
Securities and Exchange Commission reports and filings. One or more of the
foregoing factors may cause actual results to differ materially from those
expressed in or implied by the statements herein.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date thereof. The Company undertakes no
obligation to publicly release the results of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof, or thereof, as the case may be, or to reflect the
occurrence of unanticipated events.
Business Strategy
The Company's objective is to build on its position as the nation's leading
preschool educational and child care services provider by offering high quality
services in a caring, nurturing and safe environment. To meet this objective,
management's business strategy includes the following:
Accelerate New Center Additions. The Company plans to expand by further
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. The Company added 20 new community
centers during fiscal year 1998 and anticipates the addition of approximately 40
more centers during fiscal year 1999.
In addition to accelerating new center development, the Company may seek to
acquire existing child care centers where demographics, operating standards and
customer services complement the KinderCare business strategy. Management
believes that the Company's competitive position, economies of scale and
financial strength will allow it to capitalize on selective acquisition
opportunities in the fragmented child care industry.
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The Company also plans to accelerate growth in employer-sponsored child
care services through its KinderCare At Work(R) department. Employer-sponsored
care includes on-site/near-site child care for large to medium-sized employers
and other arrangements with employers to provide convenient, high quality child
care for their employees. The Company has appointed a new Senior Director for
KinderCare At Work(R) to better focus the Company's effort on this important
segment.
Pursue Selective Strategic Relationships or Acquisitions. The Company plans
to investigate and pursue selective strategic investments in, joint ventures
with or acquisitions of companies in the educational content or related fields.
KinderCare believes that there are numerous ventures related to the education
industry with innovative products and services that could enhance the services
currently provided by the Company. The Company plans to look at opportunities to
invest in or partner with businesses and to take advantage of these innovations
to better serve its customers.
Increase Occupancy. The Company plans to increase center occupancy by: (i)
enhancing marketing programs targeted to local markets prior to major enrollment
periods, (ii) enhancing recruiting, retention and training of staff, and (iii)
improving customer retention and loyalty. The Company's marketing activities are
currently designed to increase new enrollments primarily through local marketing
efforts, including direct mail solicitation, telephone directory yellow pages
and customer referrals. See "Marketing, Advertising and Promotions." These
methods communicate to parents the Company's commitment to quality preschool
education and child care by emphasizing KinderCare's nurturing environment,
educational programs, quality staff and excellent facilities and equipment.
Because a high quality teaching and administrative staff is a key factor in
maintaining and increasing center occupancy, the Company emphasizes recruiting
and retaining qualified center personnel. KinderCare's recruiting process seeks
to identify high quality candidates for its teaching, center director and area
manager positions. Additionally, the Company rewards center directors and area
managers through a bonus program which is primarily based on center operating
profit performance.
The Company also strives to increase occupancy by improving customer
retention and loyalty by strengthening its current parents' emotional commitment
to KinderCare. The Company initiates parent orientation meetings at centers
during the fall enrollment season, organizes parent involvement programs and
parent advisory forums and conducts ongoing market research on customer
satisfaction. The Company believes that retention and loyalty will be enhanced
by its renewed focus on quality and consistency in its centers.
Enhance Educational Programs and Quality of Services. The Company
continually evaluates and strives to improve the quality of its preschool
educational and child care services. KinderCare has invested significant
resources in formulating and updating proprietary educational programs,
maintaining safe and up-to-date facilities and hiring, training and retaining
high quality employees. The Company plans to continue to test and implement
innovative services and offerings, such as its award-winning, brain compatible,
continuous curriculum for infants and toddlers called Welcome To Learning(R);
its project-approach program for school-aged children called KC Imagination
Highway(R); and its newly introduced, Kindergarten at KinderCare: Journey to
Discovery curriculum which is also based on brain compatible learning and
learning by doing.
Increase Number of Accredited Centers. The Company is actively promoting
accreditation of its centers by the National Association for the Education of
Young Children, a national organization that has established comprehensive
criteria for providing quality early education and care and has implemented a
formal, though voluntary, child care center accreditation process. The Company
may also consider accreditation of centers by other appropriate accrediting
organizations. The Company
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believes that the accreditation process strengthens its centers by enhancing the
understanding by center staff of appropriate early childhood practices. Program
accreditation complements the quality improvement focus already in place at the
Company's centers.
At July 24, 1998, the Company had 68 accredited centers and an additional
400 centers had the materials required to complete the accreditation process. It
typically takes from eight months to three years for a center to become
accredited. To accelerate the accreditation of centers in fiscal year 1999, the
Company is hiring four regional accreditation coordinators to assist centers in
completing the necessary self-study, self-improvement and program description
components of the accreditation process. Through its focus on accreditation, the
Company expects to significantly increase its number of accredited centers.
Improve Operational Effectiveness. During fiscal year 1998, the Company
added 22 area managers in order to reduce the span of control of field
management and, thereby, provide more support and supervision to centers. The
Company also created regional human resource manager and controller positions to
provide more effective support for field operations. The Company plans to add
five more area managers during fiscal year 1999.
The Company plans to continue to improve its operating performance
primarily by increasing tuition rates and occupancy, while continuing to focus
on operating efficiencies. The Company also plans to continue to leverage its
economies of scale and purchasing power and to put in place purchasing programs
designed to reduce administrative costs.
Investment in Facilities. The Company plans to continue its investment in a
renovation program designed to bring all centers to a standard for physical
plant and equipment over the next four to five years. The Company is developing
a new interior design prototype that will enhance brand identity while improving
the efficiency of center renovations. During fiscal year 1998, the Company
invested in improving the delivery of required maintenance services to its
centers. In fiscal year 1999, eleven maintenance technicians will be added and a
computerized maintenance information system will be implemented to further
improve service.
Capitalize on KinderCare's Strong Brand Identity. KinderCare's strong brand
identity plays a significant role in the Company's continued growth of its
preschool education and child care business, as management believes that, among
other benefits, this factor contributes to higher enrollment for new child care
centers. Furthermore, management believes there are opportunities to leverage
the Company's brand identity. Possibilities include licensing of the KinderCare
name for educational materials, clothes, toys and other consumer products, as
well as potential brand extensions into other forms of educational or child care
services, such as the operation of primary and private schools.
Educational Programs
The Company's educational programs are routinely revised in an effort to
reflect the latest research on child growth and development. KinderCare's
educational programs recognize the recent emphasis by experts on brain growth
during the first years of a child's life, brain compatible learning and the
importance of adult-child interactions and environmental stimulation. With this
recognition, KinderCare has positioned itself as "Your Child's First
Classroom"(TM).
The Company's educational programs are also designed to provide
opportunities for the development of the whole child, as embraced in the
Company's slogan, "The Whole Child Is The Whole Idea"(R). The child-centered
environment consists of classrooms that have been designed, furnished and
equipped to meet the creative and developmental needs of young children.
Classrooms
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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 and learning 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 provide the center director with the
necessary autonomy to enhance the programs based on the resources and needs of
the local community. The Company emphasizes selection of staff who are
responsive to children and each teacher is given the opportunity, training and
resources to plan active and creative programs. Opportunity for professional
growth is available through company-wide training programs, the Certification of
Excellence Program (a professional development program established by the
Company) and tuition reimbursement for employment-related college course work or
course work in connection with obtaining a Child Development Associate
credential. The Company also maintains an education and training department in
its corporate headquarters. This department is led by a professional with a
Ph.D. in early childhood education and is staffed by curriculum specialists.
KinderCare's program for infants and toddlers, Welcome To Learning(R), is
an award winning, brain compatible, continuous curriculum designed for children
six weeks to 36 months. The curriculum encourages children to learn with age and
stage appropriate learning environments and activities. The Company has two
preschool programs suitable for multi-age groups (ages three to five years). My
Window On The World(R) is designed to encourage inquisitive children to discover
questions and formulate answers using the world of nature. KinderCare utilizes
Your Big Backyard, the National Wildlife Federation's magazine for preschoolers,
as a resource for this program. The Company's Once Upon A Time...Preschool
Program based on children's literature, both classic and modern, is the second
preschool program.
For five year olds, the Company's centers deliver the Kindergarten at
KinderCare: Journey to Discovery(R) program. In this thematic program, which
incorporates resources developed by the nationally recognized company,
Development Learning Materials, a division of Science Research Associates, Inc.,
children learn through play, hands-on exploration and activities and experiences
that are real-world and sensory in nature. The Company offers a kindergarten
program in approximately two-thirds of its centers using a program that meets
state requirements for instructional curriculum prior to first grade. The
Company's KC Imagination Highway(R) program is a project approach-based
curriculum, designed to meet the needs of school-aged children. The program
includes a number of stimulating and challenging activities and projects,
ranging from loud and active to quiet, thoughtful and social, and culminates
with an event or finale for parents.
Employer-Sponsored Child Care Services
KinderCare At Work(R) is the department which seeks to develop
relationships with other businesses and organizations to provide
on-site/near-site child care for employees. The Company believes that by
providing on-site/near-site facilities, employers can create a valuable
recruitment and retention tool, reduce absenteeism and tardiness and generate
greater loyalty among their workforce.
The Company believes that KinderCare At Work(R) can be a particularly
effective provider of employer-sponsored child care based on the quality of the
Company's curriculum and the strength of its brand identity. The Company intends
to aggressively pursue new relationships with major corporations. Each
opportunity will be individually evaluated to find the appropriate structure and
program to fit the unique needs of each employer. KinderCare At Work(R) can
assist organizations to develop needs assessments, financial analyses and
architectural design and development plans. Relationships with employers will
include management contracts, as well as owned or leased centers.
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At July 24, 1998, the Company operated 38 on-site/near-site
employer-sponsored child centers for corporations such as Delco Electronics
Corp., Fred Meyer, Inc., Lego Systems, Inc., The Walt Disney Company, Inc. and
several other businesses, universities and hospitals. Of the 38
on-site/near-site centers, 35 were Company owned or leased and three were
operated by the Company under management fee contracts. The management contracts
for KinderCare At Work(R) centers generally provide for a three-to-five-year
initial period with renewal options ranging from two to five years. The
Company's compensation under such agreements is generally based on a fixed fee
with annual escalation.
Marketing, Advertising and Promotions
Management believes that its national presence and reputation for high
quality preschool educational and child care services have created valuable and
strong name recognition and parent loyalty. In an industry where personal trust
and word-of-mouth referrals play a key role in attracting new customers, the
Company believes that its reputation and strong name recognition are important
competitive advantages.
The Company intends to continue its marketing efforts through various
promotional activities and customer retention and customer referral programs.
During fiscal year 1998, the Company awarded $10,000 college scholarships to 25
children in a promotional campaign designed to enhance winter enrollment. The
fall enrollment period in fiscal year 1999 will be supported by a direct mail,
radio and national magazine campaign, as well as local point of sale materials.
Currently, potential customers can call toll free or access the Company's
internet website (http://www.kindercare.com) to locate their nearest KinderCare
or obtain information.
When new centers are opened, they receive the benefit of pre-opening direct
mail and newspaper support, as well as local public relations support. Every new
center hosts an open house and provides for center tours where parents have
opportunities to talk with staff, visit classrooms and play with educational
toys and computers.
Other aspects of the marketing programs offered by each KinderCare center
include 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 tuition credits
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
tour inquiry tracking system is employed and center tours and "meet the
teachers" events are held periodically. New parent orientation meetings are held
in the fall at which center directors and staff explain educational and
development programs as well as policies and procedures. In addition, the
Company has established parent programs in centers to involve parents in center
activities and events. At these events, the Company is able to build a high
awareness of the center in the local community. In addition, each center has a
five to seven member parent forum which functions as a sounding board for new
ideas.
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 each year in the fall. However, each center
may adjust rates at any time based on competitive position, occupancy levels
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and consumer demand. For the fiscal years ended May 29, 1998 and May 30, 1997,
the Company's weighted average tuition rate on a weekly basis was $106.81 and
$101.93 respectively.
Human Resources
At July 24, 1998, the Company's center operations were organized into four
regions and 72 areas reporting to a Vice President of Operations. During fiscal
year 1998, the Company added 22 area manager positions and eight additional
regional support personnel to support field management's focus on quality. The
Company will continue to expand field management by adding five area managers
and four accreditation coordinators in fiscal year 1999.
Individual centers are managed by a director and an assistant director. All
center directors participate in periodic training programs or meetings and must
be familiar with applicable state and local licensing regulations. All center
teachers and other non-management staff are required to attend an initial
half-day training session prior to being assigned full duties and to complete a
six week on-the-job basic training program. Additionally, the Company has
developed and implemented extensive training programs to certify personnel as
teachers of various age groups in accordance with the Company's internal
standards and in connection with its age-specific educational programs.
Due to high employee turnover rates in the child care industry in general,
the Company focuses on and emphasizes recruiting and retaining qualified
personnel. The turnover of personnel experienced by the Company results in part
from the fact that a significant portion of the Company's employees earn
entry-level wages and are part-time employees. Management believes, however,
that the turnover of the Company's employees is in line with other companies in
the industry. For fiscal year 1999, the Company has enhanced the employee
benefits program to help attract and retain employees. Corporate human resources
monitors salaries and benefits for competitiveness. The Company plans to develop
an assessment program which will aid in identification of high quality area
manager and center director candidates.
The Company strives to ensure the care and safety of the children enrolled
in its centers. Extensive precautions are taken to ensure the safety and
well-being of all children; however, a small number of incidents of alleged
child abuse have been reported. It is the Company's policy to report any
allegation of abuse to the appropriate authorities, to investigate all
allegations of abuse, and, if appropriate, to suspend any accused employee
involved in the alleged incident pending the outcome of the investigation.
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.
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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 and probability of receiving the necessary approvals to
construct and operate a new child care center. The Company may identify several
new target areas from each broader geographical market study.
KinderCare makes specific site location decisions for new centers based
upon a detailed site analysis that includes the feasibility and demographic
studies referenced above, 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, aim
to open new centers with the highest achievable occupancy and profitability
levels.
Real Estate Asset Management
The Company routinely analyzes the profitability of existing centers
through a detailed evaluation that includes leased versus owned status, lease
options, operating history, premise expense, capital requirements, trade area
demographics, competitive analysis and site assessment. Through the center
evaluation process, the asset management staff formulates a plan for the
property reflecting the Company's strategic direction and marketing objectives.
In growth markets, the Company attempts to renegotiate long-term fixed-rate
leases for leased centers which will avoid rental increases tied to market value
or consumer indices. If a center is under performing or not attaining its
investment objectives, the Company seeks to develop alternative exit strategies
in order to minimize its financial liability. The Company makes an effort to
time center closures to lessen the negative impact on affected families. During
fiscal year 1998, the Company closed 17 leased centers.
The Company's asset management department also manages the disposition of
all surplus real estate owned or leased by the Company. These assets include
undeveloped sites, unoccupied buildings and closed centers. The Company disposed
of 12 surplus properties in fiscal year 1998 and is in the process of marketing
an additional 20 surplus properties.
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.
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The Company also seeks to improve its operating efficiencies by continually
reviewing the effectiveness and coverage of its support services and providing
management with more timely information through its nationwide communications
network and its automated information systems. The Company employs company-wide
e-mail and on-line inquiry for all managers.
KinderCare has also expanded its nationwide network to include the Internet
and company-wide Intranet applications. Through the use of Netscape Navigator(R)
software, the Company's intranet allows center directors to have immediate
access to corporate information and provides center directors with the ability
to distribute reports and questionnaires, update databases and revise center
listings on a daily basis. The Company believes that the sophistication and
scope of its communications network and information system makes its system one
of the more advanced in the child care industry and enables it to improve
further the efficiency and quality of child care and enhance the educational
experience of KinderCare students.
Many of the Company's computer systems will be upgraded, modified or
replaced over the next year and a half in order to render these systems
compliant with the "Year 2000." See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Employees
At July 24, 1998, the Company employed approximately 22,800 persons, of
whom approximately 300 were employed at corporate headquarters, 200 were
regional or area managers and support personnel and the remainder were employed
at the centers. Center employees include center directors; assistant directors;
regular full-time and part-time teachers; temporary and substitute teachers;
teachers' aides and non-teaching staff, including cooks and van drivers.
Approximately 8% of the 22,800 employees, including all management and
supervisory personnel are salaried, all other employees are paid on an hourly
basis. The Company does not have an agreement with any labor union and believes
that its relations with its employees are good.
Competition
The U.S. child care and preschool education industry is highly fragmented
and competitive. The Company's competition consists principally of local nursery
schools and child care centers, some of which are nonprofit (including
church-affiliated centers), providers of services that operate out of their
homes and other for-profit companies which may operate a number of centers. Many
church-affiliated and other local nonprofit nursery schools and child care
centers have no or lower rental costs than the Company and may receive donations
or other funding to cover operating expenses. Consequently, tuition rates at
these facilities are commonly less than the Company's rates. Additionally, fees
for home-based care are normally lower than fees for center-based care because
providers of home care are not always required to satisfy the same health,
safety or operational 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.
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Seasonality
New enrollments are generally highest in September and January. Enrollment
generally decreases 5% to 10% during holiday periods and summer months. Average
enrollment of full-time and part-time children in all centers for the most
recent twelve months ended July 24, 1998 was 122,000.
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 directors' and officers'
liability. The policies provide for a variety of coverages, are subject to
various limits, and include substantial deductibles or self-insured retention.
Special insurance is sometimes obtained with respect to specific hazards, when
and if deemed appropriate and available at reasonable cost. At July 24, 1998,
the Company had approximately $5.8 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.
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. However, there can be no
assurance that a licensing authority will not determine a particular center to
be in violation of applicable regulations and take action against that center.
There are certain tax incentives for child care programs. Section 21 of the
Internal Revenue Code of 1986, as amended (the "Code"), provides a federal
income tax credit ranging from 20% to 30% of certain child care expenses for
"qualifying individuals" (as defined therein). The credit is limited to $2,400
for taxpayers with one child, or $4,800 for taxpayers with two or more children.
The fees paid to the Company for child care services by eligible taxpayers
qualify for the tax credit, subject to the limitations of Section 21 of the
Code.
During fiscal year 1998, approximately 14% of the Company's net operating
revenues were generated from federal and state child care assistance programs,
primarily the Child Care and Development Block Grant and At-Risk Programs. These
programs are designed to assist low-income families with child care expenses and
are administered through various state agencies. Although additional funding for
child care may 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
11
<PAGE>
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.
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: Helping America's Busiest Families(R),
KC Imagination Highway(R), Kid's Choice(TM), KinderCare At Work(R), Let Me Do
It(R), Let's Move, Let's Play(R), Look At Me(R), My Window On The World(R),
Playscapes At KinderCare(R), Small Talk(R), The Whole Child Is The Whole
Idea(R), Welcome To Learning(R) and Your Child's First Classroom(TM). A
federally registered trademark in the United States is effective for ten years
subject only to a required filing and the continued use of the mark by the
registrant. A federally registered trademark provides the presumption of
ownership of the mark by the registrant in connection with its goods or services
and constitutes constructive notice throughout the United States of such
ownership. In addition, the Company has registered various trademarks in certain
other countries, including Canada, Germany, Japan, the Peoples Republic of China
and the United Kingdom. The Company believes that its name and logo are
important to its operations and intends to continue to renew the trademark
registrations thereof.
ITEM 2. PROPERTIES
The Company's corporate office is located in Portland, Oregon. The Company
has entered into a 10-year lease of approximately 73,000 square feet of office
space. The lease term commenced on the date of occupancy of November 17, 1997.
The lease calls for annual rental payments of $22.50 per square foot for the
first five years of the lease term and $26.50 for the final five years, with one
five-year extension option at market rent.
At July 24, 1998, the Company owned 726 of its operating child care
centers, leased or subleased 415 operating child care centers and operated three
child care centers under management contracts. The Company owns or leases
certain other child care centers which have not yet been opened or which are
being held for disposition. In addition, the Company owns certain real property
held for future development of centers.
A typical KinderCare community center is a one-story, air-conditioned
building located on approximately one acre of land (larger capacity centers are
situated on parcels ranging from one to four acres of land) constructed in
accordance with model designs generally developed by the Company. The community
centers contain open classroom and play areas and complete kitchen and bathroom
facilities and can accommodate from 50 to 280 children, with most centers able
to accommodate 90 to 135 children. Over the past few years, the Company has
opened community centers that are larger in size with a capacity ranging from
165 to 280 children. New prototype community centers accommodate approximately
180 children, depending on site and location. Each center is equipped with a
variety of audio and visual aids, educational supplies, games, puzzles, toys and
outdoor play equipment. Centers also have vehicles used for field trips and
transporting children enrolled in the Company's after-school program. All
KinderCare community centers are equipped with computers for children's
educational programs.
KinderCare At Work(R) provides child care programs individualized for each
corporate sponsor. Facilities are on or near the corporate sponsor's site and
range in capacity from 80 to 220 children. Kid's Choice(TM) centers, which
provide before and after school care for school-age children,
12
<PAGE>
contain homework, computer and game rooms and are able to accommodate from 75 to
180 children. Each provides school-age children with areas to perform activities
of interest to them.
The KinderCare community, KinderCare At Work(R) and Kid's Choice(TM)
centers operated by the Company at July 24, 1998 were located as follows:
<TABLE>
<CAPTION>
Kids
Community KinderCare At Choice(TM)
Location Centers Work(R) Centers Centers Total
--------------------- --------- --------------- ---------- --------
<S> <C> <C> <C> <C>
Alabama 11 -- -- 11
Arizona 16 2 -- 18
Arkansas 3 -- -- 3
California 94 -- 2 96
Colorado 25 -- 1 26
Connecticut 11 2 -- 13
Delaware 5 -- -- 5
Florida 67 6 2 75
Georgia 37 -- 2 39
Illinois 75 2 8 85
Indiana 26 1 1 28
Iowa 7 2 1 10
Kansas 18 -- -- 18
Kentucky 13 1 -- 14
Louisiana 13 2 -- 15
Maryland 23 -- 1 24
Massachusetts 17 -- -- 17
Michigan 32 2 1 35
Minnesota 35 -- 1 36
Mississippi 4 -- -- 4
Missouri 49 -- -- 49
Nebraska 10 1 -- 11
Nevada 10 -- -- 10
New Jersey 33 4 -- 37
New Mexico 7 -- -- 7
New York 2 1 -- 3
North Carolina 33 -- 2 35
Ohio 58 3 6 67
Oklahoma 10 -- -- 10
Oregon 13 3 -- 16
Pennsylvania 40 -- -- 40
Rhode Island -- 1 -- 1
Tennessee 27 1 -- 28
Texas 118 1 4 123
Utah 6 1 -- 7
Virginia 50 -- 2 52
Washington 47 1 2 50
Wisconsin 23 1 -- 24
United Kingdom 2 -- -- 2
-------- -------- -------- --------
Total 1,070 38 36 1,144
======== ======== ======== ========
</TABLE>
The Company utilizes a centralized maintenance program to ensure consistent
high-quality maintenance of its facilities located across the country. The
facilities department's maintenance technicians, each with a van stocked with
spare parts, handle routine and preventative maintenance
13
<PAGE>
functions through a central telephone dispatch and systematic checklist system.
During fiscal year 1999, a computerized maintenance system will be implemented
which connects all centers, maintenance technicians and central dispatch. Each
technician is responsible for the support of approximately 17 centers. During
fiscal year 1999, the Company plans to hire eleven additional maintenance
technicians, thereby reducing the number of centers per technician to
approximately 15. Specific geographic areas are supervised by two regional
directors and twelve facility managers, each of whom manages between four and
seven technicians.
The Company has undertaken a renovation program to ensure that all of its
centers meet specified standards to be established by the Company. The Company
anticipates that it will take four to five years to complete this renovation.
The Company believes that its properties are in good condition and are adequate
to meet its current and reasonably anticipated future needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is presently, and is from time to time, subject to claims and
suits arising in the ordinary course of business, including suits alleging child
abuse. In certain of such actions, plaintiffs request damages that are not
covered by insurance. The Company believes that none of the claims or suits of
which it is aware will materially affect its financial position, operating
results or cash flows, although absolute assurance cannot be given with respect
to the ultimate outcome of any such actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCK HOLDER MATTERS
Price Range of Common Stock
Since February 13, 1997, the date of the Merger, the Company's common stock
has been traded in the over-the-counter market, in the "pink sheets" published
by the National Quotation Bureau, and has been listed on the OTC Bulletin Board
under the symbol KDCR. The market for the Company's common stock must be
characterized as a limited market due to the relatively low trading volume and
the small number of brokerage firms acting as market makers. The following table
sets forth, for the periods indicated, certain information with respect to the
high and low bid quotations for the common stock as reported by a market maker
for the Company's common stock. The quotations represent inter-dealer quotations
without retail markups, markdowns or commissions and may not represent actual
transactions. No assurances can be given that the prices for the Company's
common stock will be maintained at their present levels.
<TABLE>
<CAPTION>
Common Stock
---------------------
High Bid Low Bid
-------- --------
<S> <C> <C>
Fiscal year ended May 29, 1998
First quarter $ 19 3/8 $ 18
Second quarter 19 1/2 18
Third quarter 19 5/8 18 1/8
Fourth quarter 22 18 3/4
Fiscal year ended May 30, 1997
Third quarter (February 13, 1997 to March 7, 1997) $ 19 $ 19
Fourth quarter N/A* N/A*
* The Company was unable to identify any trades in the common stock in the
over-the counter market during this period.
</TABLE>
Until February 13, 1997, the common stock traded on the NASDAQ National
Market System under the symbol KCLC. Following the Merger, the common stock was
delisted from the NASDAQ National Market System. The following table sets forth,
for the fiscal periods indicated, the high and low sales prices, rounded to the
nearest eighth, reported by the NASDAQ National Market System with respect to
sales of the common stock prior to February 13, 1997:
<TABLE>
<CAPTION>
Common Stock
--------------------------
High Low
----------- ----------
<S> <C> <C>
Fiscal year ended May 30, 1997
First quarter $ 15 11/16 $ 13 7/8
Second quarter 20 15 1/4
Third quarter (through February 13, 1997) 20 18 1/8
</TABLE>
15
<PAGE>
Approximate Number of Security Holders
At July 24, 1998, there were 89 holders of record of the Company's common
stock.
Dividend Policy
During the past three fiscal years, the Company has not declared or paid
any cash dividends or distributions on its capital stock. The Company currently
intends to retain earnings of the Company for operations and does not anticipate
paying cash dividends on the common stock in the foreseeable future. Further,
the 9-1/2% senior subordinated notes due 2009 and the credit facilities entered
into by the Company in connection with the Merger restrict any payment of
dividends.
16
<PAGE>
ITEM 6. SELECTED HISTORICAL CONSOLIDATED
FINANCIAL AND OTHER DATA
The following table sets forth selected historical consolidated financial
and other data for the Company. This information should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto and the
information set forth in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Selected Historical Consolidated Financial and Other Data
KinderCare Learning Centers, Inc. and Subsidiaries
(Dollars in thousands, except per share amounts and child care center data)
<TABLE>
<CAPTION>
Fiscal Year Ended (a)
-----------------------------------------------------------------------------
June 3, 1994
May 29, 1998 May 30, 1997 May 31, 1996 June 2, 1995 (53 weeks)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues, net $ 597,070 $ 563,135 $ 541,264 $ 506,505 $ 488,726
Operating expenses, exclusive of
recapitalization expenses,
restructuring and other charges
(income), net 546,376 515,481 488,071 456,607 441,560
Recapitalization expenses (b) -- 17,277 -- -- --
Restructuring and other charges
(income), net (c) 5,201 10,275 1,484 (888) --
-----------------------------------------------------------------------------
Total operating expenses 551,577 543,033 489,555 455,719 441,560
-----------------------------------------------------------------------------
Operating income 45,493 20,102 51,709 50,786 47,166
Investment income, net 612 232 250 2,635 3,176
Interest expense (40,677) (22,394) (16,727) (17,318) (17,675)
-----------------------------------------------------------------------------
Income (loss) before income taxes
and extraordinary items 5,428 (2,060) 35,232 36,103 32,667
Income tax expense 2,002 3,375 13,549 14,037 12,837
-----------------------------------------------------------------------------
Income (loss) before
extraordinary items 3,426 (5,435) 21,683 22,066 19,830
Extraordinary items, net of income
taxes (d) -- (7,532) -- -- (2,397)
-----------------------------------------------------------------------------
Net income (loss) $ 3,426 $ (12,967) $ 21,683 $ 22,066 $ 17,433
=============================================================================
Earnings (loss) per share:
Basic - Income (loss) before
extraordinary items $ 0.36 $ (0.33) $ 1.10 $ 1.10 $ 0.99
Extraordinary items, net -- (0.46) -- -- (0.12)
-----------------------------------------------------------------------------
Net income (loss) $ 0.36 $ (0.79) $ 1.10 $ 1.10 $ 0.87
=============================================================================
Assuming Dilution - Income (loss)
before extraordinary items $ 0.36 $ (0.33) $ 1.07 $ 1.07 $ 0.97
Extraordinary items, net -- (0.46) -- -- (0.12)
-----------------------------------------------------------------------------
Net income (loss) $ 0.36 $ (0.79) $ 1.07 $ 1.07 $ 0.85
=============================================================================
Other Financial Data :
EBITDA (e) $ 88,658 $ 47,055 $ 85,931 $ 81,492 $ 73,093
Adjusted EBITDA (e) 93,247 81,907 (f) 87,165 (f) 77,969 72,314
Adjusted EBITDA margin 15.6% 14.5% 16.1% 15.4% 14.8%
Cash flow provided by operations $ 57,005 $ 50,237 $ 75,897 $ 72,963 $ 74,351
Capital expenditures 86,187 43,748 67,304 74,376 35,710
Child Care Center Data :
Number of centers at end of period 1,147 1,144 1,148 1,137 1,132
Center licensed capacity at end of
period 143,000 143,000 141,000 N/C (g) N/C (g)
Occupancy (h) 70.6% 70.0% 70.3% N/C (g) N/C (g)
Average tuition rate (i) $ 106.81 $ 101.93 $ 99.24 N/C (g) N/C (g)
Balance Sheet Data (at end of period):
Total assets $ 591,539 $ 569,878 $ 527,476 $ 503,274 $ 458,920
Total debt 403,097 394,889 146,617 160,394 178,692
Stockholders' equity 31,900 27,707 (j) 262,435 241,216 203,882
See accompanying notes to selected historical consolidated financial and other data.
</TABLE>
17
<PAGE>
Notes to Selected Historical Consolidated
Financial and Other Data
(a) The Company's fiscal year ends on the Friday closest to May 31.
(b) In fiscal year 1997, the Company incurred non-recurring recapitalization
costs in order to fund the transactions contemplated by the Merger.
(c) Restructuring and other charges (income), net, include (i) restructuring
charges of $5.7 million, $3.4 million and $6.5 million in fiscal years
1998, 1997 and 1996, respectively, (ii) losses on asset impairments of $6.9
million and $6.3 million in fiscal years 1997 and 1996, respectively, (iii)
gains on litigation settlements of $(0.5) million, $(1.5) million, $(11.3)
million and $(0.9) million in fiscal years 1998, 1997, 1996 and 1995,
respectively, and (iv) charges of $1.5 million to write-off certain assets
in fiscal year 1997.
(d) In fiscal years 1994 and 1997, the Company retired debt prior to maturity,
the losses on which were recorded as extraordinary items.
(e) "EBITDA" represents earnings before interest expense, income taxes,
depreciation and amortization. "Adjusted EBITDA" represents EBITDA
exclusive of recapitalization expenses, restructuring and other charges
(income), investment income and extraordinary items. A reconciliation from
EBITDA to Adjusted EBITDA follows (dollars in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------------------------------------
June 3, 1994
May 29, 1998 May 30, 1997 May 31, 1996 June 2, 1995 (53 weeks)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
EBITDA $ 88,658 $ 47,055 $ 85,931 $ 81,492 $ 73,093
Adjustments:
Recapitalization expenses -- 17,277 -- -- --
Restructuring and other
(income), net 5,201 10,275 1,484 (888) --
Investment income, net (612) (232) (250) (2,635) (3,176)
Extraordinary items, net -- 7,532 -- -- 2,397
------------ ------------ ------------ ------------ ------------
$ 93,247 $ 81,907 (f) $ 87,165 (f) $ 77,969 $ 72,314
============ ============ ============ ============ ============
</TABLE>
Neither EBITDA nor Adjusted EBITDA is intended to represent a measure of
cash flow or operating results in accordance with generally accepted
accounting principles. Rather, certain investors and creditors may find
EBITDA and, more specifically, Adjusted EBITDA a useful tool for measuring
the Company's ability to service its debt. However, EBITDA and Adjusted
EBITDA should not be used as tools for comparison as the computations may
not be similar for all companies.
(f) See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(g) Prior to June 3, 1995, the Company used average occupancy and the three
year old tuition rate to measure performance. Average occupancy was defined
as actual operating revenues for the respective period divided by the
building capacity of each of the Company's centers multiplied by such
center's basic tuition rate for full-time, three-year-old students for the
respective period. The three-year-old tuition rate represents the weekly
tuition rate paid by a parent for a three-year-old child to attend a
KinderCare center five full days during one week. The three-year-old
tuition rate represented an approximate average of all tuition rates at
each center. The child care center data utilized in prior fiscal years to
measure performance is as follows:
18
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------
June 3, 1994
May 31, 1996 June 2, 1995 (53 weeks)
------------ ------------ ------------
<S> <C> <C> <C>
Center building capacity 141,000 137,000 136,000
at end of period
Average occupancy 76% 76% 77%
Average three-year-old $ 100 $ 96 $ 90
tuition rate
</TABLE>
At June 3, 1995, the Company changed its method of measuring performance to
the utilization of occupancy and average tuition rate (see notes (h) and
(i) below). Prior to fiscal 1996, the company did not track licensed
capacity or full-time equivalent attendance. Therefore, occupancy and
average tuition rate can not be calculated ("n/c") for fiscal 1995 and
1994.
(h) Occupancy, a measure of the utilization of center capacity, is defined by
the Company as the full-time equivalent ("FTE") attendance at all of the
Company's centers divided by the sum of the licensed capacity of all of the
Company's centers. FTE attendance is not a strict head count. Rather, the
methodology used is to determine an approximate number of full-time
children based on weighted averages. For example, an enrolled full-time
child equates to one FTE, while a part-time child enrolled for a half-day
would equate to 0.5 FTE. The FTE measurement of center capacity utilization
does not necessarily reflect the actual number of full- and part-time
children enrolled.
(i) Average tuition rate is defined by the Company as actual net revenues,
exclusive of fees (primarily reservation and registration) and non-tuition
income, divided by FTE attendance for the respective period. The average
tuition rate represents the approximate weighted average tuition rate at
each center paid by a parent for a child to attend a KinderCare center five
full days during one week. Center occupancy mix, however, can significantly
affect these averages with respect to any specific child care center.
(j) In connection with the Merger and related transactions, the Company paid
$382.4 million to redeem common stock, warrants and options. KKR, through
KCLC, contributed $148.8 million in common equity for approximately 83.6%
of the 9,368,421 shares outstanding immediately after the Merger and
existing stockholders retained approximately 16.4% of the shares
outstanding immediately after the Merger.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
document. The Company's fiscal year ends on the Friday closest to May 31. The
information presented herein refers to the years ended May 29, 1998 ("fiscal
1998"), May 30, 1997 ("fiscal 1997") and May 31, 1996 ("fiscal 1996"), each of
which was a 52-week fiscal year.
Occupancy, a measure of the utilization of center capacity, is defined by
the Company as the full-time equivalent ("FTE") attendance at all of the
Company's centers divided by the sum of the licensed capacity of all of the
Company's centers. FTE attendance is not a strict head count. Rather, the
methodology used is to determine an approximate number of full-time children
based on weighted averages. For example, an enrolled full-time child equates to
one FTE, while a part-time child enrolled for a half-day would equate to 0.5
FTE. The FTE measurement of center capacity utilization does not necessarily
reflect the actual number of full- and part-time children enrolled.
Average tuition rate is defined by the Company as actual net revenues,
exclusive of fees (primarily reservation and registration) and non-tuition
income, divided by FTE attendance for the respective period. The average tuition
rate represents the approximate weighted average tuition rate at each center
paid by a parent for a child to attend a KinderCare center five full days during
one week. Center occupancy mix, however, can significantly affect these averages
with respect to any specific child care center.
Fiscal 1998 compared to Fiscal 1997
The following table shows the comparative operating results of the Company
(dollars in thousands):
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Change
Ended Percent Ended Percent Amount
May 29, of May 30, of Increase/
1998 Revenues 1997 Revenues (Decrease)
----------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Revenues, net $ 597,070 100.0% $ 563,135 100.0% $ 33,935
---------- ------- ---------- ----- ---------
Expenses:
Salaries, wages and benefits 327,161 54.8 300,580 53.4 26,581
Depreciation 42,553 7.1 34,253 6.1 8,300
Rent 27,985 4.7 28,140 4.9 (155)
Other 148,677 24.9 152,508 27.1 (3,831)
Recapitalization expenses --- --- 17,277 3.1 (17,277)
Restructuring and other
charges (income), net 5,201 0.9 10,275 1.8 (5,074)
---------- ------- ---------- ----- ---------
Total operating expenses 551,577 92.4 543,033 96.4 8,544
---------- ------- ---------- ----- ---------
Operating income $ 45,493 7.6% $ 20,102 3.6% $ 25,391
========== ======= ========== ===== =========
</TABLE>
Revenues, net - Net revenues increased $33.9 million, or 6.0%, to $597.1
million in fiscal 1998 from fiscal 1997. The increase in net revenues is
primarily attributable to an approximate 4.4% weighted average tuition increase
implemented in the second quarter of fiscal 1998. The average tuition rate and
occupancy, respectively, increased to $106.81 and 70.6% for fiscal 1998 from
$101.93 and 70.0% for fiscal 1997. Centers opened during fiscal 1998 and 1997
contributed
20
<PAGE>
incremental net revenues of $12.6 million in fiscal 1998. The positive effect of
those factors on net revenues was offset in part by center closings.
During fiscal 1998, the Company opened 20 community centers and closed 17
centers. During fiscal 1997, the Company opened 16 centers: 15 community centers
and one KinderCare at Work(R) center, and closed or sold 20 centers. Total
licensed capacity was approximately 143,000 at the end of both fiscal 1998 and
1997.
Salaries, wages and benefits - Salaries, wages and benefits (which include
incentives) expense increased $26.6 million, or 8.8%, to $327.2 million in
fiscal 1998 from fiscal 1997. The expense directly associated with the centers
was $304.5 million in fiscal 1998, an increase of $19.4 million from fiscal
1997. The center level increase is attributable to increased staff wage rates,
employee health costs and bonus expense. The expense related to field management
and corporate administration was $22.7 million in fiscal 1998, an increase of
$7.2 million from fiscal 1997. The increase is attributable to the addition of
certain field management positions, higher salaries as a result of the
relocation of the corporate office to Portland, Oregon and increased bonus
expense.
At the center level, salaries, wages and benefits expense, as a percentage
of net revenues, increased only slightly to 51.0% for fiscal 1998 from 50.6% for
fiscal 1997 despite increased wage rates and bonus expense due to the control of
labor hours by field management. See "Inflation and Wage Increases." Total
salaries, wages and benefits expense, as a percentage of net revenues, increased
to 54.8% for fiscal 1998 from 53.4% for fiscal 1997.
Depreciation - Depreciation expense increased $8.3 million to $42.6 million
in fiscal 1998 from fiscal 1997 due primarily to additional depreciation expense
of $9.4 million related to a change in the estimated useful life of center
auxiliary equipment. Auxiliary equipment is comprised of educational supplies,
such as toys, books, video games and playground equipment, furniture, cots and
kitchen and other equipment used in the operation of a center. (See Note 1 to
the Company's Consolidated Financial Statements). Exclusive of the impact from
the change in estimate, depreciation expense decreased slightly due to the
effect of certain assets reaching the end of their estimated depreciable lives.
Rent - Rent expense remained relatively flat at $28.0 million for fiscal
1998 and $28.1 million for fiscal 1997. During fiscal 1998, 17 leased centers
were closed, while three leased centers were opened. The rental rates
experienced on leases entered into currently are higher than those experienced
in previous periods. Administrative rent expense increased primarily as a result
of the Company's occupancy of its new headquarters in Portland, Oregon during
the second quarter of fiscal 1998. See "Item 2. Properties."
Other operating expenses - Other operating expenses decreased $3.8 million,
or 2.5%, to $148.7 million in fiscal 1998 from fiscal 1997. Other operating
expenses include costs directly associated with the centers, such as food,
educational materials, janitorial and maintenance costs, utilities and
transportation, and expenses related to field management and corporate
administration. The decrease is primarily due to a reduction in expenses related
to self-insurance, which was offset by additional marketing expense to fund a
targeted marketing program during the fall of fiscal 1998 and increased bad debt
expense. As a percentage of net revenues, other operating expenses decreased to
24.9% for fiscal 1998 from 27.1% for fiscal 1997. The improvement in other
operating expenses, as a percentage of net revenues, is due to effective cost
control by management.
Recapitalization expenses - During fiscal 1997 and in connection with the
merger (the "Merger") of the Company and KCLC Acquisition Corp. ("KCLC"), a
wholly owned subsidiary of a partnership formed at the direction of Kohlberg
Kravis Roberts & Co., a private investment firm
21
<PAGE>
("KKR"), the Company repaid the then outstanding $91.6 million balance on the
Company's previous $150.0 million credit facility and paid $382.4 million to
redeem common stock, warrants and options. In order to fund the transactions
contemplated by the Merger (the "Recapitalization"), the Company issued $300.0
million principal amount 9 1/2 % senior subordinated notes ("9 1/2% Senior
Subordinated Notes"), entered into a $300.0 million revolving credit facility
("Revolving Credit Facility"), borrowed $50.0 million against a term loan
facility and issued 7,828,947 shares of common stock to KKR affiliates. During
fiscal 1997, non-recurring recapitalization costs of approximately $17.3 million
were incurred and expensed and financing costs of approximately $27.2 million
were deferred and are being amortized over the lives of the new debt facilities
(see Notes 2 and 8 to the Company's Consolidated Financial Statements).
Restructuring and other charges (income), net - During fiscal 1997, the
Company decided to relocate its corporate offices from Montgomery, Alabama to
Portland, Oregon in fiscal 1998. In connection with the relocation, the Company
recognized $5.7 million in restructuring costs, primarily expenses incurred in
the retention, recruitment and relocation of employees and travel costs related
to the office relocation, in fiscal 1998. During fiscal 1997, restructuring
costs, primarily severance related, of $3.4 million and a $5.0 million charge to
write down the Company's then headquarters facility in Montgomery, Alabama to
net realizable value were recognized.
During fiscal 1997, the Company recorded impairment losses of $1.9 million,
comprised of $1.3 million with respect to certain long-lived assets and $0.6
million related to Kids Choice(TM) anticipated lease termination costs.
Additionally, charges of approximately $1.5 million were incurred to write-off
certain marketing materials and deferred pre-opening costs on new centers.
During fiscal 1998, the Company, as a member of the Presidential Life
Global Class Action, received a $0.5 million payment, net of attorney's fees, as
settlement of the Company's claim in the United States District Court in New
York against Michael R. Milken, et al. During fiscal 1997, a $1.5 million
interest payment was received from Enstar Group Inc. ("Enstar"), the Company's
former parent, in connection with a settlement of the Company's claim against
Enstar in the U.S. Bankruptcy court in Montgomery, Alabama.
Operating income - Operating income increased $25.4 million to $45.5
million in fiscal 1998 from fiscal 1997. Operating income before
recapitalization expenses, restructuring and other charges (income), net,
increased $3.0 million to $50.7 million in fiscal 1998 from fiscal 1997. The
increase is primarily due to the higher average tuition rate and occupancy
growth combined with strong cost controls, which was offset partially by
additional depreciation expense of $9.4 million due to a change in estimate, as
discussed above.
EBITDA, defined as earnings before interest expense, income taxes,
depreciation and amortization, for fiscal 1998 of $88.7 million was $41.6
million above fiscal 1997. As a percentage of net revenues, EBITDA for fiscal
1998 was 14.8% compared to 8.4% for fiscal 1997. Adjusted EBITDA, defined as
EBITDA exclusive of recapitalization expenses, restructuring and other charges
(income), investment income and extraordinary items was $93.2 million in fiscal
1998, an increase of $11.3 million from fiscal 1997. As a percentage of net
revenues, Adjusted EBITDA was 15.6% for fiscal 1998 and 14.5% for fiscal 1997.
Neither EBITDA nor Adjusted EBITDA is intended to indicate that cash flow is
sufficient to fund all of the Company's cash needs or represent cash flow from
operations as defined by generally accepted accounting principles.
Interest expense - Interest expense increased to $40.7 million in fiscal
1998 from $22.4 million in fiscal 1997. This increase is substantially
attributable to the $350.0 million of long-term debt which was incurred in the
third quarter of fiscal 1997 to fund the Merger and repay $91.6 million on the
Company's then existing line of credit. The Company's weighted average interest
rate on its
22
<PAGE>
long-term debt, including amortization of deferred financing costs, was 10.1%
for fiscal 1998 versus 8.5% for fiscal 1997.
Income tax expense - Income tax expense during fiscal 1998 and 1997 of $2.0
and $3.4 million, respectively, was computed by applying estimated effective
income tax rates to income before income taxes. Income tax expense varies from
the statutory federal income tax rate due to state income taxes and, during
fiscal 1997, non-deductible recapitalization expenses, offset by tax credits.
Extraordinary items - During fiscal 1997, the Company purchased $99.4
million aggregate principal amount of its 10 3/8% senior subordinated notes for
an aggregate price of $108.3 million. The transactions included the write-off of
deferred financing costs of $1.7 million and resulted in an extraordinary loss
of $6.5 million, net of income taxes of $4.1 million. In connection with the
Merger and retirement of existing debt, an extraordinary loss of $1.0 million,
net of income taxes of $0.7 million, was recognized for the write-off of
deferred financing costs related to the Company's previous credit facility.
23
<PAGE>
Fiscal 1997 compared to Fiscal 1996
The following table shows the comparative operating results of the Company
(dollars in thousands):
<TABLE>
<CAPTION>
Fiscal Fiscal Change
Year Ended Percent Year Ended Percent Amount
May 30, of May 31, of Increase/
1997 Revenues 1996 Revenues (Decrease)
---------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Revenues, net $ 563,135 100.0% $ 541,264 100.0% $ 21,871
---------- --------- ---------- ---------- -----------
Operating expenses:
Salaries, wages and benefits 300,580 53.4 284,115 52.5 16,465
Depreciation 34,253 6.1 33,972 6.3 281
Rent 28,140 4.9 26,515 4.9 1,625
Other 152,508 27.1 143,469 26.5 9,039
Recapitalization expenses 17,277 3.1 -- -- 17,277
Restructuring and other charges
(income), net 10,275 1.8 1,484 0.2 8,791
---------- --------- ---------- ---------- -----------
Total operating expenses 543,033 96.4 489,555 90.4 53,478
---------- --------- ---------- ---------- -----------
Operating income $ 20,102 3.6% $ 51,709 9.6% $ (31,607)
========== ========= ========== ========== ===========
</TABLE>
Revenues, net - Net revenues increased $21.9 million, or 4.0%, to $563.1
million in fiscal 1997 from fiscal 1996. The increase in net operating revenues
is primarily attributable to an approximate 4.7% weighted average tuition
increase implemented in the fall of 1996 and to new center openings and
acquisitions. The average tuition rate increased to $101.93 in fiscal 1997 from
$99.24 in fiscal 1996. The positive effect of those factors on net revenues was
offset in part by a decline in total occupancy and center closings.
Total occupancy decreased slightly to 70.0% in fiscal 1997 from 70.3% in
fiscal 1996. The Company believes the decline in occupancy was caused by a
variety of factors including, in particular, the following recently implemented
initiatives: (a) a reduced, lower cost marketing program, (b) an expanded
employee child care discount program that may have precluded the enrollment of
tuition paying children and (c) changes in field management which provided less
direct center supervision. The Company evaluated such initiatives and made
certain revisions including funding a targeted marketing program for early
fiscal 1998, limiting the employee child care discount effective July 1997 and
adding certain area manager positions and additional regional field support to
increase center supervision.
During fiscal 1997, the Company opened 16 new centers: 15 KinderCare
community centers and one KinderCare At Work(R) center; and closed or sold 20
centers. During fiscal 1996, the Company opened 37 new centers: 22 KinderCare
community centers, six KinderCare At Work(R) centers and nine Kid's Choice(TM)
centers (including the conversion of one community center to a Kid's Choice(TM)
center); and closed or sold 26 centers. Total licensed capacity increased to
approximately 143,000 at the end of fiscal 1997 from approximately 141,000 at
the end of fiscal 1996.
Salaries, wages and benefits - Salaries, wages and benefits (which include
incentives) expense increased $16.5 million, or 5.8%, to $300.6 million in
fiscal 1997 from fiscal 1996. The expense directly associated with the centers
was $285.1 million in fiscal 1997, an increase of $19.7 million from fiscal
1996. The center level increase is attributable to increased staff wage rates
and hours and employee health insurance costs, offset in part by reduced bonus
expense. The expense related to field management and corporate administration
decreased $3.2 million from fiscal 1996. The decrease is attributable to the
reduction of field management staff and reduced bonus expense.
24
<PAGE>
At the center level, salaries, wages and benefits expense, as a percentage
of net revenues, increased to 50.6% for fiscal 1997 from 49.0% for fiscal 1996
due to higher labor hours. Total salaries, wages and benefits expense, as a
percentage of net revenues, increased to 53.4% for fiscal 1997 from 52.5% for
fiscal 1996.
Depreciation - Depreciation expense increased to $34.3 million in fiscal
1997 from $34.0 million in fiscal 1996 due to asset additions related to
renovations of existing centers, purchases of short lived assets and to the
opening of 16 new centers, offset partially by the closing of 20 older centers
in fiscal 1997 and by a reduction in depreciation expense related to certain
assets reaching the end of their estimated depreciable lives.
Rent - Rent expense increased $1.6 million to $28.1 million in fiscal 1997
from fiscal 1996. The increase is primarily a result of lease renewals at
current market rates. During fiscal 1997, five leased centers were opened and 17
leased centers were closed. The rental rates experienced on leases entered into
in fiscal 1997 were higher than those experienced in previous years. See "Item
2. Properties."
Other operating expenses - Other operating expenses increased $9.0 million,
or 6.3%, to $152.5 million in fiscal 1997 from fiscal 1996. As a percentage of
net revenues, other operating expenses increased to 27.1% for fiscal 1997 from
26.5% for fiscal 1996. This increase is principally due to increased center
level operating and insurance costs and a provision for lease termination costs,
offset partially by a reduced, lower cost marketing program and improved
administrative and field management efficiencies from re-engineering efforts
initiated during fiscal 1996.
Recapitalization expenses - During fiscal 1997 and in connection with the
Merger, the Company repaid the $91.6 million balance on the Company's previous
$150.0 million credit facility and paid $382.4 million to redeem common stock,
warrants and options. In order to fund the Recapitalization, the Company issued
$300.0 million principal amount 9-1/2% Senior Subordinated Notes, entered into a
$300.0 million Revolving Credit Facility, borrowed $50.0 million against a term
loan facility and issued 7,828,947 shares of common stock to KKR affiliates.
During fiscal 1997, non-recurring recapitalization costs of approximately $17.3
million were incurred and expensed and financing costs of approximately $27.2
million were deferred and are being amortized over the lives of the new debt
facilities (see Notes 2 and 8 to the Company's Consolidated Financial
Statements).
Restructuring and other charges (income), net - During fiscal 1997, the
Company decided to relocate its corporate offices from Montgomery, Alabama to
Portland, Oregon in fiscal 1998. In connection with the relocation, the Company
recognized $3.4 million in restructuring costs, primarily severance related, and
recorded a $5.0 million charge to write-down its Montgomery, Alabama
headquarters facility to net realizable value. Additionally, impairment losses
of $1.9 million, comprised of $1.3 million with respect to certain long-lived
assets and $0.6 million related to Kids Choice(TM) anticipated lease termination
costs, were recorded. The Company also recorded charges of approximately $1.5
million to write-off marketing materials and deferred pre-opening costs on new
centers. Finally, a $1.5 million interest payment was received from Enstar
Group, Inc. ("Enstar"), the Company's former parent, in connection with a
settlement of the Company's claim against Enstar in the U.S. Bankruptcy Court in
Montgomery, Alabama.
During fiscal 1996, substantial changes were made to the field operations,
facilities management and support functions. As a result of these changes, the
Company provided $6.5 million for restructuring costs, primarily to cover
severance arrangements for the approximately 100 positions which were
eliminated. Additionally, the Company limited the development of its Kid's
Choice(TM) centers to contracts in process and recorded an impairment loss of
$6.3 million, consisting of a writedown of $5.3 million for the recoverability
of certain long lived assets, primarily leasehold
25
<PAGE>
improvements (which were valued based on anticipated discounted cash flows), and
$1.0 million for anticipated lease termination costs. Finally, a cash
distribution of $11.3 million was received from Enstar in connection with the
Company's claim against Enstar referred to above.
Operating income - Operating income decreased $31.6 million, or 61.1%, to
$20.1 million in fiscal 1997 from fiscal 1996. Operating income before
recapitalization expenses, restructuring and other charges (income), net,
decreased $5.5 million to $47.7 million in fiscal 1997 from fiscal 1996. The
decrease is due to lower occupancy, increases in employee child care discounts
and increased labor expenses, as discussed above. The Company took certain steps
to address these issues including funding a targeted marketing program for early
fiscal 1998, limiting the employee child care discount effective July 1997 and
adding certain area manager positions and additional regional field support to
increase center supervision.
EBITDA, defined as earnings before interest expense, income taxes,
depreciation and amortization, for fiscal 1997 of $47.1 million was $38.9
million below fiscal 1996. As a percentage of net revenues, EBITDA for fiscal
1997 was 8.4% compared to 15.9% for fiscal 1996. Adjusted EBITDA, defined as
EBITDA exclusive of recapitalization expenses, restructuring and other charges
(income), investment income and extraordinary items was $81.9 million in fiscal
1997, a decrease of $5.3 million from fiscal 1996. As a percentage of net
revenues, Adjusted EBITDA was 14.5% for fiscal 1997 and 16.1% for fiscal 1996.
In addition to the factors discussed above, as part of the Company's normal
review of the adequacy of reserves, during fiscal 1996, self insurance reserves
were reduced by $2.0 million, the impact of which was to increase EBITDA and
Adjusted EBITDA by a like amount. In fiscal 1997, as part of the normal review
of the adequacy of reserves, the Company increased self insurance reserves,
which reduced EBITDA and Adjusted EBITDA by $2.0 million. In addition, during
fiscal 1997, the Company recorded provisions of $1.2 million for anticipated
lease termination costs which are included in other operating expenses. 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.
Interest expense - Interest expense increased to $22.4 million in fiscal
1997 from $16.7 million in fiscal 1996. This increase is substantially
attributable to the $350.0 million of long-term debt which was incurred in the
third quarter of fiscal 1997 to fund the Merger and repay $91.6 million on the
Company's then existing line of credit. The Company's weighted average interest
rate on its long-term debt, including amortization of debt issuance costs, was
8.5% for fiscal 1997 versus 10.8% for fiscal 1996.
Income tax expense - Income tax expense during fiscal 1997 and 1996 of $3.4
and $13.5 million, respectively, was computed by applying estimated effective
tax rates to income before taxes. Income tax expense varies from the statutory
federal income tax rate due to state income taxes and, during fiscal 1997,
non-deductible recapitalization expenses, offset by tax credits.
Extraordinary items - During fiscal 1997, the Company purchased $99.4
million aggregate principal amount of its 10 3/8% senior subordinated notes for
an aggregate price of $108.3 million. The transactions included the write-off of
deferred financing costs of $1.7 million and resulted in an extraordinary loss
of $6.5 million, net of income taxes of $4.1 million. In connection with the
Merger and retirement of existing debt, an extraordinary loss of $1.0 million,
net of income taxes of $0.7 million, was recognized for the write-off of
deferred financing costs related to the Company's previous credit facility.
26
<PAGE>
Liquidity and Capital Resources
The Company's principal sources of liquidity are cash flow generated from
operations and future borrowings under the $300.0 million revolving credit
facility. The Company's principal uses of liquidity are meeting debt service
requirements, financing the Company's capital expenditures and renovations and
providing working capital.
In connection with the Merger, the Company entered into credit facilities
totaling $390.0 million, comprised of (i) a $90.0 million term loan facility
(the "Term Loan Facility"), of which $50.0 million was drawn at the time of the
Merger and $40.0 million has since expired, and (ii) a $300.0 million Revolving
Credit Facility (together with the Term Loan Facility, the "Credit Facilities").
In addition, the Company issued $300.0 million of 9-1/2% Senior Subordinated
Notes. At May 29, 1998, the Company was committed on outstanding letters of
credit totaling $42.2 million and had drawn $10.0 million, which was repaid from
cash flow generated from operations subsequent to the fiscal year end, under the
Revolving Credit Facility.
The Term Loan Facility is subject to mandatory repayment with the proceeds
of certain asset sales and certain debt offerings and a portion of excess cash
flow (as defined in the Credit Facilities). The Term Loan Facility will mature
on February 13, 2006 and provides for nominal annual amortization. The Revolving
Credit Facility will terminate on February 13, 2004.
The Company utilized approximately $40.2 million of net operating loss
carryforwards to offset taxable income in its 1995 through 1998 fiscal years.
Approximately $18.4 million of net operating loss carryforwards are available to
be utilized in fiscal 1999 and future fiscal years. If such net operating loss
carryforwards were reduced, the Company would be required to pay additional
taxes and interest, thereby reducing available cash.
The Company's net cash provided by operating activities for fiscal 1998 was
$57.0 million compared to $50.2 million for fiscal 1997. The increase in net
cash flow from operations is primarily a result of net income before
extraordinary items, of $3.4 million in fiscal 1998 as compared to the $5.4
million net loss before extraordinary items, in fiscal 1997, the components of
which are discussed above. Cash and cash equivalents totaled $11.8 million at
May 29, 1998 compared to $24.2 million at May 30, 1997 and the ratio of current
assets to current liabilities was .46 to one at May 29, 1998, versus .67 to one
at May 30, 1997.
During the first quarter of fiscal 1997, the Company repurchased $30.0
million aggregate principal amount of its 10-3/8% senior subordinated notes
("10-3/8% Senior Subordinated Notes") at an aggregate price of $31.5 million
which resulted in an extraordinary loss of $1.2 million, net of income taxes.
During the second quarter of fiscal 1997 and in connection with the Merger, the
Company announced and completed a tender offer and consent solicitation for the
remainder of its outstanding 10-3/8% Senior Subordinated Notes seeking the
elimination of substantially all of the restrictive covenants, and 99.7% of the
notes were purchased at an aggregate price of $76.8 million. This second
transaction resulted in an extraordinary loss of $5.3 million, net of income
taxes.
On June 3, 1996, the Board of Directors authorized the repurchase of $23.0
million of the Company's common stock. During fiscal 1997, 852,500 shares and
315,000 warrants were repurchased for $14.1 million. All shares that were
repurchased have been retired. Other than in connection with the Merger, no
shares of common stock or warrants have been purchased by the Company since July
22, 1996 and the stock buyback programs were terminated at the effective time of
the Merger.
27
<PAGE>
Capital Expenditures
The Company anticipates substantial increases in its capital expenditures
budget over the next several years. During fiscal 1999, the Company anticipates
opening approximately 40 new centers. Over the next three years, the Company
expects to increase its rate of opening and/or acquiring new centers to between
50 and 75 new centers per year in the aggregate, which the Company expects will
be primarily community centers, and to continue its practice of closing centers
that are identified as under performing. The length of time from site selection
to the opening of a community center ranges from 18 to 24 months. The average
total cost per community center typically ranges from $1.5 million to $1.8
million depending on the size and location of the center; however, the actual
costs of a particular center may vary from such range. New centers are based
upon detailed site analyses that include feasibility and demographic studies and
financial modeling. No assurance can be given by the Company that it will be
able to successfully negotiate and acquire properties, meet its targets for new
center additions or meet targeted deadlines. Frequently, new site negotiations
are delayed or canceled or construction delayed for a variety of reasons, many
outside the control of the Company.
The Company also plans to make significant capital expenditures in
connection with the renovation of its existing facilities. The Company expects
to make these improvements over the next four to five years.
During fiscal 1998, the Company opened 20 community centers. In fiscal
1997, 16 centers were opened: 15 community centers and one KinderCare At Work(R)
center. There are no planned additions to the Company's Kids' Choice(TM) format
as management does not believe that the concept is meeting its full potential.
The Company currently anticipates that any Kid's Choice(TM) center that is under
performing when its lease expires will be closed at that time. Fiscal 1996
center openings totaled 37 centers; consisting of 22 community centers, six
KinderCare At Work(R) centers and nine Kid's Choice(TM) centers (including the
conversion of one community center to a Kid's Choice(TM) center).
Capital expenditures during fiscal 1998 amounted to approximately $85.0
million. Approximately $36.5 million was spent on new center development and
renovations on existing facilities was $23.7 million. Purchases of equipment and
corporate information systems were $22.3 and $2.5 million, respectively.
Capital expenditures, during fiscal 1997 totaled approximately $43.7
million compared to $67.3 million in fiscal 1996. Expenditures for new center
development were $21.3 and $40.0 million, and renovations on existing facilities
were $12.2 and $15.6 million during fiscal 1997 and 1996, respectively.
Purchases of equipment and corporate information systems were $7.2 and $3.0
million, respectively, during fiscal 1997 and $9.8 and $1.9 million,
respectively, during fiscal 1996.
Capital expenditure limits under the Credit Facilities for fiscal 1998 were
$100.0 million and are $155.0 million for fiscal year 1999. Capital expenditure
limits may be increased by carryover of a portion of unused amounts from
previous periods and are subject to certain exceptions. Also, the Company is
permitted a degree of flexibility under the provisions of the indenture under
which the senior subordinated notes were issued and the credit facilities with
respect to the incurrence of additional indebtedness, including through certain
mortgages or sale-leaseback transactions.
Management believes that cash flow generated from operations and future
borrowings under the revolving credit facility will adequately provide for its
working capital and debt service needs and will be sufficient to fund the
Company's expected capital expenditures over the next several years. Although no
assurance can be given that such sources will be sufficient, the capital
expenditure
28
<PAGE>
program has substantial flexibility and is subject to revision based on various
factors, including but not limited to, business conditions, changing time
constraints, cash flow requirements, debt covenants, competitive factors and
seasonality of openings. If the Company experiences a lack of working capital,
it may reduce its capital expenditures. In the long term, if these expenditures
were substantially reduced, in management's opinion, its operations and its cash
flow would be adversely impacted.
Year 2000
Many of the Company's computer systems will be upgraded, modified or
replaced over the next year and a half in order to render these systems
compliant with the "Year 2000." A review of the Company's computer systems has
been conducted to identify those areas which may be affected by the Year 2000
issue. The Company has successfully tested certain operational software. An
implementation plan to provide resolution for other software, which has not yet
been tested or is known to be non-compliant, is being developed. The Company
presently believes, with modification to existing software and converting to new
software, the Year 2000 will not pose significant operational problems. However,
there can be no assurance that the systems of other companies on which the
Company may rely also will be timely converted or that such failure to convert
by another company would not have an adverse effect on the Company's systems.
Costs associated with Year 2000 compliance, which will be expensed as incurred,
are not anticipated to be material to the Company's financial position or
results of operations in any given year.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes requirements for disclosure of
comprehensive income. The new standard becomes effective for the Company's
fiscal year 1999 and requires reclassification of earlier financial statements
for comparative purposes.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards for
disclosure about operating segments in annual financial statements and requires
disclosure of selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. This statement superceded
SFAS No. 14, Financial Reporting for Segments of a Business Enterprise. The new
standard becomes effective for the Company's fiscal year 1999 and requires that
comparative information from earlier years be restated to conform to the
requirements of this standard. The Company does not believe any substantial
changes to its disclosures will be made at the time SFAS No. 131 is adopted.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
statement requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair value. The new standard
becomes effective for the Company's fiscal year 2001. The Company has not yet
fully evaluated the impact of this statement.
Seasonality
New enrollments are generally highest in September and January, with
attendance declining 5% to 10% during the summer months and the year-end holiday
period. The decreased attendance in
29
<PAGE>
the summer months and during the year-end holiday period may result in decreased
liquidity during these periods.
Governmental Law & Regulations
There are certain tax incentives for child care programs. Section 21 of the
Internal Revenue Code of 1986, as amended (the "Code"), provides a federal
income tax credit ranging from 20% to 30% of certain child care expenses for
"qualifying individuals" (as defined therein). The credit is limited to $2,400
for taxpayers with one child or $4,800 for taxpayers with two or more children.
The fees paid to the Company for child care services by eligible taxpayers
qualify for the tax credit, subject to the limitations of Section 21 of the
Code.
During fiscal 1998, approximately 14% of the Company's net operating
revenues were generated from federal and state child care assistance programs,
primarily the Child Care and Development Block Grant and At-Risk Programs. These
programs are designed to assist low-income families with child care expenses and
are administered through various state agencies. Although additional funding for
child care may be available for low income families as part of welfare reform,
no assurance can be given that the Company will benefit from any such additional
funding.
Inflation and Wage Increases
Management does not believe that the effect of inflation on the results of
the Company's operations has been significant in recent periods.
Salaries, wages and benefits represented approximately 54.8% of net
revenues for fiscal 1998. Low unemployment rates and positive economic trends
have challenged recruiting efforts and put pressure on wage rates in many of the
Company's markets. During 1996, Congress enacted an increase in the minimum
hourly wage from $4.25 to $4.75 effective October 1, 1996, with an additional
increase to $5.15 effective on September 1, 1997. The effect of the federal
minimum wage increase has not been material to the results of operations. The
Company believes that, through increases in its tuition rates, it can recover
any future increase in expenses caused by the minimum wage rate, or other market
adjustments. 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 changes at the local
level.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK
Not applicable.
30
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share and per share amounts)
May 29, 1998 May 30, 1997
------------ ------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 11,820 $ 24,150
Receivables, net 14,987 13,649
Prepaid expenses and supplies 4,939 6,114
Deferred income taxes 12,412 14,127
------------ ------------
Total current assets 44,158 58,040
Property and equipment, net 508,113 471,558
Deferred income taxes 12,030 11,621
Deferred financing costs and other assets 27,238 28,659
------------ ------------
$ 591,539 $ 569,878
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Bank overdrafts $ 8,184 $ 5,357
Accounts payable 9,796 10,746
Current portion of long-term debt 1,839 1,760
Accrued expenses and other liabilities 76,221 69,056
------------ ------------
Total current liabilities 96,040 86,919
Long-term debt 401,258 393,129
Self insurance liabilities 20,922 21,880
Deferred income taxes 5,444 5,600
Other noncurrent liabilities 35,975 34,693
------------ ------------
Total liabilities 559,639 542,171
------------ ------------
Commitments and contingencies (Notes 8 and 12)
Stockholders' equity:
Preferred stock, $.01 par value; authorized
10,000,000 shares; none outstanding -- --
Common stock, $.01 par value; authorized 20,000,000 shares;
issued and outstanding 9,474,197 and 9,368,421 shares,
respectively. 95 94
Additional paid-in capital 2,009 --
Notes receivable from stockholders (1,325) --
Retained earnings 31,179 27,753
Cumulative translation adjustment (58) (140)
------------ ------------
Total stockholders' equity 31,900 27,707
------------ ------------
$ 591,539 $ 569,878
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except share and per share amounts)
Fiscal Year Ended
------------------------------------------------
May 29, 1998 May 30, 1997 May 31, 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues, net $ 597,070 $ 563,135 $ 541,264
-------------- -------------- --------------
Operating expenses:
Salaries, wages and benefits 327,161 300,580 284,115
Depreciation 42,553 34,253 33,972
Rent 27,985 28,140 26,515
Provision for doubtful accounts 5,529 4,697 3,908
Other 143,148 147,811 139,561
Recapitalization expenses -- 17,277 --
Restructuring and other charges
(income), net 5,201 10,275 1,484
-------------- -------------- --------------
Total operating expenses 551,577 543,033 489,555
-------------- -------------- --------------
Operating income 45,493 20,102 51,709
Investment income, net 612 232 250
Interest expense (40,677) (22,394) (16,727)
-------------- -------------- --------------
Income (loss) before income taxes and
extraordinary items 5,428 (2,060) 35,232
Income tax expense 2,002 3,375 13,549
-------------- -------------- --------------
Income (loss) before extraordinary items 3,426 (5,435) 21,683
Extraordinary items - loss on early
retirement of debt, net of income
taxes of $4,815 -- (7,532) --
-------------- -------------- --------------
Net income (loss) $ 3,426 $ (12,967) $ 21,683
============== ============== ==============
Income (loss) per common share:
Basic - income (loss) before
extraordinary items $ 0.36 $ (0.33) $ 1.10
Extraordinary items - loss on early
retirement of debt, net of income taxes -- (0.46) --
-------------- -------------- --------------
Net income (loss) $ 0.36 $ (0.79) $ 1.10
============== ============== ==============
Assuming dilution - income (loss) before
extraordinary items $ 0.36 $ (0.33) $ 1.07
Extraordinary items - loss on early
retirement of debt, net of income taxes -- (0.46) --
-------------- -------------- --------------
Net income (loss) $ 0.36 $ (0.79) $ 1.07
============== ============== ==============
Weighted average common shares
outstanding 9,397,000 16,479,000 19,770,000
============== ============== ==============
Weighted average common shares
outstanding and potential
common shares 9,398,000 16,479,000 20,192,000
============== ============== ==============
See accompanying notes to consolidated financial statements.
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Dollars in thousands, except share amounts)
Common Stock Additional Cumulative
----------------------- Paid-in Notes Retained Translation Treasury
Shares Amount Capital Receivable Earning Adjustment Stock Total
---------- --------- ---------- ---------- --------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 2, 1995 20,119,818 $ 201 $ 200,867 $ -- $ 40,116 $ 32 $ -- $ 241,216
Net income -- -- -- -- 21,683 -- -- 21,683
Tax benefits of the
valuation allowance
for deferred tax
assets -- -- 4,121 -- -- -- -- 4,121
Cumulative translation
adjustment -- -- -- -- -- (52) -- (52)
Purchase and retirement
of stock and warrants (969,883) (10) (13,477) -- -- -- (523) (14,010)
Exercise of stock
options and warrants 831,872 8 8,476 -- -- -- -- 8,484
Tax benefit of option
exercises -- -- 993 -- -- -- -- 993
---------- --------- ---------- ---------- --------- ----------- ------- ---------
Balance at May 31,
1996 19,981,807 199 200,980 -- 61,799 (20) (523) 262,435
Net loss -- -- -- -- (12,967) -- -- (12,967)
Cumulative translation
adjustment -- -- -- -- -- (120) -- (120)
Issuance of common
stock 7,986,842 80 151,670 -- -- -- -- 151,750
Purchase and retirement
of common stock (20,217,416) (201) (361,685) -- ( 21,079) -- 523 (382,442)
Purchase of outstanding
warrants -- -- (11,143) -- -- -- -- (11,143)
Exercise of stock
options and warrants 1,617,188 16 19,735 -- -- -- -- 19,751
Tax benefit of option
exercises -- -- 443 -- -- -- -- 443
---------- --------- ---------- ---------- --------- ----------- ------- ---------
Balance at May 30,
1997 9,368,421 94 -- -- 27,753 (140) -- 27,707
Net income -- -- -- -- 3,426 -- -- 3,426
Cumulative translation
adjustment -- -- -- -- -- 82 -- 82
Issuance of common stock 105,776 1 2,009 (1,490) -- -- -- 520
Proceeds from collection
of notes receivable -- -- -- 165 -- -- -- 165
---------- --------- ---------- ---------- --------- ----------- ------- ---------
Balance at May 29,
1998 9,474,197 $ 95 $ 2,009 $ (1,325) $ 31,179 $ (58) $ -- 31,900
=========== ========= ========== ========== ========= =========== ======= =========
See accompanying notes to consolidated financial statements.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
Fiscal Year Ended
------------------------------------------------
May 29, 1998 May 30, 1997 May 31, 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operations:
Net income (loss) $ 3,426 $ (12,967) $ 21,683
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 42,553 34,253 33,972
Write-down of property and equipment -- 6,300 5,312
Amortization of deferred financing costs
and other assets 3,111 1,822 1,533
Loss (gain) on sales and disposals of
property and equipment, net 105 (12) (1,684)
Deferred tax expense 1,150 (1,982) 12,285
Extraordinary items - loss on early
retirement of debt, net of income
taxes -- 7,532 --
Changes in operating assets and
liabilities: (2,305) 1,616 (2,473)
Decrease (increase) in receivables
Decrease (increase) in prepaid
expenses and supplies 1,175 3,002 (1,354)
Decrease (increase) in other assets (1,640) 2,604 116
Increase in accounts payable,
accrued expenses and other 9,348 8,382 7,735
liabilities
Other, net 82 (313) (1,228)
-------------- -------------- --------------
Net cash provided by operating activities 57,005 50,237 75,897
-------------- -------------- --------------
Cash flows from investing activities:
Purchases of property and equipment (84,954) (43,748) (67,304)
Proceeds from sales of property and equipment 3,691 12,438 3,883
Proceeds from sales or redemption of
investments -- -- 3,396
Proceeds from collection of notes receivable
and other 765 396 2,042
-------------- -------------- --------------
Net cash used by investing activities (80,498) (30,914) (57,983)
-------------- -------------- --------------
Cash flows from financing activities:
Proceeds from long-term borrowings 20,000 350,000 --
Deferred financing costs -- (27,160) --
Proceeds from issuance of common stock 685 151,750 --
Exercise of stock options and warrants -- 20,194 8,484
Purchase and retirement of common stock -- (382,442) --
Payments on long-term borrowings (11,792) (107,558) (13,777)
Payments on capital leases (557) -- --
Purchases of treasury stock and warrants -- (11,143) (14,010)
Bank overdrafts 2,827 (4,411) 2,753
-------------- -------------- --------------
Net cash provided (used) by financing activities 11,163 (10,770) (16,550)
-------------- -------------- --------------
Increase (decrease) in cash and cash equivalents (12,330) 8,553 1,364
Cash and cash equivalents at the beginning of the
fiscal year 24,150 15,597 14,233
-------------- -------------- --------------
Cash and cash equivalents at the end of the
fiscal year $ 11,820 $ 24,150 $ 15,597
============== ============== ==============
Supplemental cash flow information:
Interest paid $ 36,744 $ 14,325 $ 8,944
Income taxes paid (refunded), net 561 3,160 3,795
See accompanying notes to consolidated financial statements.
</TABLE>
34
<PAGE>
KinderCare Learning Centers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Nature of Business and Basis of Presentation
KinderCare Learning Centers, Inc. ("KinderCare" or the "Company") is the
largest for-profit provider of preschool educational and childcare services in
the United States. At May 29, 1998, KinderCare operated a total of 1,147
centers, with 1,145 centers in 38 states in the United States and two centers in
the United Kingdom. The consolidated financial statements include the financial
statements of the Company and its wholly owned subsidiaries: Mini-Skools
Limited; KinderCare Development Corp.; KinderCare Real Estate Corporation;
KinderCare Learning Centres Limited and KinderCare Properties Limited. All
significant inter-company balances and transactions have been eliminated in
consolidation.
Fiscal Year
The Company's fiscal year ends on the Friday closest to May 31. The first
quarter is 16 weeks long and the second, third and fourth quarters are each
twelve weeks long. The fiscal years ended May 29, 1998 ("fiscal 1998"), May 30,
1997 ("fiscal 1997"), and May 31, 1996 ("fiscal 1996") were 52-week fiscal
years.
Revenue Recognition
The Company recognizes revenue for child care services as earned. Net
revenues include tuition, fees and non-tuition income, reduced by discounts. The
Company receives fees for reservation, registration, education and
transportation services. Non-tuition income is primarily comprised of field trip
revenue.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash held in banks and liquid
investments with original maturities not exceeding 90 days.
Property and Equipment
Property and equipment are stated at cost. Depreciation on buildings and
equipment is provided on the straight-line basis over the estimated useful lives
of the assets. Leasehold improvements are amortized over the shorter of the
estimated useful life of the improvements or the lease term, including expected
lease renewal options where the Company has the unqualified right to exercise
the option.
The Company's property and equipment is depreciated using the following
estimated useful lives:
Life
-----------
Buildings 10-40 years
Building renovations 5-10 years
Leasehold improvements 5-10 years
Computer equipment 3 years
All other equipment 3-10 years
During the fourth quarter of fiscal 1998, the Company changed the estimated
useful life of auxiliary equipment to three years. The change was made to better
align the estimated useful life of
35
<PAGE>
auxiliary equipment with actual experience. Depreciation expense increased $9.4
million in fiscal 1998 as a result of the change in estimate. The after-tax
impact was reduced net income and basic and diluted income per share of $5.6
million and $0.60 per share, respectively. Auxiliary equipment is comprised of
educational supplies, such as toys, books, video games and playground equipment,
furniture, cots and kitchen and other equipment used in the operation of the
centers. Auxiliary equipment is depreciated to 50% of its initial cost on a
straight-line basis over three years. Subsequent replacements are expensed when
placed in service.
Asset Impairments
Long-lived assets and certain identifiable intangibles to be held and used
by the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. The Company regularly evaluates long-lived assets for impairment by
comparing projected undiscounted cash flows for each asset to the carrying value
of such asset. If the projected undiscounted cash flows are less than the
asset's carrying value, the Company records an impairment charge, if necessary,
to reduce the carrying value to estimated fair value.
Deferred Financing Costs
Deferred financing costs are amortized on a straight-line basis over the
lives of the related debt facilities.
Pre-Opening Costs
Pre-opening costs include training salaries, grand opening and promotion
expenses and the initial purchase of forms and supplies needed to operate the
center. During fiscal 1997, the Company changed its method of accounting for
pre-opening costs to the direct write-off method, resulting in expense of
approximately $0.7 million (see Note 3). Prior to fiscal 1997, pre-opening costs
were deferred and amortized over one year.
Self-Insurance Programs
The Company is self-insured for certain levels of general liability,
workers' compensation, property and employee medical coverage. Estimated costs
of these self-insurance programs are accrued at the undiscounted value of
projected settlements for known and anticipated claims.
Income Taxes
Deferred income taxes result primarily from temporary differences between
financial and tax reporting. If it is more likely than not that some portion or
all of a deferred tax asset will not be realized, a valuation allowance is
recognized.
Stock-Based Compensation
Effective June 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation.
The Company will continue to measure compensation expense for its stock-based
employee compensation plans using the method prescribed by APB Opinion No. 25,
Accounting for Stock Issued to Employees, and will, if material, provide pro
forma disclosures of net income and earnings per share as if the method
prescribed by SFAS No. 123 had been applied in measuring compensation expense.
36
<PAGE>
Net Income (Loss) Per Share
During the third quarter of fiscal 1998, the Company adopted SFAS No. 128,
Earnings per Share. This statement requires the presentation of basic and
diluted earnings per share for all periods presented.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes requirements
for disclosure of comprehensive income. The new standard becomes effective for
the Company's fiscal year 1999 and requires reclassification of earlier
financial statements for comparative purposes.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards for
disclosure about operating segments in annual financial statements and requires
disclosure of selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. This statement superceded
SFAS No. 14, Financial Reporting for Segments of a Business Enterprise. The new
standard becomes effective for the Company's fiscal year 1999 and requires that
comparative information from earlier years be restated to conform to the
requirements of this standard. The Company does not believe any substantial
changes to its disclosures will be made at the time SFAS No. 131 is adopted.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
statement requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair value. The new standard
becomes effective for the Company's fiscal year 2001. The Company has not yet
fully evaluated the impact of this statement.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior period amounts have been reclassified to conform to the
current year's presentation.
2. Recapitalization
On October 3, 1996, the Company and KCLC Acquisition Corp. ("KCLC") entered
into an Agreement and Plan of Merger (the "Merger Agreement"). KCLC was a wholly
owned subsidiary of KLC Associates, L.P. (the "Partnership"), a partnership
formed at the direction of Kohlberg Kravis Roberts & Co., a private investment
firm ("KKR"). Pursuant to the Merger Agreement, on February 13, 1997, KCLC was
merged with and into the Company (the "Merger"), with the Company continuing as
the surviving corporation. Upon completion of the Merger, affiliates of KKR
owned 7,828,947 shares,
37
<PAGE>
or approximately 83.6% of the 9,368,421 shares of common stock outstanding after
the Merger. At May 29, 1998, the Partnership owned 82.6% of the outstanding
common stock of the Company. Subject to certain provisions of the Merger
Agreement, each issued and outstanding share of common stock was converted, at
the election of the holder, into either the right to receive $19.00 in cash or
the right to retain one share of common stock, subject to proration.
In connection with the Merger, the Company repaid the then outstanding
$91.6 million balance on the Company's previous $150.0 million credit facility
and paid $382.4 million to redeem common stock, warrants and options. In order
to fund the transactions contemplated by the Merger (the "Recapitalization"),
the Company issued $300.0 million 9 1/2% senior subordinated notes, executed a
revolving credit facility of $300.0 million, borrowed $50.0 million against a
term loan facility and issued 7,828,947 shares of common stock to KKR affiliates
for $148.8 million.
During the third and fourth quarters of fiscal 1997, non-recurring costs in
connection with the Recapitalization of approximately $17.3 million were
incurred and expensed. Additionally, financing costs of $27.2 million were
deferred, classified as other assets and are being amortized over the lives of
the new debt facilities.
3. Restructuring and Other Charges (Income), Net
During the fourth quarter of fiscal 1997, the Company decided to relocate
its corporate offices from Montgomery, Alabama to Portland, Oregon in fiscal
1998. In connection with the relocation, the Company recognized $5.7 million in
restructuring costs, primarily expenses incurred in the retention, recruitment
and relocation of employees and travel costs related to the office relocation,
in fiscal 1998. During the fourth quarter of fiscal 1997, restructuring costs,
primarily severance related, of $3.4 million and a $5.0 million charge to write
down the Company's then headquarters facility in Montgomery, Alabama to net
realizable value were recognized. During fiscal 1996, the Company made
substantial changes to its field operations, facilities management and support
functions. As a result of these changes, the Company provided $6.5 million for
restructuring costs, primarily to cover severance arrangements for the
approximately 100 positions which were eliminated.
During the fourth quarter of fiscal 1997, the Company recorded impairment
losses of $1.9 million, comprised of $1.3 million with respect to certain
long-lived assets and $0.6 million related to Kids Choice(TM) anticipated lease
termination costs. Additionally, charges of approximately $1.5 million were
incurred to write-off certain marketing materials and deferred pre-opening costs
on new centers. During fiscal 1996, the Company limited the development of its
Kid's Choice(TM) centers to contracts in process and recorded an impairment loss
of $6.3 million, consisting of a writedown of $5.3 million for the
recoverability of certain long lived assets, primarily leasehold improvements
(which were valued based on anticipated discounted cash flows), and $1.0 million
for anticipated lease termination costs.
During fiscal 1998, the Company, as a member of the Presidential Life
Global Class Action, received a $0.5 million payment, net of attorney's fees, as
settlement of the Company's claim in the United States District Court in New
York against Michael R. Milken, et al. During fiscal 1997, a $1.5 million
interest payment was received from Enstar Group Inc. ("Enstar"), the Company's
former parent, in connection with a settlement of the Company's claim against
Enstar in the U.S. Bankruptcy court in Montgomery, Alabama. During fiscal 1996,
the Company received a cash distribution of $11.3 million from Enstar in
connection with the Company's claim.
38
<PAGE>
4. Receivables
Receivables consist of the following (dollars in thousands):
May 29, 1998 May 30, 1997
------------ ------------
Tuition $ 17,817 $ 14,728
Allowance for doubtful accounts (3,695) (2,192)
------------ ------------
14,122 12,536
Other 865 1,113
------------ ------------
$ 14,987 $ 13,649
============ ============
5. Prepaid Expenses and Supplies
Prepaid expenses and supplies consist of the following (dollars in
thousands):
May 29, 1998 May 30, 1997
------------ ------------
Prepaid rent $ 3,279 $ 3,233
Inventories 1,224 1,862
Other 436 1,019
============ ============
$ 4,939 $ 6,114
============ ============
6. Property and Equipment
Property and equipment consists of the following (dollars in thousands):
May 29, 1998 May 30, 1997
------------ ------------
Land $ 147,535 $ 139,481
Buildings and leasehold improvements 364,235 337,010
Equipment 107,472 91,354
Construction in progress 18,097 7,947
------------ ------------
637,339 575,792
Accumulated depreciation and amortization (129,226) (104,234)
------------ ------------
$ 508,113 $ 471,558
============ ============
7. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following (dollars in
thousands):
May 29, 1998 May 30, 1997
------------ ------------
Accrued compensation, benefits
and related taxes $ 29,475 $ 22,481
Accrued interest 8,845 9,144
Deferred revenue 8,210 8,704
Accrued property taxes 6,605 6,622
Accrued restructuring and other charges 1,625 5,020
Self insurance 7,103 5,707
Accrued income taxes 2,800 3,136
Other 11,558 8,242
------------ ------------
$ 76,221 $ 69,056
============ ============
39
<PAGE>
8. Long-Term Debt
Long-term debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
May 29, 1998 May 30, 1997
------------ ------------
<S> <C> <C>
Secured:
Borrowings under revolving credit facility, interest at adjusted $ 10,000 $ --
LIBOR plus 2.50% (7.15% at May 29, 1998)
Term loan facility, interest at adjusted LIBOR
plus 3.00% (8.14% at May 29, 1998 and 8.69% at May 30, 1997) 49,500 50,000
Industrial refunding revenue bonds at variable rates of interest
from 4.05% to 5.70% at May 29, 1998 and 4.15% to 5.79% at May
30, 1997, supported by letters of credit, maturing 1999 to 2009 33,025 33,025
Real and personal property mortgages payable in monthly
installments through 1999, interest rate of 8.00% 5,223 6,161
Industrial revenue bonds secured by real property with maturities
to 2005 at interest rates of 5.95% to 12.75% 5,190 5,492
Unsecured:
Senior subordinated notes due 2009, interest at 9-1/2%,
payable semi-annually 300,000 300,000
Senior subordinated notes due 2001, interest at 10-3/8%,
payable semi-annually 159 211
------------ ------------
403,097 394,889
Less current portion of long-term debt 1,839 1,760
------------ ------------
$ 401,258 $ 393,129
============ ============
</TABLE>
Credit Facilities
The Company has credit facilities which are provided by a syndicate of
financial institutions and include a Term Loan Facility of $50.0 million and a
Revolving Credit Facility of $300.0 million (the "Credit Facilities"). The
Company must pay an annual commitment fee equal to 1/2 of 1% per annum of the
undrawn portion of the commitments in respect of the Credit Facilities, subject
to reduction under a performance-based pricing grid, and a letter of credit fee
based on the aggregate face value of the outstanding letters of credit under the
Revolving Credit Facility.
The Term Loan Facility will mature on February 13, 2006 and provides for
$0.5 million annual interim amortization. The initial interest rate, at the
option of the Company, is adjusted LIBOR (as defined) plus 3.00% or ABR (as
defined) plus 1.75%, subject to reduction under a performance-based pricing
grid. The Company drew $50.0 million under the original $90.0 million of total
availability under the Term Loan Facility. The availability of the remaining
$40.0 million expired on August 13, 1997. The Term Loan Facility is subject to
mandatory prepayment from (i) 100% of the net cash proceeds on the sale of
certain non-ordinary-course assets, (ii) 100% of the net cash proceeds from
certain sale/leaseback transactions, (iii) 50% of excess cash flow (as defined)
and (iv) 100% of the net proceeds from the issuance of certain debt obligations.
The Revolving Credit Facility commitment will mature February 13, 2004. The
initial interest rate, at the option of the Company, is adjusted LIBOR plus
2.50% or ABR plus 1.25%, subject to reduction under a performance-based pricing
grid. At May 29,1998, of the $300.0 million available under the Revolving Credit
Facility, the Company had approximately $42.2 million committed under
outstanding letters of credit and $10.0 million drawn.
The Company's obligations under the Credit Facilities are secured by a
perfected first priority pledge of and security interest in the common stock of
each existing and subsequently acquired direct domestic subsidiary of the
Company and 65% of the common stock of each existing and subsequently
40
<PAGE>
acquired direct foreign subsidiary and, in certain circumstances, non-cash
consideration received for certain sales of assets.
The Credit Facilities contain customary covenants and restrictions on the
Company's ability to engage in certain activities and include customary events
of default. In addition, the Credit Facilities provide that the Company must
meet or exceed defined interest coverage ratios and must not exceed defined
leverage ratios.
Industrial Revenue Bonds
Series A Through E Industrial Revenue Bonds - The Company is obligated to
various issuers of industrial revenue bonds (the "Refunded IRBs") in an amount
totaling approximately $33.0 million outstanding at May 29, 1998 and May 30,
1997. The Refunded IRBs were issued to provide funds for refunding an equal
principal amount of industrial revenue bonds which were used to finance the cost
of acquiring, constructing and equipping certain facilities of the Company. The
Refunded IRBs bear interest at variable rates from 4.05% to 5.70% and each is
secured by a letter of credit under the Revolving Credit Facility.
Other IRBs - The Company also is obligated to various issuers of other
industrial revenue bonds (the "IRBs") in the aggregate principal amount of
approximately $5.2 and $5.5 million at May 29, 1998 and May 30, 1997,
respectively. The principal amount of such IRBs was used to finance the cost of
acquiring, constructing and equipping certain child care facilities and the IRBs
are secured by these facilities. The IRBs bear interest at rates of 5.95% to
12.75%.
Senior Subordinated Notes
In fiscal 1997, the Company issued $300.0 million in unsecured senior
subordinated notes due February 15, 2009 (the "9-1/2% Senior Subordinated
Notes") under an indenture (the "Indenture") between the Company and Marine
Midland Bank, as trustee. The 9-1/2% Senior Subordinated Notes bear interest at
the fixed rate of 9-1/2% per annum, payable semi-annually on February 15 and
August 15 of each year, and are effectively subordinated to the secured
indebtedness of the Company, including indebtedness under the Credit Facilities.
The 9-1/2% Senior Subordinated Notes are callable by the Company at
104.750% of par from February 15, 2002 through February 15, 2003. The redemption
price is reduced to 103.167% of par on February 15, 2003, to 101.583% of par on
February 15, 2004 and on February 15, 2005, until maturity, the notes may be
redeemed at par. Upon a change of control, as defined in the Indenture, each
holder of the 9-1/2% Senior Subordinated Notes may require the Company to
repurchase all or a portion of such holder's notes for a cash purchase price
equal to 101% of par, together with accrued and unpaid interest to the date of
repurchase.
The 9-1/2% Senior Subordinated Notes contain a number of covenants similar
to those of the Credit Facilities and include certain limitations with respect
to payment of dividends, incurrence of additional indebtedness, creation of
liens, asset or subsidiary sales, transactions with affiliates, investments and
guarantees, all of which are described in the Indenture.
In fiscal 1994, the Company issued $100.0 million in unsecured senior
subordinated notes due June 1, 2001, which bear interest at a fixed rate of
10-3/8% per annum, payable semi-annually on December 1 and June 1 of each year
("the 10-3/8% Senior Subordinated Notes"). The 10-3/8% Senior Subordinated Notes
are effectively subordinated to the secured indebtedness of the Company,
including indebtedness under the Credit Facilities. In a series of transactions
preceding and in contemplation of the Merger, the Company retired 99.7% of the
10-3/8% Senior Subordinated Notes.
41
<PAGE>
Principal Payments
The aggregate minimum annual maturities of long-term debt for the five
fiscal years subsequent to May 29, 1998 are as follows (dollars in thousands):
Fiscal Year:
1999 $ 1,839
2000 11,681
2001 14,733
2002 822
2003 4,733
Thereafter 369,289
=============
Total $ 403,097
=============
9. Income Taxes
The provision (benefit) for income taxes attributable to income (loss)
before income taxes and extraordinary items consists of the following (dollars
in thousands):
Fiscal Years Ended
--------------------------------------------
May 29, 1998 May 30, 1997 May 31, 1996
------------ ------------ ------------
Current:
Federal $ 470 $ 3,980 $ 832
State 60 815 (132)
Foreign 322 562 564
------------ ------------ ------------
852 5,357 1,264
------------ ------------ ------------
Deferred:
Federal 3,224 (1,390) 10,292
State 1,426 (530) 2,137
Foreign (3,500) (62) (144)
------------ ------------ ------------
1,150 (1,982) 12,285
------------ ------------ ------------
$ 2,002 $ 3,375 $ 13,549
============ ============ ============
A reconciliation between the statutory federal income tax rate and the
effective income tax rates on income (loss) before income taxes and
extraordinary items is as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended
----------------------------------------------
May 29, 1998 May 30, 1997 May 31, 1996
------------ ------------ ------------
<S> <C> <C> <C>
Expected tax provision (benefit) on
income (loss) before income taxes
and extraordinary items at
federal rate - 35% $ 1,900 $ (721) $ 12,334
State income taxes, net of federal
tax benefit 265 (235) 1,303
Non-deductible recapitalization and
other expenses 101 4,594 --
Tax credits, net of valuation
adjustment (332) (620) (465)
Other, net 68 357 377
------------ ------------ ------------
$ 2,002 $ 3,375 $ 13,549
============ ============ ============
</TABLE>
42
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at May 29, 1998
and May 30, 1997 are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
May 29, 1998 May 30, 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Self-insurance reserves $ 11,232 $ 11,282
Net operating loss carryforwards 9,461 4,760
Capital loss carryforwards 361 4,818
Tax credits 9,466 6,547
Property and equipment, basis differences -- 1,355
Other 7,397 13,058
------------ ------------
Total gross deferred tax assets 37,917 41,820
Less valuation allowance (3,000) (7,050)
------------ ------------
Net deferred tax assets 34,917 34,770
------------ ------------
Deferred tax liabilities:
Property and equipment, basis differences (6,853) --
Property and equipment, basis differences
of foreign subsidiaries (5,444) (8,944)
Stock basis of foreign subsidiary (3,622) (3,622)
Other -- (2,056)
------------ ------------
Total gross deferred tax liabilities (15,919) (14,622)
------------ ------------
Financial statement net deferred tax assets $ 18,998 $ 20,148
============ ============
</TABLE>
The valuation allowance decreased by $4.1 million during fiscal 1998.
Deferred tax assets have been recognized to the extent of existing deferred tax
liabilities and income taxes paid that are subject to recovery through
carryback. Future recognized tax benefits relating to the valuation allowance of
$3.0 million will reduce tax expense.
At May 29, 1998, the Company had $24.6 million of net operating losses
available for carryforward which expire in fiscal year 2013. Utilization of the
net operating losses is subject to an annual limitation of $9.8 million. The
Company also has capital losses of $0.9 million, which are available to offset
future capital gains, and expire in fiscal year 2000. Additionally, the Company
has tax credits available for carryforward for federal income tax purposes of
$9.5 million, which are available to offset future federal income taxes through
fiscal year 2013.
10. Benefit Plans
Stock Option Plans
During 1993, the Company adopted the KinderCare Learning Centers, Inc. 1993
Stock Option and Incentive Plan (the "1993 Plan"). Prior to the Merger, this
plan authorized a committee of the Board of Directors of the Company to grant or
award to eligible employees of the Company and its subsidiaries and affiliates,
stock options and restricted stock and related warrants of the Company beginning
on March 31, 1993. In connection with the 1993 Plan, the Company reserved
approximately 1.9 million shares of common stock for issuance to employees of
the Company upon exercise of options available for grants made by the Board of
Directors of the Company.
At the effective time of the Merger, all stock options granted by the
Company under the 1993 Plan were cancelled and each option was exchanged for a
payment from the Company after the Merger (subject to any applicable withholding
taxes) equal to the product of (i) the total number of shares of common stock
previously subject to such stock option and (ii) the excess of $19.00 over the
exercise price per share of the common stock previously subject to such stock
option. The cancellation of the stock options resulted in payments of
approximately $3.8 million. The 1993 Plan was terminated at the effective time
of the Merger.
43
<PAGE>
During fiscal 1997, the Board of Directors of the Company adopted and,
during fiscal 1998, the stockholders approved the 1997 Stock Purchase and Option
Plan for Key Employees of KinderCare Learning Centers, Inc. and Subsidiaries
(the "1997 Plan"). The 1997 Plan authorizes grants of stock or stock options
covering 2,500,000 shares of the Company's common stock. Grants or awards under
the 1997 Plan may take the form of purchased stock, restricted stock, incentive
or nonqualified stock options or other types of rights specified in the 1997
Plan.
During fiscal 1998 and fiscal 1997, the executive officers purchased
105,776 and 157,895 shares of restricted common stock in aggregate,
respectively, under the terms of the 1997 Plan. Certain executive officers
executed term notes ("Stockholder Notes") with the Company in order to purchase
the restricted stock. The Stockholder Notes are due February 20, 2008 and bear
interest at 5.84% per annum, payable semi-annually on June 30 and December 31.
Certain of the Stockholder Notes contain mandatory prepayment provisions. At May
29, 1998, Stockholder Notes totaled $1.3 million and are reflected as a
component of stockholders' equity.
In conjunction with the purchase of restricted stock, options to acquire an
aggregate of an additional 264,440 and 421,053 shares of common stock were
granted to the executive officers during fiscal 1998 and 1997, respectively.
Each of such options had a weighted average fair value, calculated using the
Black Scholes option pricing model, of approximately $7.53 and $8.35 on the date
of grant in fiscal 1998 and 1997, respectively. The assumptions used, during
fiscal 1998 and 1997, to estimate the grant date present value were volatility
of 26.0% in fiscal 1998 and 28.0% in fiscal 1997, risk-free rate of return of
5.5% in fiscal 1998 and 5.8% in fiscal 1997, dividend yield of 0.0% and time to
exercise of seven years. All of the stock options granted were non-qualified
options which vest 20% per year over a five-year period. No other options were
outstanding at May 29, 1998.
Grants or awards under the 1997 Plan are made at prices determined by the
Board of Directors. All options granted under the 1997 Plan during fiscal 1998
and 1997 have an exercise price of $19.00 per share.
A summary of options outstanding is as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
------------- --------------
<S> <C> <C>
Outstanding June 2, 1995 1,307,638 $ 10.11
Granted 256,700 13.03
Exercised (746,560) 9.60
Canceled (73,640) 11.62
------------- --------------
Outstanding May 31, 1996 744,138 11.48
Granted 460,053 18.60
Exercised (596,058) 11.70
Canceled (187,080) 11.36
------------- --------------
Outstanding May 30, 1997 421,053 19.00
Granted 264,440 19.00
------------- --------------
Outstanding May 29, 1998 685,493 $ 19.00
============= ==============
</TABLE>
Options outstanding at May 29, 1998 have a remaining contractual life of
8.8 years. Exercisable options at May 29, 1998 totaled 120,388.
As discussed in Note 1, the Company has adopted the disclosure-only
provisions of SFAS No. 123. Accordingly, no compensation cost has been
recognized for stock options granted with an exercise price equal to the fair
value of the underlying stock on the date of grant. Had compensation cost for
the
44
<PAGE>
Company's stock option plans been determined based on the estimated weighted
average fair value of the options at the date of grant, the Company's net income
and basic and diluted income per share for fiscal 1998 would have been $2.8
million and $0.29 per share compared to the reported amounts of $3.4 million and
$0.36, respectively. During fiscal 1997 and 1996, the pro forma and reported
amounts did not materially differ.
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 and approved the restatement of the Savings Plan effective July 1, 1998.
All employees of the Company and its subsidiaries are eligible to participate in
the Savings Plan on the quarterly entry date after the employee has completed
one year of service and the attainment of age 21. Participants may contribute,
in increments of 1% up to 18% of their compensation to the Savings Plan. The
Board of Directors has elected, since April 1, 1991, not to match employee
contributions.
Nonqualified Deferred Compensation Plan
The Board of Directors of the Company adopted the KinderCare Learning
Centers, Inc. Nonqualified Deferred Compensation Plan (the "DC Plan") effective
August 1, 1996 and approved the restatement of the DC Plan effective August 1,
1996. Under the DC Plan, certain highly compensated or key management employees
are provided the opportunity to defer receipt and income taxation of such
employees' compensation.
Directors' Deferred Compensation Plan
On May 27, 1998, the Board of Directors of the Company adopted the
Directors' Deferred Compensation Plan (the "Directors' DC Plan"). Under the
Directors' DC Plan, members of the Board of Directors may elect to defer receipt
and income taxation of all or a portion of such members' annual retainer. Any
amounts deferred under the Directors' DC Plan will be credited to a phantom
stock account. The number of shares of phantom stock credited to the director's
account will be determined based on the amount of deferred compensation divided
by the then fair value per share, as defined in Directors' DC Plan, of the
Company's common stock.
Distributions from the Directors' DC Plan are made in cash and reflect the
fair value per share of the common stock at the time of distribution multiplied
by the number of phantom shares credited to the director's account.
Distributions from the Directors' DC Plan occur upon the earlier of (i) the
first day of the year following the director's retirement or separation from the
Board, or (ii) termination of the Directors' DC Plan.
11. Disclosures About Fair Value of Financial Instruments
Fair value estimates, methods and assumptions are set forth below for the
Company's financial instruments at May 29, 1998 and May 30, 1997.
Cash and cash equivalents, receivables and current liabilities
Fair value approximates carrying value as reflected in the consolidated
balance sheets at May 29, 1998 and May 30, 1997 because of the short-term
maturity of these instruments.
45
<PAGE>
Long-term debt
The carrying value of the Company's 9-1/2% Senior Subordinated Notes, at
May 29, 1998, approximated fair value based on current market activity, while
the fair value at May 30, 1997, approximated fair value due to the recent Merger
and refinancing. The carrying values for the Company's remaining long-term debt
of $103.1 and $94.9 million at May 29, 1998 and May 30, 1997, respectively,
approximated market value based on current rates that management believes could
be obtained for similar debt.
12. Commitments and Contingencies
The Company conducts a portion of its operations from leased or subleased
day care centers. Subsequent to January 1, 1993, the Company re-negotiated
certain day care center leases to amend the terms to allow the Company the right
to terminate the lease at any time with minimal notice. In connection with the
termination option, the Company, in certain instances, prepaid up to 12 months
rent. Such amounts, totaling approximately $3.2 million, will be amortized over
the termination transition period or over the appropriate remaining months of
the lease period. At May 29, 1998, the remaining unamortized balance of the
prepaid amount was $2.3 million. In addition, several leases were re-negotiated
to decrease the monthly fixed rental payments.
The Company leases its fleet of vehicles. Each vehicle in the Company's
fleet is leased pursuant to the terms of a 12-month non-cancelable master lease
which may be renewed on a month-to-month basis after the initial 12 month lease
period. Payments under the vehicle leases vary with the number of vehicles
leased and changes in interest rates. The vehicle leases require that the
Company guarantee specified residual values upon cancellation. In most cases,
management expects that substantially all of the leases will be renewed or
replaced by other leases as part of the normal course of business. All such
leases are classified as operating leases. Expenses incurred in connection with
the fleet vehicle leases were $10.9 million, $10.1 million and $10.3 million for
fiscal 1998, 1997 and fiscal 1996 respectively.
Following is a schedule of future minimum lease payments under operating
leases, that have initial or remaining non-cancelable lease terms in excess of
one year at May 29, 1998 (dollars in thousands):
Fiscal Year:
1999 $ 17,952
2000 15,253
2001 12,446
2002 10,217
2003 8,780
Subsequent years 47,543
At May 29, 1998, the Company had a Revolving Credit Facility of $300.0
million, of which $42.2 million was committed under outstanding letters of
credit.
The Company is presently, and is from time to time, subject to claims and
suits arising in the ordinary course of business, including suits alleging child
abuse. In certain of such actions, plaintiffs request damages that are covered
by insurance. The Company believes that none of the claims or suits of which it
is aware will materially affect its financial position, operating results or
cash flows, although absolute assurance cannot be given with respect to the
ultimate outcome of any such actions.
46
<PAGE>
13. Stock Repurchase Programs
On February 15, 1995 the Board of Directors of KinderCare authorized the
repurchase of up to $10 million of the Company's common stock. This repurchase
was completed and all shares retired during fiscal 1996. On May 2, 1996, the
Board of Directors authorized an additional repurchase of $10 million and
increased it to $23.0 million on June 3, 1996. During fiscal 1996, under the
additional stock buyback program, 259,000 shares and 120,000 warrants were
repurchased for $4.2 million. During fiscal 1997, under the additional stock
buyback program, 852,500 shares and 315,000 warrants were repurchased for $14.1
million. All shares repurchased were retired. Other than in connection with the
Merger, no additional shares or warrants were repurchased subsequent to July 22,
1996 and the stock buyback programs were terminated at the effective time of the
Merger.
14. Extraordinary Losses
During fiscal 1997, the Company purchased $99.4 million aggregate principal
amount of its 10 3/8 % senior subordinated notes for an aggregate price of
$108.3 million. This transaction included the write-off of deferred financing
costs of $1.7 million and resulted in an extraordinary loss of $6.5 million, net
of income taxes of $4.1 million. In connection with the Merger and retirement of
existing debt, an extraordinary loss of $1.0 million, net of income taxes of
$0.7 million, was recognized for the write-off of deferred financing costs
related to the Company's previous credit facility.
15. Income (Loss) Per Share
In 1997, the FASB issued SFAS No. 128, Earnings per Share. SFAS No. 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants or
convertible securities. Diluted earnings per share is very similar to previously
reported fully diluted earnings per share. All earnings per share amounts have
been presented, and where necessary restated, to conform to the requirements of
SFAS No. 128.
Income (loss) before extraordinary items (numerator) was the same in the
calculation of basic and diluted income (loss) per share for fiscal 1998, 1997
and 1996. The following table shows the reconciliation of the weighted average
common shares (shares in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------
May 29, 1998 May 30, 1997 May 31, 1996
------------ ------------ ------------
<S> <C> <C> <C>
Weighted average common shares outstanding 9,397 16,479 19,770
Dilutive effect of options 1 -- 422
------------ ------------ ------------
Weighted average common shares outstanding and
potential common shares 9,398 16,479 20,192
============ ============ ============
</TABLE>
In accordance with SFAS No. 128, the potential common shares for fiscal
1997 were not included in the calculation of diluted income (loss) per share due
to their anti-dilutive effect when a loss before extraordinary items exists.
47
<PAGE>
16. Quarterly Results (Unaudited)
A summary of results of operations for fiscal 1998 and fiscal 1997 is as
follows (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter (a) Quarter (b) Quarter (b) Quarter (b)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Fiscal year ended May 29, 1998:
Revenues, net $ 180,562 $ 135,587 $ 134,823 $ 146,098
Operating income 12,649 9,807 12,633 10,404
Net income 28 319 2,060 1,019
Basic and diluted income per share 0.00 0.03 0.22 0.11
Fiscal year ended May 30, 1997:
Revenues, net $ 171,427 $ 128,324 $ 126,657 $ 136,727
Operating income (loss) 9,751 14,366 (3,074) (941)
Income (loss) before extraordinary
items 2,978 6,820 (10,455) (4,778)
Basic income (loss) per share before
extraordinary items 0.15 0.35 (0.61) (0.50)
Diluted income (loss) per share before
extraordinary items 0.15 0.33 (0.61) (0.50)
Net income (loss) 1,749 1,569 (11,507) (4,778)
Basic and diluted income (loss) per share 0.09 0.08 (0.67) (0.50)
(a) Sixteen week quarter
(b) Twelve week quarters
</TABLE>
48
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
KinderCare Learning Centers, Inc.:
We have audited the accompanying consolidated balance sheets of KinderCare
Learning Centers, Inc. and subsidiaries (the "Company") as of May 29, 1998 and
May 30, 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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, such consolidated financial statements present fairly, in all
material respects, the financial position of KinderCare Learning Centers, Inc.
and subsidiaries as of May 29, 1998 and May 30, 1997, and the results of their
operations and their cash flows for each of the years then ended, in conformity
with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Portland, Oregon
July 24, 1998
49
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
KinderCare Learning Centers, Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of KinderCare Learning Centers, Inc. and
subsidiaries for the year ended May 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of KinderCare Learning Centers, Inc. and subsidiaries for the year ended May 31,
1996, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Atlanta, Georgia
August 9, 1996
50
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The following table sets forth the names of the directors, their ages, the
year in which each was first elected a director, their positions with the
Company, their principal occupations and employers for at least the last five
years and any other directorships held by them in companies that are subject to
the reporting requirements of the Securities Exchange Act of 1934 or any company
registered as an investment company under the Investment Company Act of 1940.
For information concerning directors' ownership of common stock, see "Item 12.
Security Ownership of Certain Beneficial Owners."
<TABLE>
<CAPTION>
Position with the Company, Principal
Name and Year First Elected Occupation During at Least the
Director Age Last Five Years and Other Directorships
- --------------------------- ------- --------------------------------------------------------
<S> <C> <C>
David J. Johnson (a) 52 Mr. Johnson joined the Company as Chief Executive Officer
(1997) and Chairman of the Board in February 1997. Between
September 1991 and November 1996, Mr. Johnson served as
President, Chief Executive Officer and Chairman of the
Board of Red Lion Hotels, Inc. (formerly a KKR affiliate)
or its predecessor. From 1989 to September 1991, Mr.
Johnson was a general partner of Hellman & Freidman, a
private equity investment firm based in San Francisco.
Nils P. Brous (a) (b) (c) 33 Mr. Brous has served as a director since February 1997.
(1997) Mr. Brous has been, since 1992, an executive of KKR.
Prior to that time, he was an associate at Goldman, Sachs
& Co. Mr. Brous is a director of Bruno's, Inc. and
Randalls Food Markets, Inc.
Stephen A. Kaplan 38 Mr. Kaplan has served as a director since January 1996.
(1996) He has been a Principal of Oaktree Capital Management,
LLC ("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 Acorn Products, Inc.,
GeoLogistics Corporation and Roller Bearing Holding Co.
Henry R. Kravis (c) (d) 54 Mr. Kravis has served as a director since February 1997.
(1997) Mr. 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 Amphenol Corporation, Borden, Inc., Bruno's,
Inc., Evenflo & Spalding Holdings Corporation, The
Gillette Company, IDEX Corporation, Newsquest Capital
plc, Owens-Illinois, Inc., Owens-Illinois Group, Inc.,
PRIMEDIA, Inc., RELTEC Corporation, Safeway, Inc.,
Sotheby's Holdings, Inc., Union Texas Petroleum Holdings,
Inc. and World Color Press, Inc.
51
<PAGE>
Clifton S. Robbins (a) (b) (c) 40 Mr. Robbins has served as a director since February 1997.
(1997) Mr. 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 to that, he was an executive of
that company. Mr. Robbins is a director of AEP Industries
Inc., Borden Inc., IDEX Corporation and Newsquest Capital
plc.
George R. Roberts (d) 55 Mr. Roberts has served as a director since February 1997.
(1997) Mr. 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 Accuride Corporation, Amphenol Corporation,
AutoZone, Inc., Borden, Inc., Bruno's, Inc., Evenflo &
Spalding Holdings Corporation, IDEX Corporation, KSL
Recreation Group, Inc., Neway Anchorlok International,
Owens-Illinois Group, Inc., Owens-Illinois, Inc.,
Randalls Food Markets, Inc., RELTEC Corporation, Safeway,
Inc., Union Texas Petroleum Holdings, Inc. and World
Color Press, Inc.
Sandra W. Scarr, Ph.D. 61 Dr. Scarr was elected a Director in June 1990 and served
(1990) as Chairman from July 1994 until February 1997 and as
Chief Executive Officer of the Company from June 1995
until February 1997. She was a Commonwealth Professor,
Department of Psychology of the University of Virginia,
from September 1983 until joining the Company.
(a) member of the Executive Committee.
(b) member of the Audit Committee.
(c) member of the Compensation Committee.
(d) Messrs. Kravis and Roberts are first cousins.
</TABLE>
Executive Officers
Set forth below are the names, ages, positions with the Company and
employment history of each of the executive officers of the Company:
<TABLE>
<CAPTION>
Name and Year First
Elected Officer Age Position with Company
- ------------------- --- ---------------------
<S> <C> <C>
David J. Johnson (1997) 52 Chief Executive Officer and Chairman of the Board
Beth A. Ugoretz (1997) 43 Executive Vice President, Corporate Services
Bruce A. Walters (1997) 41 Senior Vice President and Chief Development Officer
Trudy R. Anderson (1996) 35 Region Vice President, Central
David A. Benedict (1998) 44 Vice President, Tax
DeeAnn M. Besch (1997) 40 Region Vice President, Southeast
Edward L. Brewington (1997) 54 Vice President, Human Resources
Marcia P. Guddemi, Ph.D. (1991) 44 Vice President, Education, Research and Training
S. Wray Hutchinson (1996) 38 Vice President, Operations
Dan R. Jackson (1997) 44 Vice President, Financial Control and Planning
Lauren A. Klein (1996) 42 Region Vice President, Western
Eva M. Kripalani (1997) 39 Vice President, General Counsel and Secretary
Miriam D. Liggett (1996) 37 Region Vice President, Northeast
William O. Robards, Jr. (1997) 45 Vice President, Real Estate
Bobby J. Willey (1995) 58 Vice President, Information Services
</TABLE>
52
<PAGE>
Mr. Johnson joined the Company as Chief Executive Officer and Chairman in
February 1997. Between September 1991 and November 1996, Mr. Johnson served as
President, Chief Executive Officer and Chairman of the Board of Red Lion Hotels,
Inc. (formerly a KKR affiliate) or its predecessor. From 1989 to September 1991,
Mr. Johnson was a general partner of Hellman & Friedman, a private equity
investment firm based in San Francisco. From 1986 to 1988, he served as
President, Chief Operating Officer and director of Dillingham Holdings, a
diversified company headquartered in San Francisco. From 1984 to 1987, Mr.
Johnson was President and Chief Executive Officer of Cal Gas Corporation, a
principal subsidiary of Dillingham Holdings.
Ms. Ugoretz joined the Company as Executive Vice President of Corporate
Services in March 1997. Ms. Ugoretz served as Senior Vice President, General
Counsel and Secretary of Red Lion Hotels, Inc. or its predecessor from June 1993
to December 1996. Prior to that time, Ms. Ugoretz was a partner with the law
firm of Stoel Rives LLP in Portland, Oregon, where she had worked since 1983.
Mr. Walters joined the Company as Senior Vice President and Chief
Development Officer in July 1997. From June 1995 to February 1997, Mr. Walters
served as the Executive Vice President of Store Development for Hollywood
Entertainment Corporation in Portland, Oregon. Prior to that time, Mr. Walters
spent 14 years with McDonald's Corporation in various domestic and international
development positions.
Ms. Anderson was promoted in April 1996 to Vice President of the Central
Region. She joined the Company in February 1989 as a Center Director in
California and was promoted to District Manager in California. She later served
as a District Manager in Minnesota and was subsequently promoted to Region
Manager.
Mr. Benedict joined the Company in January 1998 as Vice President of Tax.
From May 1997 through December 1997, Mr. Benedict was a Director in the
Portland, Oregon office of Price Waterhouse, LLP. From May 1996 to March 1997,
he was Vice President of Corporate Tax for Red Lion Hotels, Inc. Prior to that,
he spent 10 years with the Portland Office of Deloitte & Touche LLP, where he
was a Senior Manager in the tax department.
Ms. Besch was promoted in April 1997 to Vice President of the Southeast
Region. She joined the Company in June 1984 as a Center Director in Minnesota
and was later promoted first to District Manager and then Area Manager in
Minneapolis, Minnesota.
Mr. Brewington joined the Company in April 1997 as Vice President of Human
Resources. From June 1993 to April 1997 Mr. Brewington was with Times Mirror
Training Group where his last position held was Vice President, Human Resources.
Prior to that time, Mr. Brewington spent 25 years with IBM in various human
resource, sales and marketing positions.
Dr. Guddemi joined the Company in August 1991 as Vice President of
Education and Research. For over five years prior to joining the Company, she
was an assistant professor of early childhood education at the University of
South Florida and at the University of South Carolina.
Mr. Hutchinson was promoted in April 1996 to Vice President of Operations.
He began his employment with the Company in 1992 as District Manager in New
Jersey and was later promoted to Region Manager for the Chicago, Illinois area.
From 1990 until 1992, Mr. Hutchinson was self-employed.
Mr. Jackson joined the Company in February 1997 as Vice President of
Financial Control and Planning. Prior to that time, Mr. Jackson served as Vice
President Controller for Red Lion Hotels, Inc., or its predecessor, from
September 1985 to January 1997. From 1978 to 1985, Mr. Jackson held several
53
<PAGE>
financial management positions with Harsch Investment Corporation, a real estate
holding company based in Portland, Oregon.
Ms. Klein was promoted in April 1996 to Vice President of the Western
Region. She joined the Company in February 1989 as District Manager of the
Connecticut and Western Massachusetts area and was later promoted to Region
Manager in January 1990. Since June 1994, Ms. Klein has served as National
Director of Special Projects.
Ms. Kripalani joined the Company in July 1997 as Vice President, General
Counsel and Secretary. Prior to joining the Company, Ms. Kripalani was a partner
in the law firm of Stoel Rives LLP in Portland, Oregon, where she had worked
since 1987.
Ms. Liggett was promoted in April 1996 to Vice President of the Northeast
Region. She joined the Company in October 1988 and held various center-level
management positions until she was promoted to District Manager for Northern
Virginia. Ms. Liggett was later promoted first to Northeast Account Executive
for KinderCare At Work and then Region Manager for the Mid-Atlantic Area
(including Maryland and Virginia).
Mr. Robards joined the Company in August 1997 as Vice President of Real
Estate. Prior to joining the Company, Mr. Robards spent 19 years in various real
estate development positions with McDonald's Corporation, most recently as
Senior Real Estate Manager.
Mr. Willey joined the Company in June 1995 as Vice President of Information
Services. From 1992 to 1995, Mr. Willey served as MIS Director for PETSTUFF,
Inc. and was Corporate Information Officer for ANCO Management Service, Inc.
from 1989 to 1992.
54
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
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 29, 1998, the fiscal year ended May 30,
1997, and the fiscal year ended May 31, 1996, for David J. Johnson, the Chief
Executive Officer and Chairman of the Board of Directors of the Company, and
each of the other four most highly compensated executive officers of the Company
(determined at May 29, 1998):
<TABLE>
<CAPTION>
Long Term
Compensation
Awards -
Annual Compensation Securities
Name and Fiscal ----------------------- Underlying All Other
Principal Position Year Salary Bonus Options(a) Compensation
- ------------------ ------ -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
David J. Johnson 1998 $606,138 $658,266 -- $ --
Chief Executive Officer and 1997 175,385 105,231 421,053 --
Chairman of the Board 1996 -- -- -- --
Beth A. Ugoretz 1998 $201,750 $164,325 33,183 --
Executive Vice President, 1997 50,000 22,500 -- --
Corporate Services 1996 -- -- -- --
Bruce A. Walters 1998 $176,923 $127,739 32,895 --
Senior Vice President & Chief 1997 -- -- -- --
Development Officer 1996 -- -- -- --
Dan R. Jackson 1998 $151,310 $105,855 24,887 --
Vice President, Financial 1997 37,500 13,125 -- --
Control and Planning 1996 -- -- -- --
Edward L. Brewington 1998 $150,660 $ 94,705 19,824 $ 94,601 (b)
Vice President, Human 1997 17,308 6,058 -- --
Resources 1996 -- -- --
- --------------
(a) Stock options granted under the 1997 Stock Purchase and Option Plan for Key
Employees of KinderCare Learning Centers, Inc. and Subsidiaries.
(b) Payment of relocation expenses.
</TABLE>
55
<PAGE>
Stock Option Plans
During fiscal year 1997, the Board of Directors of the Company adopted and,
during fiscal year 1998, the stockholders approved the 1997 Stock Purchase and
Option Plan for Key Employees of KinderCare Learning Centers, Inc. and
Subsidiaries (the "1997 Plan"). The 1997 Plan authorizes grants of stock or
stock options covering 2,500,000 shares of the Company's common stock. Grants or
awards under the 1997 Plan may take the form of purchased stock, restricted
stock, incentive or nonqualified stock options or other types of rights
specified in the 1997 Plan.
The following table shows information regarding individual option grants
during the fiscal year ended May 29, 1998 for the persons named in the Summary
Compensation Table:
<TABLE>
<CAPTION>
Number of
Securities Percent of
Underlying Total Options Exercise Grant Date
Options Granted to Price per Expiration Present
Name Granted (a) Employees Share Date Value (b)
- ---- ----------- ------------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C>
David J. Johnson -- --% $ -- -- $ --
Beth A Ugoretz 33,183 12.5 19.00 March 1, 2007 249,868
Bruce A. Walters 32,895 12.4 19.00 July 15, 2007 247,699
Dan R. Jackson 24,887 9.4 19.00 March 1, 2007 187,399
Edward L. Brewington 19,824 7.5 19.00 April 14, 2007 149,275
(a) The options become exercisable 20% per year over a five year period, with
the first 20% becoming exercisable on the first anniversary of the vesting
commencement date. Vesting ceases upon termination of employment; however,
options vest in full upon death or disability. The options expire upon the
earlier of (i) ten years following grant date, (ii) the first anniversary
of death or disability or retirement, (iii) a specified period following
any termination of employment other than for cause, (iv) termination for
cause and (v) the date of any merger or certain other transactions.
Exercisability of options will accelerate upon a change of control of the
Company.
(b) Although the Company believes that it is not possible to place a value on
an option, in accordance with the rules of the Securities and Exchange
Commission, the Company has used a modified Black-Scholes model of option
valuation to estimate grant date present value. The actual value realized,
if any, may vary significantly from the values estimated by this model. Any
future values realized will ultimately depend upon the excess of the stock
price over the exercise price on the date the option is exercised. The
assumptions used to estimate the grant date present value of this option
were volatility (26.0%), risk-free rate of return (5.5%), dividend yield
(0.0%) and time to exercise (seven years).
</TABLE>
56
<PAGE>
Aggregated Option Exercises in Fiscal Year 1998 and 1998 Fiscal Year End Option
Values
The following table shows the unexercised options held at May 29, 1998 by
the persons named in Summary Compensation Table:
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised "In-The-Money"
Options at May 29, 1998 Options at May 29, 1998
------------------------------ -----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David J. Johnson 84,211 336,842 $78,316 $313,263
Beth A. Ugoretz 6,637 26,546 6,172 24,688
Bruce A. Walters -- 32,895 -- 30,592
Dan R. Jackson 4,977 19,910 4,629 18,516
Edward L. Brewington 3,965 15,859 3,687 14,749
(1) The value of options represents the aggregate difference between the fair
value, as determined by the Company, at May 29, 1998 and the applicable
exercise price.
</TABLE>
There were no shares acquired upon exercise of options during fiscal year 1998.
Compensation of Directors
During fiscal year 1998, non-employee directors of the Company received an
annual retainer of $30,000, paid in advance in quarterly installments. Directors
who are employees of the Company were not paid any additional compensation for
their service as directors. All directors were reimbursed for travel and other
expenses incurred in connection with the performance of their duties.
On May 27, 1998, the Board of Directors of the Company adopted the
Directors' Deferred Compensation Plan (the "Directors' DC Plan"). Under the
Directors' DC Plan, members of the Board of Directors may elect to defer receipt
and income taxation of all or a portion of such members' annual retainer. Any
amounts deferred under the Directors' DC Plan will be credited to a phantom
stock account. The number of shares of phantom stock credited to the director's
account will be determined based on the amount of deferred compensation divided
by the then fair value per share, as defined in Directors' DC Plan, of the
Company's common stock.
Distributions from the Directors' DC Plan are made in cash and reflect the
fair value per share of the common stock at the time of distribution multiplied
by the number of phantom shares credited to the director's account.
Distributions from the Directors' DC Plan occur upon the earlier of (i) the
first day of the year following the director's retirement or separation from the
Board, or (ii) termination of the Directors' DC Plan.
Compensation Committee Interlocks and Insider Participation
Following the Merger, the Board of Directors of the Company approved the
appointment of a Compensation Committee composed of Henry R. Kravis, Clifton S.
Robbins and Nils P. Brous. Messrs. Kravis and Robbins are general partners of
KKR and Mr. Brous is an executive of KKR. See "Item 13. Certain Transactions."
57
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Security Ownership of Certain Beneficial Owners
The following table sets forth, at July 24, 1998, certain information
concerning ownership of shares of common stock by: (i) persons who are known by
the Company to own beneficially more than 5% of the outstanding shares of common
stock; (ii) each director of the Company; (iii) each person named in the Summary
Compensation Table; and (iv) all directors and executive officers of the Company
as a group:
<TABLE>
<CAPTION>
Beneficial Ownership of Percentage 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. 7,828,947 81.5%
9 West 57th Street
New York, NY 10019(b)
The TCW Group, Inc. (and
certain affiliated entities
("TCW")) 949,244 9.9%
865 South Figueroa Street
Los Angeles, CA 90017(c)
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) 242,106 2.5%
Beth A. Ugoretz (d) 19,910 *
Bruce A. Walters (d) 19,737 *
Dan R. Jackson (d) 14,932 *
Edward L. Brewington (d) 11,894 *
All directors and executive 397,875 4.1%
officers as a group (21
persons) (b)(c)(d)
*represents less than 1.0% of class outstanding.
58
<PAGE>
(a) The amounts and percentages 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 is based on the 9,474,197 shares of common stock outstanding at
of July 24, 1998 and the 134,204 shares subject to option grants which have
vested or will vest prior to September 22, 1998.
(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. At July 24,
1998, KKR Partners II, L.P. owned 1.1% of the Company's outstanding common
stock.
(c) TCW and certain of its affiliates have voting and dispositive powers over
beneficially owned 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 sub-advisor with respect to the Principal Fund.
Stephen A. Kaplan is a director of the Company. 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) Shares owned by executive officers are subject to restrictions on transfer.
Includes shares subject to options that are currently exercisable or become
exercisable prior to September 22, 1998 as follows:
Name Number of Options
---- -----------------
David J. Johnson 84,211
Beth A. Ugoretz 6,637
Bruce A. Walters 6,579
Dan R. Jackson 4,977
Edward L. Brewington 3,965
-----------------
106,369
</TABLE>
59
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Transactions
At July 24, 1998, KKR-KLC L.L.C. and certain affiliated entities
beneficially own approximately 81.5% 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., may receive customary investment banking fees for services rendered to
the Company in connection with divestitures, acquisitions and certain other
transactions, plus reimbursement of its expenses in connection therewith. During
fiscal year 1998, KKR received $625,255 in fees and reimbursement of expenses
from the Company for management, consulting and financial services rendered to
the Company and reimbursement of expenses totaling $122,064 in connection with
investment banking services.
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, including certain members of
management, may be allowed to participate in any registration process, subject
to certain conditions and exceptions.
Pursuant to an agreement between KCLC Acquisition Corp. and Dr. Sandra W.
Scarr (the "Scarr Letter Agreement"), at the effective time of the Merger (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
director of the Company following her retirement. In connection with the Scarr
Letter Agreement, Dr. Scarr performs consulting, advisory and other services for
the Company and is subject to a non-competition covenant. In consideration of
the services Dr. Scarr is required to provide to the Company and her obligation
not to compete with the Company, she will receive total payment of $1.1 million
from the Company paid in equal monthly payments for the period of 30 months
beginning July 15, 1997. In addition, pursuant to the Scarr Letter Agreement,
the Company continues to provide certain medical, disability and life insurance
coverage through December 15, 1998.
60
<PAGE>
Indebtedness of Management
During fiscal year 1998, the executive officers of the Company, excluding
David J. Johnson, purchased 105,776 shares of restricted stock in aggregate
under the terms of the 1997 Plan. In conjunction with such purchase, options to
acquire an aggregate of an additional 264,440 shares of common stock were
granted to the executive officers. For executive officers with aggregate
indebtedness in excess of $60,000 during fiscal year 1998, the following table
shows the amount of indebtedness due under term notes executed by such executive
officers ("Stockholder Notes") with respect to their purchases of restricted
stock:
<TABLE>
<CAPTION>
Largest Aggregate Amount of Amount of Indebtedness
Indebtedness During Fiscal Outstanding at July 24,
Name Year 1998 1998
--------------------------- --------------------------- ----------------------
<S> <C> <C>
Beth A. Ugoretz $ 242,187 $ 77,187
Bruce A. Walters 150,002 150,002
Trudy R. Anderson 87,995 87,995
DeeAnn M. Besch 84,003 84,003
Edward L. Brewington 125,651 125,651
Marcia P. Guddemi, Ph.D. 79,991 79,991
S. Wray Hutchinson 166,258 166,258
Dan R. Jackson 94,145 94,145
Lauren A. Klein 89,009 89,009
Eva M. Kripalani 120,005 120,005
Miriam D. Liggett 91,005 91,005
Bobby J. Willey 105,001 105,001
</TABLE>
The Stockholder Notes are due February 20, 2008 and bear interest at 5.84% per
annum, payable semi-annually on June 30 and December 31. Certain of the
Stockholder Notes contain mandatory prepayment provisions.
61
<PAGE>
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following is an index of the financial statements, schedules and
exhibits included in this Report or incorporated herein by reference:
(a)(1) Financial Statements.
Page
Consolidated Balance Sheets at May 29, 1998 and
May 30, 1997 and..................................... 31
Consolidated Statements of Operations for the fiscal years
ended May 29, 1998, May 30, 1997, and
May 31, 1996......................................... 32
Consolidated Statements of Stockholders' Equity
for the fiscal years ended May 29, 1998, May 30,
1997 and May 31, 1996................................ 33
Consolidated Statements of Cash Flows for the fiscal years
ended May 29, 1998, May 30, 1997 and
May 31, 1996......................................... 34
Notes to Consolidated Financial Statements................. 35-48
Independent Auditors' Reports.............................. 49-50
(a)(2) Schedules to Financial Statements.
None.
(a)(3) Exhibits.
The following is an index of the exhibits included in this Annual
Report on Form 10-K or incorporated herein by reference.
62
<PAGE>
Exhibit
Number Description of Exhibits
- ------- -----------------------
2(a) Agreement and Plan of Merger dated as of October 3, 1996, between
KinderCare Learning Centers, Inc. ("KinderCare") and KCLC Acquisition
Corp. ("KCLC Acquisition") (incorporated by reference from Exhibit
2.1(a) to KinderCare's Form S-4, filed January 7, 1997, File no.
333-19345).
2(b) Merger Agreement Amendment dated as of December 27, 1996 between
KinderCare and KCLC Acquisition (incorporated by reference from
Exhibit 2.1(b) to KinderCare's Form S-4, filed January 7, 1997, File
no. 333-19345).
2(c) Voting Agreement, dated as of October 3, 1996, among KCLC Acquisition
and the stockholders parties thereto (incorporated by reference from
Exhibit 2.2(a) to KinderCare's Form S-4, filed January 7, 1997, File
no. 333-19345).
2(d) Voting Agreement Amendment dated as of December 27, 1996 among KCLC
Acquisition and the stockholders parties thereto (incorporated by
reference from Exhibit 2.2(b) to KinderCare's Form S-4, filed January
7, 1997, File no. 333-19345).
2(e) Stockholders' Agreement between KinderCare and the stockholders
parties thereto (incorporated by reference from Exhibit 2.3 of
Amendment No. 1 to KinderCare's Registration Statement on Form S-4
dated April 9, 1997, File no. 333-23127).
3(a) Certificate of Merger of KCLC Acquisition into KinderCare
(incorporated by reference from Exhibit 3.1 of Amendment No. 1 to
KinderCare's Registration Statement on Form S-4 dated April 9, 1997,
File no. 333-23127).
3(b) By-Laws of KinderCare (incorporated by reference from Exhibit 3.2 of
Amendment No. 1 to KinderCare's Registration Statement on Form S-4
dated April 9, 1997, file no. 333-23127).
4(a) Indenture dated as of February 13, 1997 between KinderCare and Marine
Midland Bank, as Trustee (incorporated by reference from Exhibit 4.1
of Amendment No. 1 to KinderCare's Registration Statement on Form S-4
dated April 9, 1997, File no. 333-23127).
4(b) Form of 9 1/2 % Senior Subordinated Note due 2009 (incorporated by
reference from Exhibit 4.2 of Amendment No. 1 to KinderCare's
Registration Statement on Form S-4 dated April 9, 1997, File no.
333-23127).
4(c) Form of 9 1/2% Series B Senior Subordinated Note due 2009
(incorporated by reference from Exhibit 4.3 of Amendment No. 1 to
KinderCare's Registration Statement on Form S-4 dated April 9, 1997,
File no. 333-23127).
63
<PAGE>
10(a) Credit Agreement, dated as of February 13, 1997, among KinderCare, the
several lenders from time to time parties thereto, and the Chase
Manhattan Bank as administrative agent (incorporated by reference from
Exhibit 10.1 of Amendment No. 1 to the KinderCare's Registration
Statement on Form S-4 dated April 9, 1997, File no. 333-23127).
10(b) Registration Rights Agreement, dated as of February 13, 1997, among
KCLC Acquisition, KLC Associated L.P. and KKR Partners II, L.P.
(incorporated by reference from Exhibit 10.2 of Amendment No. 1 to
KinderCare's Registration Statement on Form S-4 dated April 9, 1997,
File no. 333-23127).
10(c) Registration Rights Agreement dated February 13, 1997 among
KinderCare, Chase Securities, Inc., BT Securities Corporation, Salomon
Brothers Inc and Smith Barney Inc. (incorporated by reference from
Exhibit 4.4 of Amendment No. 1 to KinderCare's Registration Statement
on Form S-4 dated April 9, 1997, File no. 333-23127).
10(d)* Employment Agreement of Philip L. Maslowe dated May 8, 1995
(incorporated by reference from Exhibit 10(w) of KinderCare's Annual
Report on Form 10-K for the fiscal year ended June 2, 1995, File No.
0-17098).
10(e)* Letter Agreement relating to termination of employment of Sandra Scarr
dated January 8, 1997 (incorporated by reference from Exhibit 10(e) of
KinderCare's Annual Report on Form 10-K for the fiscal year ended May
30, 1997, File No. 0-17098).
10(f)* Lease between 600 Holladay Limited Partnership and KinderCare Learning
Centers, Inc. dated June 2, 1997 (incorporated by reference from
Exhibit 10(f) of KinderCare's Annual Report on Form 10-K for the
fiscal year ended May 30, 1997, File No. 0-17098).
10(g)* Restated KinderCare Learning Centers, Inc. Nonqualified Deferred
Compensation Plan Effective August 1, 1996 (incorporated by reference
from Exhibit 10(a) to KinderCare's Quarterly Report on Form 10-Q for
the Quarterly Period ended March 6, 1998, File No. 0-17098).
10(h)* 1997 Stock Purchase and Option Plan for Key Employees of KinderCare
Learning Centers, Inc. and Subsidiaries (incorporated by reference
from Exhibit 10(c) to KinderCare's Quarterly Report on Form 10-Q for
the Quarterly Period ended March 6, 1998, File No. 0-17098)
10(i)* Form of Management Stockholder's Agreement (incorporated by reference
from Exhibit 10(d) to KinderCare's Quarterly Report on Form 10-Q for
the Quarterly Period ended March 6, 1998, File No. 0-17098).
10(j)* Form of Non-Qualified Stock Option Agreement (incorporated by
reference from Exhibit 10(e) to KinderCare's Quarterly Report on Form
10-Q for the Quarterly Period ended March 6, 1998, File No. 0-17098).
10(k)* Form of Sale Participation Agreement (incorporated by reference from
Exhibit 10(f) to KinderCare's Quarterly Report on Form 10-Q for the
Quarterly Period ended March 6, 1998, File No. 0-17098).
64
<PAGE>
10(l)* Form of Term Note (incorporated by reference from Exhibit 10(g) to
KinderCare's Quarterly Report on Form 10-Q for the Quarterly Period
ended March 6, 1998, File No. 0-17098).
10(m)* Form of Pledge Agreement (incorporated by reference from Exhibit 10(h)
to KinderCare's Quarterly Report on Form 10-Q for the Quarterly Period
ended March 6, 1998, File No. 0-17098).
10(n)* Stockholders' Agreement dated as of February 14, 1997 between
KinderCare Learning Centers, Inc. and David J. Johnson (incorporated
by reference from Exhibit 10(i) to KinderCare's Quarterly Report on
Form 10-Q for the Quarterly Period ended March 6, 1998, File No.
0-17098).
10(o)* Nonqualified Stock Option Agreement dated as of February 14, 1997
between KinderCare Learning Centers, Inc. and David J. Johnson
(incorporated by reference from Exhibit 10(j) to KinderCare's
Quarterly Report on Form 10-Q for the Quarterly Period ended March 6,
1998, File No. 0-17098).
10(p)* Sale Participation Agreement dated as of February 14, 1997 among KKR
Partners II, L.P., KLC Associates, L.P. and David J. Johnson
(incorporated by reference from Exhibit 10(k) to KinderCare's
Quarterly Report on Form 10-Q for the Quarterly Period ended March 6,
1998, File No. 0-17098).
10(q)* Directors' Deferred Compensation Plan.
10(r) Form of Indemnification Agreement for Directors and Officers of the
Company.
16 Letter from KPMG Peat Marwick LLP re Change in Certifying Accountant,
hereby incorporated by reference from Exhibit 16 of the Registrant's
Current Report on Form 8-K dated April 17, 1997.
21 Subsidiaries of KinderCare.
23(a) Accountants' Consent - Deloitte & Touche, LLP
23(b) Accountants' Consent - KPMG Peat Marwick, LLP
27 Financial Data Schedule.
- --------------
* Management Contract or Compensatory Plan or Arrangement.
The Company does not intend to send an annual report or proxy material to
stockholders during calendar year 1999.
65
<PAGE>
(b) Reports on Form 8-K.
The registrant filed no Reports on Form 8-K during the fourth quarter of
fiscal 1998.
(c) Exhibits Required by Item 601 of Regulation S-K.
The Exhibits to this Report are listed under item 14(a)(3) above.
66
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, on
August 21, 1998.
KINDERCARE LEARNING CENTERS, INC.
By: /s/ DAVID J. JOHNSON
-------------------------------------
David J. Johnson
Chief Executive Officer and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed on the 21st day of August, 1998 by the following
persons in the capacities indicated:
Signature Title
--------- -----
/s/ DAVID J. JOHNSON Chief Executive Officer, and Chairman of
- ---------------------------------- the Board of Directors (Principal
David J. Johnson Executive Officer)
/s/ DAN JACKSON Vice President, Financial Control and
- ---------------------------------- Planning (Principal Financial and
Dan Jackson Accounting Officer)
/s/ HENRY R. KRAVIS Director
- ----------------------------------
Henry R. Kravis
/s/ GEORGE R. ROBERTS Director
- ----------------------------------
George R. Roberts
/s/ CLIFTON S. ROBBINS Director
- ----------------------------------
Clifton S. Robbins
/s/ NILS P. BROUS Director
- ----------------------------------
Nils P. Brous
/s/ SANDRA W. SCARR, Ph.D. Director
- ----------------------------------
Sandra W. Scarr
/s/ STEPHEN KAPLAN Director
- ----------------------------------
Stephen Kaplan
67
<PAGE>
KinderCare Learning Centers, Inc.
Annual Report on Form 10-K
Fiscal Year Ended May 29, 1998
Exhibit Index
Exhibit
Number Description of Exhibits
- ------- -----------------------
2(a) Agreement and Plan of Merger dated as of October 3, 1996, between
KinderCare Learning Centers, Inc. ("KinderCare") and KCLC Acquisition
Corp. ("KCLC Acquisition") (incorporated by reference from Exhibit
2.1(a) to KinderCare's Form S-4, filed January 7, 1997, File no.
333-19345).
2(b) Merger Agreement Amendment dated as of December 27, 1996 between
KinderCare and KCLC Acquisition (incorporated by reference from
Exhibit 2.1(b) to KinderCare's Form S-4, filed January 7, 1997, File
no. 333-19345).
2(c) Voting Agreement, dated as of October 3, 1996, among KCLC Acquisition
and the stockholders parties thereto (incorporated by reference from
Exhibit 2.2(a) to KinderCare's Form S-4, filed January 7, 1997, File
no. 333-19345).
2(d) Voting Agreement Amendment dated as of December 27, 1996 among KCLC
Acquisition and the stockholders parties thereto (incorporated by
reference from Exhibit 2.2(b) to KinderCare's Form S-4, filed January
7, 1997, File no. 333-19345).
2(e) Stockholders' Agreement between KinderCare and the stockholders
parties thereto (incorporated by reference from Exhibit 2.3 of
Amendment No. 1 to KinderCare's Registration Statement on Form S-4
dated April 9, 1997, File no. 333-23127).
3(a) Certificate of Merger of KCLC Acquisition into KinderCare
(incorporated by reference from Exhibit 3.1 of Amendment No. 1 to
KinderCare's Registration Statement on Form S-4 dated April 9, 1997,
File no. 333-23127).
3(b) By-Laws of KinderCare (incorporated by reference from Exhibit 3.2 of
Amendment No. 1 to KinderCare's Registration Statement on Form S-4
dated April 9, 1997, file no. 333-23127).
4(a) Indenture dated as of February 13, 1997 between KinderCare and Marine
Midland Bank, as Trustee (incorporated by reference from Exhibit 4.1
of Amendment No. 1 to KinderCare's Registration Statement on Form S-4
dated April 9, 1997, File no. 333-23127).
4(b) Form of 9 1/2 % Senior Subordinated Note due 2009 (incorporated by
reference from Exhibit 4.2 of Amendment No. 1 to KinderCare's
Registration Statement on Form S-4 dated April 9, 1997, File no.
333-23127).
4(c) Form of 9 1/2% Series B Senior Subordinated Note due 2009
(incorporated by reference from Exhibit 4.3 of Amendment No. 1 to
KinderCare's Registration Statement on Form S-4 dated April 9, 1997,
File no. 333-23127).
<PAGE>
10(a) Credit Agreement, dated as of February 13, 1997, among KinderCare, the
several lenders from time to time parties thereto, and the Chase
Manhattan Bank as administrative agent (incorporated by reference from
Exhibit 10.1 of Amendment No. 1 to the KinderCare's Registration
Statement on Form S-4 dated April 9, 1997, File no. 333-23127).
10(b) Registration Rights Agreement, dated as of February 13, 1997, among
KCLC Acquisition, KLC Associated L.P. and KKR Partners II, L.P.
(incorporated by reference from Exhibit 10.2 of Amendment No. 1 to
KinderCare's Registration Statement on Form S-4 dated April 9, 1997,
File no. 333-23127).
10(c) Registration Rights Agreement dated February 13, 1997 among
KinderCare, Chase Securities, Inc., BT Securities Corporation, Salomon
Brothers Inc and Smith Barney Inc. (incorporated by reference from
Exhibit 4.4 of Amendment No. 1 to KinderCare's Registration Statement
on Form S-4 dated April 9, 1997, File no. 333-23127).
10(d)* Employment Agreement of Philip L. Maslowe dated May 8, 1995
(incorporated by reference from Exhibit 10(w) of KinderCare's Annual
Report on Form 10-K for the fiscal year ended June 2, 1995, File No.
0-17098).
10(e)* Letter Agreement relating to termination of employment of Sandra Scarr
dated January 8, 1997 (incorporated by reference from Exhibit 10(e) of
KinderCare's Annual Report on Form 10-K for the fiscal year ended May
30, 1997, File No. 0-17098).
10(f)* Lease between 600 Holladay Limited Partnership and KinderCare Learning
Centers, Inc. dated June 2, 1997 (incorporated by reference from
Exhibit 10(f) of KinderCare's Annual Report on Form 10-K for the
fiscal year ended May 30, 1997, File No. 0-17098).
10(g)* Restated KinderCare Learning Centers, Inc. Nonqualified Deferred
Compensation Plan Effective August 1, 1996 (incorporated by reference
from Exhibit 10(a) to KinderCare's Quarterly Report on Form 10-Q for
the Quarterly Period ended March 6, 1998, File No. 0-17098).
10(h)* 1997 Stock Purchase and Option Plan for Key Employees of KinderCare
Learning Centers, Inc. and Subsidiaries (incorporated by reference
from Exhibit 10(c) to KinderCare's Quarterly Report on Form 10-Q for
the Quarterly Period ended March 6, 1998, File No. 0-17098)
10(i)* Form of Management Stockholder's Agreement (incorporated by reference
from Exhibit 10(d) to KinderCare's Quarterly Report on Form 10-Q for
the Quarterly Period ended March 6, 1998, File No. 0-17098).
10(j)* Form of Non-Qualified Stock Option Agreement (incorporated by
reference from Exhibit 10(e) to KinderCare's Quarterly Report on Form
10-Q for the Quarterly Period ended March 6, 1998, File No. 0-17098).
<PAGE>
10(k)* Form of Sale Participation Agreement (incorporated by reference from
Exhibit 10(f) to KinderCare's Quarterly Report on Form 10-Q for the
Quarterly Period ended March 6, 1998, File No. 0-17098).
10(l)* Form of Term Note (incorporated by reference from Exhibit 10(g) to
KinderCare's Quarterly Report on Form 10-Q for the Quarterly Period
ended March 6, 1998, File No. 0-17098).
10(m)* Form of Pledge Agreement (incorporated by reference from Exhibit 10(h)
to KinderCare's Quarterly Report on Form 10-Q for the Quarterly Period
ended March 6, 1998, File No. 0-17098).
10(n)* Stockholders' Agreement dated as of February 14, 1997 between
KinderCare Learning Centers, Inc. and David J. Johnson (incorporated
by reference from Exhibit 10(i) to KinderCare's Quarterly Report on
Form 10-Q for the Quarterly Period ended March 6, 1998, File No.
0-17098).
10(o)* Nonqualified Stock Option Agreement dated as of February 14, 1997
between KinderCare Learning Centers, Inc. and David J. Johnson
(incorporated by reference from Exhibit 10(j) to KinderCare's
Quarterly Report on Form 10-Q for the Quarterly Period ended March 6,
1998, File No. 0-17098).
10(p)* Sale Participation Agreement dated as of February 14, 1997 among KKR
Partners II, L.P., KLC Associates, L.P. and David J. Johnson
(incorporated by reference from Exhibit 10(k) to KinderCare's
Quarterly Report on Form 10-Q for the Quarterly Period ended March 6,
1998, File No. 0-17098).
10(q)* Directors' Deferred Compensation Plan.
10(r) Form of Indemnification Agreement for Directors and Officers of the
Company.
16 Letter from KPMG Peat Marwick LLP re Change in Certifying Accountant,
hereby incorporated by reference from Exhibit 16 of the Registrant's
Current Report on Form 8-K dated April 17, 1997.
21 Subsidiaries of KinderCare.
23(a) Accountants' Consent - Deloitte & Touche, LLP
23(b) Accountants' Consent - KPMG Peat Marwick, LLP
27 Financial Data Schedule.
- --------------
* Management Contract or Compensatory Plan or Arrangement.
KINDERCARE LEARNING CENTERS, INC.
DIRECTORS' DEFERRED COMPENSATION PLAN
-------------------------------------
<PAGE>
KINDERCARE LEARNING CENTERS, INC.
DIRECTORS' DEFERRED COMPENSATION PLAN
-------------------------------------
Table of Contents
-----------------
ARTICLE 1 DEFINITIONS..................................................... 1
ARTICLE 2 ELECTION TO DEFER............................................... 3
ARTICLE 3 DEFERRED COMPENSATION ACCOUNTS.................................. 3
ARTICLE 4 PAYMENT OF DEFERRED COMPENSATION................................ 4
ARTICLE 5 ADMINISTRATION.................................................. 5
ARTICLE 6 AMENDMENT OF PLAN............................................... 5
<PAGE>
ARTICLE 1.
DEFINITIONS
-----------
1.1 "Board" shall mean the Board of Directors of Kindercare Learning
Centers, Inc.
1.2 "Book Value" shall mean book value per share based on generally
accepted accounting principals consistently applied, excluding
accounting charges, costs and expenses incurred within 12 months after
the Closing (as such term is defined in the Management Stockholder's
Agreement) related to (i) the separation or severance of headquarters'
personnel, (ii) recruiting and hiring, (iii) the Merger (as such term
is defined in the Management Stockholder's Agreement), and (iv) the
restructuring of the Company, including all costs related to the
moving of the headquarters of the Company to Portland, Oregon and the
closing of the Company's former headquarters in Montgomery, Alabama,
and also excluding, in the Board of Directors' discretion, any
extraordinary or unusual charges or credits such as one time
write-offs of goodwill or similar events.
1.3 "Change of Control" shall mean (i) a sale of all or substantially all
of the assets of the Company (other than in connection with financing
transactions, sale and leaseback transactions or other similar
transactions) to a person who is not KKR or an affiliate (as such term
is defined in Section 12b-2 of the Securities Exchange Act of 1934, as
amended) of KKR ("KKR Affiliates" and, together with KKR, the "KKR
Entities"), (ii) a sale by KKR or any KKR Affiliate resulting in more
than 50% of the voting stock of the Company being held by a person or
group that does not include a KKR Entity or (iii) (a) a merger or
consolidation of the Company into another person which is not a KKR
Entity or (b) any dilution of KKR's beneficial ownership interest in
the Company which results in the KKR Entities owning less than 50% of
the outstanding shares of the Common Stock of the Company; if and only
if any such event described in either (iii) (a) or (b) results in the
inability of the KKR Entities to elect a majority of the Board (or the
board of directors of a resulting entity).
1.4 "Common Stock" shall mean the Common Stock of the Company.
1.5 "Company" shall mean Kindercare Learning Centers, Inc.
1.6 "Director" shall mean a member of the Board of Directors of the
Company who is not an employee of the Company or any of its
subsidiaries.
1.7 "Fees" shall mean amounts earned for serving as a member of the Board,
including any committees of the Board.
1.8 "KKR" shall mean Kohlberg, Kravis, Roberts & Co., L.P.
<PAGE>
1.9 "Plan" shall mean this Deferred Compensation Plan for Directors as it
may be amended from time to time.
1.10 "Public Offering" shall mean the sale of shares of Common Stock to the
public subsequent to the date hereof pursuant to a registration
statement under the Securities Act of 1933, as amended, which has been
declared effective by the Securities and Exchange Commission (other
than a registration statement on Form S-8) which results in an active
trading market of 30% or more of the outstanding shares of the Common
Stock.
1.11 "Stock Account" shall mean the account created by the Company pursuant
to Article III of this Plan in accordance with an election by a
Director to defer Fees and receive stock-based compensation under
Article II hereof.
1.12 "Stock Value" shall mean, for any given day, (i) if the Common Stock
of the Company is not publicly traded, $19 per share, plus or minus
any increase or decrease in the Book Value, of the Company's Common
Stock since February 14, 1997, and (ii) following a Public Offering,
the "Public Stock Price", which shall mean: (A) the price per share
equal to the average of the closing price of the Company's Common
Stock on the day in question, as reported on each national securities
exchange upon which such Common Stock is listed on such day or, (B) if
there have been no sales on any of such exchanges on the day in
question, the average of the closing bid and asked prices on each such
exchange on the next preceding date when such bid and asked price
occurred or (C) if the Common Stock shall not be so listed, the
closing sales price as reported by the National Association of
Securities Dealers Automated Quotation system at the end of the day in
question or (D) if there is no such bid and asked price on the date in
question, the average closing sales price as reported by the National
Association of Securities Dealers, Inc. in the "pink sheets" for the
15-day period immediately preceding the date in question, or (E) if no
such sales occurred within such 15-day period, the Book Value.
Notwithstanding the foregoing, if in the event of a Change of Control
and, within thirty (30) days thereafter, a Director becomes entitled
to a distribution of the Director's Stock Account, the Stock Value
shall mean the price paid in cash or the value of any consideration
received in the transaction resulting in the Change of Control by each
holder of the Company's Common Stock or, if greater, the Public Stock
Price. For purposes of this definition, Book Value shall be calculated
based on the unaudited financial statements for the last day of the
financial period preceding the applicable calculation date.
1.13 "Year" shall mean calendar year.
1.14 "He", "Him" or "His" shall apply equally to male and female members of
the Board.
<PAGE>
ARTICLE 2
ELECTION TO DEFER
-----------------
2.1 A Director may irrevocably elect, on or before December 31 of any
Year, to defer payment of all or a specified part of all Fees earned
during the Year following such election and succeeding Years (until
the Director ceases to be a Director); provided, however, that with
respect to Year 1998 a Director may elect, within thirty (30) days
after adoption of this Plan, to defer all or a specified part of all
Fees earned on or after the date of adoption of this Plan. Any person
who shall become a Director during any Year, and who was not a
Director of the Company on the preceding December 31, may elect,
before the Director's term begins, to defer payment of all or a
specified part of such Fees earned during the remainder of such Year
and for succeeding Years. Any Fees deferred pursuant to this Paragraph
shall be paid to the Director at the time(s) and in the manner
specified in Article IV hereof, as designated by the Director.
2.2 The election to participate in the Plan and manner of payment shall be
designated by submitting a letter in the form attached hereto as
Appendix A to the Secretary of the Company.
2.3 The election shall continue from Year to Year unless the Director
terminates it by written request delivered to the Secretary of the
Company prior to the commencement of the Year for which the
termination is first effective.
ARTICLE 3
DEFERRED COMPENSATION ACCOUNTS
------------------------------
3.1 The Company shall maintain separate memorandum accounts for the Fees
deferred by each Director.
3.2 The Company shall credit, on the date Fees become payable, the Stock
Account of each Director with the number of phantom shares of Common
Stock which is equal to the deferred Fees due the Director as to which
an election to receive stock-based compensation has been made, divided
by the Stock Value on the date such fees would otherwise have been
paid. For purposes of this Section 3.3, the Stock Value shall be
determined on the date fees would otherwise have been paid.
<PAGE>
3.3 The Company shall credit, on the date that any dividends are paid with
respect to the Common Stock, the Stock Account of each Director who
has elected to defer Fees with the number of phantom shares of Common
Stock equal to the cash dividends payable on the number of phantom
shares of Common Stock represented in each Director's Stock Account
divided by the Stock Value on the dividend payment date. If
adjustments are made to the outstanding shares of Common Stock as a
result of split-ups, recapitalizations, mergers, consolidations and
the like, an appropriate adjustment also will be made in the number of
phantom shares of Common Stock credited to the Director's Stock
Account.
3.4 The value of the Common Stock shall be computed to three decimal
places.
3.5 Nothing contained herein shall be deemed to create a trust of any kind
or any fiduciary relationship. To the extent that any person acquires
a right to receive payments from the Company under the Plan, such
right shall be no greater than the right of any unsecured general
creditor of the Company.
ARTICLE 4
PAYMENT OF DEFERRED COMPENSATION
--------------------------------
4.1 Subject to the second succeeding sentence of this Section 4.1, amounts
contained in a Director's Stock Account shall be distributed as the
Director's election (made pursuant to Paragraph 2.2 of Article II
hereof) shall provide. Distributions shall begin with the earlier of
the first day of the Year following the Director's retirement or
separation from the Board, or the termination of this Plan. Amounts
credited to a Director's Stock Account shall be paid, in cash
(determined by multiplying the number of full phantom shares in the
Director's Stock Account by the then Stock Value).
4.2 Each Director shall have the right to designate a beneficiary who is
to succeed to his right to receive payments hereunder in the event of
his death. Any designated beneficiary shall receive payments in the
same manner as the Director would have received payments if he had
lived. In case of a failure of designation or the death of a
designated beneficiary without a designated successor, the balance of
the amounts contained in the Director's Stock Account shall be payable
in accordance with Section 4.1 to the Director's or former Director's
estate in full on the first day of the Year following the Year in
which he dies. No designation of beneficiary or change in beneficiary
shall be valid unless in writing signed by the Director and filed with
the Secretary of the Company.
<PAGE>
ARTICLE 5
ADMINISTRATION
--------------
5.1 The Company shall administer the Plan at its expense. All decisions
made by the Company with respect to issues hereunder shall be final
and binding on all parties.
5.2 Except to the extent required by law, the right of any Director or any
beneficiary to any benefit or to any payment hereunder shall not be
subject in any manner to attachment or other legal process for the
debts of such Director or beneficiary; and any such benefit or payment
shall not be subject to alienation, sale, transfer, assignment or
encumbrance.
ARTICLE 6
AMENDMENT OF PLAN
-----------------
6.1 The Plan may be amended, suspended or terminated in whole or in part
from time to time by the Board except that no amendment, suspension,
or termination shall apply to the payment to any Director or
beneficiary of a deceased Director of any amounts previously credited
to a Director's Stock Account.
Adopted and Approved by the Board of Directors: May 27, 1998
<PAGE>
APPENDIX A
Date______________________________
- ---------------------------
Corporate Secretary
Kindercare Learning Centers, Inc.
- ----------------------------
- ------------------, -------- -----
Dear Mr. ______________:
Pursuant to the Kindercare Learning Centers, Inc. Directors'
Deferred Compensation Plan, (the "Plan"), I hereby irrevocably elect to defer
receipt of all or a portion of my Director's fees commencing May [__], 1998 and
for succeeding calendar years commencing January 1, 1999, in accordance with the
percentages indicated below.
I elect to have my Director's fees (and committee fees, if any)
credited as follows (fill in appropriate percentages for options a and b,
below):
(a) _______% of the aggregate Director's fees shall be credited
to my Stock Account as defined in the Plan;
(b) _______% of the aggregate Director's fees shall not be
deferred, but shall be paid to me directly as they accrue.
Further, I elect to receive the payments pursuant to the Plan
(check method desired, below):
_______ in one lump sum
_______ in ______ equal annual installments
Further, I understand that my Stock Account shall become payable
on the first day of January or as soon thereafter as is practicable following my
retirement or separation from the Board.
In the event of my death prior to receipt of all or any balance
of such fees and interest or dividends thereon so accumulated, I designate
_______________________ as my beneficiary to receive the funds so accumulated.
Very truly yours,
KINDERCARE LEARNING CENTERS, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is effective as of May 30,
1998 by and between KinderCare Learning Centers, Inc., a Delaware corporation
(the "Company"), and _____________ _____________ ("Indemnitee").
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve the Company and its related
entities;
WHEREAS, in order to induce Indemnitee to continue to provide services to
the Company, the Company wishes to provide for the indemnification of, and the
advancement of expenses to, Indemnitee to the maximum extent permitted by law;
WHEREAS, the Company and Indemnitee recognize the continued difficulty in
obtaining liability insurance for the Company's directors, officers, employees,
agents and fiduciaries, the significant increases in the cost of such insurance
and the general reductions in the coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees, agents and fiduciaries to expensive litigation risks at the same time
as the availability and coverage of liability insurance has been severely
limited;
WHEREAS, the Company and Indemnitee desire to have in place the additional
protection provided by an indemnification agreement and to provide
indemnification and advancement of expenses to the Indemnitee to the maximum
extent permitted by Delaware law; and
WHEREAS, in view of the considerations set forth above, the Company desires
that Indemnitee shall be indemnified and advanced expenses by the Company as set
forth herein,
NOW, THEREFORE, the Company and Indemnitee hereby agree as set forth below.
1. Certain Definitions.
(a) "Change in Control" shall mean, and shall be deemed to have
occurred if, on or after the date of this Agreement, (i) any "person" (as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended), other than a trustee or other fiduciary holding securities under an
employee benefit plan of the Company acting in such capacity or a corporation
owned directly or indirectly by the stockholders of the Company in substantially
the same proportions as their ownership of stock of the Company, becomes the
"beneficial owner" (as defined in Rule l3d-3 under said Act), directly or
indirectly, of securities of the Company representing more than 50% of the total
voting power represented by the Company's then outstanding Voting Securities,
(ii) during any period of two consecutive years, individuals who at
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<PAGE>
the beginning of such period constitute the Board of Directors of the Company
and any new director whose election by the Board of Directors or nomination for
election by the Company's stockholders was approved by a vote of at least two
thirds (2/3) of the directors then still in office who either were directors at
the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof,
or (iii) the stockholders of the Company approve a merger or consolidation of
the Company with any other corporation other than a merger or consolidation
which would result in the Voting Securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into Voting Securities of the surviving
entity) at least 80% of the total voting power represented by the Voting
Securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation, or the stockholders of the Company approve a plan
of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of (in one transaction or a series of related
transactions) all or substantially all of the Company's assets.
(b) "Claim" shall mean with respect to a Covered Event: any
threatened, pending or completed action, suit, proceeding or alternative dispute
resolution mechanism, or any hearing, inquiry or investigation that Indemnitee
in good faith believes might lead to the institution of any such action, suit,
proceeding or alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other.
(c) References to the "Company" shall include, in addition to
KinderCare Learning Centers, Inc., any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger to which
KinderCare Learning Centers, Inc. (or any of its wholly owned subsidiaries) is a
party which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees, agents or
fiduciaries, so that if Indemnitee is or was a director, officer, employee,
agent or fiduciary of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee, agent
or fiduciary of another corporation, partnership, joint venture, employee
benefit plan, trust or other enterprise, Indemnitee shall stand in the same
position under the provisions of this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(d) "Covered Event" shall mean any event or occurrence related to the
fact that Indemnitee is or was a director, officer, employee, agent or fiduciary
of the Company, or any subsidiary of the Company, or is or was serving at the
request of the Company as a director, officer, employee, agent or fiduciary of
another corporation, partnership, joint venture, trust or other enterprise, or
by reason of any action or inaction on the part of Indemnitee while serving in
such capacity.
(e) "Expenses" shall mean any and all expenses (including attorneys'
fees and all other costs, expenses and obligations incurred in connection with
investigating, defending, being a witness in or participating in (including on
appeal), or preparing to defend, to be a witness in or to participate in, any
action, suit, proceeding, alternative dispute resolution mechanism, hearing,
inquiry or investigation), judgments, fines, penalties and amounts paid in
settlement (if such
2
<PAGE>
settlement is approved in advance by the Company, which approval shall not be
unreasonably withheld), actually and reasonably incurred, of any Claim and any
federal, state, local or foreign taxes imposed on the Indemnitee as a result of
the actual or deemed receipt of any payments under this Agreement.
(f) "Expense Advance" shall mean a payment to Indemnitee pursuant to
Section 3 of Expenses in advance of the settlement of or final judgment in any
action, suit, proceeding or alternative dispute resolution mechanism, hearing,
inquiry or investigation which constitutes a Claim.
(g) "Independent Legal Counsel" shall mean an attorney or firm of
attorneys, selected in accordance with the provisions of Section 2(d) hereof,
who shall not have otherwise performed services for the Company or Indemnitee
within the last three years (other than with respect to matters concerning the
rights of Indemnitee under this Agreement, or of other indemnitees under similar
indemnity agreements).
(h) References to "other enterprises" shall include employee benefit
plans; references to "fines" shall include any excise taxes assessed on
Indemnitee with respect to an employee benefit plan; and references to "serving
at the request of the Company" shall include any service as a director, officer,
employee, agent or fiduciary of the Company which imposes duties on, or involves
services by, such director, officer, employee, agent or fiduciary with respect
to an employee benefit plan, its participants or its beneficiaries; and if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to
be in the interest of the participants and beneficiaries of an employee benefit
plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the
best interests of the Company" as referred to in this Agreement.
(i) "Reviewing Party" shall mean, subject to the provisions of Section
2(d), any person or body appointed by the Board of Directors in accordance with
applicable law to review the Company's obligations hereunder and under
applicable law, which may include a member or members of the Company's Board of
Directors, Independent Legal Counsel or any other person or body not a party to
the particular Claim for which Indemnitee is seeking indemnification.
(j) "Section" refers to a section of this Agreement unless otherwise
indicated.
(k) "Voting Securities" shall mean any securities of the Company that
vote generally in the election of directors.
2. Indemnification.
(a) Indemnification of Expenses. Subject to the provisions of Section
2(b) below, the Company shall indemnify Indemnitee for Expenses to the fullest
extent permitted by law if Indemnitee was or is or becomes a party to or witness
or other participant in, or is threatened to be made a party to or witness or
other participant in, any Claim (whether by reason of or arising in part out of
a Covered Event), including all interest, assessments and other charges paid or
payable in connection with or in respect of such Expenses.
3
<PAGE>
(b) Review of Indemnification Obligations. Notwithstanding the
foregoing, if any Reviewing Party has determined (in a written opinion, in any
case in which Independent Legal Counsel is the Reviewing Party) that Indemnitee
is not entitled to be indemnified hereunder under applicable law (assuming all
disputed facts or matters of law are resolved in favor of Indemnitee), (i) the
Company shall have no further obligation under Section 2(a) to make any payments
to Indemnitee not made prior to such determination by such Reviewing Party, and
(ii) the Company shall be entitled to be reimbursed by Indemnitee (who hereby
agrees to reimburse the Company) for all Expenses theretofore paid in
indemnifying Indemnitee; provided, however, that if Indemnitee has commenced or
thereafter commences legal proceedings in a court of competent jurisdiction to
secure a determination that Indemnitee is entitled to be indemnified hereunder
under applicable law, any determination made by any Reviewing Party that
Indemnitee is not entitled to be indemnified hereunder under applicable law
shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expenses theretofore paid in indemnifying Indemnitee until a
final judicial determination is made with respect thereto (as to which all
rights of appeal therefrom have been exhausted or lapsed). Indemnitee's
obligation to reimburse the Company for any Expenses shall be unsecured and no
interest shall be charged thereon. Notwithstanding any other provision of this
Agreement, Indemnitee shall be deemed to be entitled to indemnification for all
Expenses of Indemnitee if the Reviewing Party fails to make the determination
provided by this Section 2(b) within 30 days following Indemnitee's written
request for indemnification for such Expenses.
(c) Indemnitee Rights on Unfavorable Determination: Binding Effect. If
any Reviewing Party determines that Indemnitee substantively is not entitled to
be indemnified hereunder in whole or in part under applicable law, Indemnitee
shall have the right to commence litigation seeking an initial determination by
the court or challenging any such determination by such Reviewing Party or any
aspect thereof, including the legal or factual basis therefor, and the Company
hereby consents to service of process and to appear in any such proceeding.
Absent such litigation, any determination by any Reviewing Party shall be
conclusive and binding on the Company and Indemnitee.
(d) Selection of Reviewing Party: Change in Control. If there has not
been a Change in Control, any Reviewing Party shall be selected by the Board of
Directors, and if there has been such a Change in Control (other than a Change
in Control which has been approved by a majority of the Company's Board of
Directors who were directors immediately prior to such Change in Control), any
Reviewing Party with respect to all matters thereafter arising concerning the
rights of Indemnitee to indemnification of Expenses under this Agreement or any
other agreement or under the Company's Certificate of Incorporation or Bylaws as
now or hereafter in effect, or under any other applicable law, if desired by
Indemnitee, shall be Independent Legal Counsel selected by Indemnitee and
approved by the Company (which approval shall not be unreasonably withheld).
Such counsel, among other things, shall render its written opinion to the
Company and Indemnitee as to whether and to what extent Indenmitee would be
entitled to be indemnified hereunder under applicable law and the Company agrees
to abide by such opinion. The Company agrees to pay the reasonable fees of the
Independent Legal Counsel referred to above and to indemnify fully such counsel
against any and all expenses (including attorneys' fees), claims, liabilities
and damages arising out of or relating to this Agreement or its engagement
pursuant hereto. Notwithstanding any
4
<PAGE>
other provision of this Agreement, the Company shall not be required to pay
Expenses of more than one Independent Legal Counsel in connection with all
matters concerning a single Indemnitee, and such Independent Legal Counsel shall
be the Independent Legal Counsel for any or all other Indemnitees unless (i) the
Company otherwise determines or (ii) any Indemnitee shall provide a written
statement setting forth in detail a reasonable objection to such Independent
Legal Counsel representing other Indemnitees.
(e) Mandatory Payment of Expenses. Notwithstanding any other provision
of this Agreement other than Section 10 hereof, to the extent that Indemnitee
has been successful on the merits or otherwise, including, without limitation,
the dismissal of an action without prejudice, in defense of any Claim,
Indemnitee shall be indemnified against all Expenses incurred by Indemnitee in
connection therewith.
3. Expense Advances.
(a) Obligation to Make Expense Advances. Upon receipt of a written
undertaking by or on behalf of the Indemnitee to repay such amounts if it shall
ultimately be determined that the Indemnitee is not entitled to be indemnified
therefor by the Company, the Company shall make Expense Advances to Indemnitee.
(b) Form of Undertaking. Any written undertaking by the Indemnitee to
repay any Expense Advances hereunder shall be unsecured and no interest shall be
charged thereon.
(c) Determination of Reasonable Expense Advances. The parties agree
that for the purposes of any Expense Advance for which Indemnitee has made
written demand to the Company in accordance with this Agreement, all Expenses
included in such Expense Advance that are certified by affidavit of Indemnitee's
counsel as being reasonable shall be presumed conclusively to be reasonable.
4. Procedures for Indemnification and Expense Advances.
(a) Timing of Payments. All payments of Expenses (including without
limitation Expense Advances) by the Company to the Indemnitee pursuant to this
Agreement shall be made to the fullest extent permitted by law as soon as
practicable after written demand by Indemnitee therefor is presented to the
Company, but in no event later than forty-five (45) business days after such
written demand by Indemnitee is presented to the Company, except in the case of
Expense Advances, which shall be made no later than twenty (20) business days
after such written demand by Indemnitee is presented to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition
precedent to Indemnitee's right to be indemnified or Indemnitee's right to
receive Expense Advances under this Agreement, give the Company notice in
writing as soon as practicable of any Claim made against Indemnitee for which
indemnification will or could be sought under this Agreement. Notice to the
Company shall be directed to the Chief Executive Officer of the Company at the
address shown on the signature page of this Agreement (or such other address as
the Company shall
5
<PAGE>
designate in writing to Indemnitee). In addition, Indemnitee shall give the
Company such information and cooperation as it may reasonably require and as
shall be within Indemnitee's power.
(c) No Presumptions Burden of Proof. For purposes of this Agreement,
the termination of any Claim by judgment, order, settlement (whether with or
without court approval) or conviction, or upon a plea of nolo contendere, or its
equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by this Agreement or applicable
law. In addition, neither the failure of any Reviewing Party to have made a
determination as to whether Indemnitee has met any particular standard of
conduct or had any particular belief, nor an actual determination by any
Reviewing Party that Indemnitee has not met such standard of conduct or did not
have such belief, prior to the commencement of legal proceedings by Indemnitee
to secure a judicial determination that Indemnitee should be indemnified under
this Agreement or applicable law, shall be a defense to Indemnitee's claim or
create a presumption that Indemnitee has not met any particular standard of
conduct or did not have any particular belief. In connection with any
determination by any Reviewing Party or otherwise as to whether the Indemnitee
is entitled to be indemnified hereunder, the burden of proof shall be on the
Company to establish that Indemnitee is not so entitled.
(d) Notice to Insurers. If, at the time of the receipt by the Company
of a notice of a Claim pursuant to Section 4(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim to the insurers in accordance
with the procedures set forth in the respective policies. The Company shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of the Indemnitee, all amounts payable as a result of such Claim in
accordance with the terms of such policies.
(e) Selection of Counsel. If the Company shall be obligated hereunder
to provide indemnification for or make any Expense Advances with respect to the
Expenses of any Claim, the Company, if appropriate, shall be entitled to assume
the defense of such Claim with counsel approved by Indemnitee (which approval
shall not be unreasonably withheld) upon the delivery to Indemnitee of written
notice of the Company's election to do so. After delivery of such notice,
approval of such counsel by Indemnitee and the retention of such counsel by the
Company, the Company will not be liable to Indemnitee under this Agreement for
any fees or expenses of separate counsel subsequently employed by or on behalf
of Indemnitee with respect to the same Claim; provided that, (i) Indemnitee
shall have the right to employ Indemnitee's separate counsel in any such Claim
at Indemnitee's expense and (ii) if (A) the employment of separate counsel by
Indemnitee has been previously authorized by the Company, (B) Indemnitee shall
have reasonably concluded that there may be a conflict of interest between the
Company and Indemnitee in the conduct of any such defense, or (C) the Company
shall not continue to retain such counsel to defend such Claim, then the fees
and expenses of Indemnitee's separate counsel shall be Expenses for which
Indemnitee may receive indemnification or Expense Advances hereunder.
6
<PAGE>
5. Additional Indemnification Rights; Nonexclusivity.
(a) Scope. The Company hereby agrees to indemnify the Indemnitee to
the fullest extent permitted by law, notwithstanding that such indemnification
is not specifically authorized by the other provisions of this Agreement, the
Company's Certificate of Incorporation, the Company's Bylaws or by statute. If
any change after the date of this Agreement in any applicable law, statute or
rule expands the right of a Delaware corporation to indemnify a member of its
board of directors or an officer, employee, agent or fiduciary, it is the intent
of the parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits afforded by such change. If any change in any applicable law, statute
or rule narrows the right of a Delaware corporation to indemnify a member of its
board of directors or an officer, employee, agent or fiduciary, such change, to
the extent not otherwise required by such law, statute or rule to be applied to
this Agreement, shall have no effect on this Agreement or the parties' rights
and obligations hereunder except as set forth in Section 10(a) hereof.
(b) Nonexclusivity. The indemnification and the payment of Expense
Advances provided by this Agreement shall be in addition to any rights to which
Indemnitee may be entitled under the Company's Certificate of Incorporation, its
Bylaws, any other agreement, any vote of stockholders or disinterested
directors, the Delaware General Corporation Law, or otherwise. The
indemnification and the payment of Expense Advances provided under this
Agreement shall continue as to Indenmmnitee for any action taken or not taken
while serving 'in an indemnified capacity even though subsequent thereto
Indemnitee may have ceased to serve in such capacity.
6. No Duplication of Payments. The Company shall not be liable under this
Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, provision of the Company's Certificate of
Incorporation, Bylaws or otherwise) of the amounts otherwise payable hereunder.
7. Partial Indemnification. If Indemnitee is entitled under any provision
of this Agreement to indemnification by the Company for some or a portion of
Expenses incurred in connection with any Claim, but not, however, for all of the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion of such Expenses to which Indemnitee is entitled.
8. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge that
in certain instances, federal law or applicable public policy may prohibit the
Company from indemnifying its directors, officers, employees, agents or
fiduciaries under this Agreement or otherwise. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the U.S. Securities and Exchange Commission to submit the
question of indemnification to a court in certain circumstances for a
determination of the Company's right under public policy to indemnify
Indemnitee.
9. Liability Insurance. To the extent the Company maintains liability
insurance applicable to directors, officers, employees, agents or fiduciaries,
Indemnitee shall be covered by
7
<PAGE>
such policies in such a manner as to provide Indemnitee the same rights and
benefits as are provided to the most favorably insured of the Company's
directors, if Indemnitee is a director; or of the Company's officers, if
Indemnitee is not a director of the Company but is an officer; or of the
Company's key employees, agents or fiduciaries, if Indemnitee is not an officer
or director but is a key employee, agent or fiduciary.
10. Exceptions. Notwithstanding any other provision of this Agreement, the
Company shall not be obligated pursuant to the terms of this Agreement:
(a) Excluded Action or Omissions. To indemnify Indemnitee for Expenses
resulting from acts, omissions or transactions for which Indemnitee is
prohibited from receiving indemnification under this Agreement or applicable
law; provided, however, that notwithstanding any limitation set forth in this
Section 10(a) regarding the Company's obligation to provide indemnification,
Indemnitee shall be entitled under Section 3 to receive Expense Advances
hereunder with respect to any such Claim unless and until a court having
jurisdiction over the Claim shall have made a final judicial determination (as
to which all rights of appeal therefrom have been exhausted or lapsed) that
Indemnitee has engaged in acts, omissions or transactions for which Indemnitee
is prohibited from receiving indemnification under this Agreement or applicable
law.
(b) Claims Initiated by Indemnitee. To indemnify or make Expense
Advances to Indemnitee with respect to Claims initiated or brought voluntarily
by Indemnitee and not by way of defense, counterclaim or cross-claim, except (i)
with respect to actions or proceedings brought to establish or enforce a right
to indemnification under this Agreement or any other agreement or insurance
policy or under the Company's Certificate of Incorporation or Bylaws now or
hereafter in effect relating to Claims for Covered Events, (ii) in specific
cases if the Board of Directors has approved the initiation or bringing of such
Claim, or (iii) as otherwise required under Section 145(k) of the Delaware
General Corporation Law, regardless of whether Indemnitee ultimately is
determined to be entitled to such indemnification or insurance recovery, as the
case may be.
(c) Lack of Good Faith. To indemnify Indemnitee for any Expenses
incurred by the Indemnitee with respect to any action instituted (i) by
Indemnitee to enforce or interpret this Agreement, if a court having
jurisdiction over such action determines as provided in Section 13 that each of
the material assertions made by the Indemnitee as a basis for such action was
not made in good faith or was frivolous, or (ii) by or in the name of the
Company to enforce or interpret this Agreement, if a court having jurisdiction
over such action determines as provided in Section 13 that each of the material
defenses asserted by Indemnitee in such action was made in bad faith or was
frivolous.
(d) Claims Under Section 16(b). To indemnify Indemnitee for expenses
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute; provided, however, that
notwithstanding any limitation set forth in this Section 10(d) regarding the
Company's obligation to provide indemnification, Indemnitee shall be entitled
under Section 3 to receive Expense Advances hereunder with respect to any such
Claim unless and until a court having
8
<PAGE>
jurisdiction over the Claim shall have made a final judicial determination (as
to which all rights of appeal therefrom have been exhausted or lapsed) that
Indemnitee has violated said statute.
11. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of and be enforceable by the parties hereto and
their respective successors (including any direct or indirect successor by
purchase, merger, consolidation or otherwise to all or substantially all of the
business or assets of the Company), assigns, spouses, heirs and personal and
legal representatives. The Company shall require and cause any successor
(whether direct or indirect, and whether by purchase, merger, consolidation or
otherwise) to all, substantially all, or a substantial part, of the business or
assets of the Company, by written agreement in form and substance satisfactory
to Indemnitee, expressly to assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to perform
if no such succession had taken place. This Agreement shall continue in effect
regardless of whether Indemnitee continues to serve as a director, officer,
employee, agent or fiduciary (as applicable) of the Company or of any other
enterprise at the Company's request.
13. Expenses Incurred in Action Relating to Enforcement or Interpretation.
If any action is instituted by Indemnitee under this Agreement or under any
liability insurance policies maintained by the Company to enforce or interpret
any of the terms hereof or thereof, Indemnitee shall be entitled to be
indemnified for all Expenses incurred by Indemnitee with respect to such action
(including without limitation attorneys' fees), regardless of whether Indemnitee
is ultimately successful in such action, unless as a part of such action a court
having jurisdiction over such action makes a final judicial determination (as to
which all rights of appeal therefrom have been exhausted or lapsed) that each of
the material assertions made by Indemnitee as a basis for such action was not
made in good faith or was frivolous; provided, however, that until such final
judicial determination is made, Indemnitee shall be entitled under Section 3 to
receive payment of Expense Advances hereunder with respect to such action. If an
action is instituted by or in the name of the Company under this Agreement to
enforce or interpret any of the terms of this Agreement, Indemnitee shall be
entitled to be indemnified for all Expenses incurred by Indemnitee in defense of
such action (including without limitation costs and expenses incurred with
respect to Indemnitee's counterclaims and cross-claims made in such action),
unless as a part of such action a court having jurisdiction over such action
makes a final judicial determination (as to which all rights of appeal therefrom
have been exhausted or lapsed) that each of the material defenses asserted by
Indemnitee in such action was made in bad faith or was frivolous; provided,
however, that until such final judicial determination is made, Indemnitee shall
be entitled under Section 3 to receive payment of Expense Advances hereunder
with respect to such action.
14. Notice. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and signed for by the party addressed, on the date of such
delivery, or (ii) if mailed by domestic certified or registered mail with
postage prepaid, on the third business day after the date postmarked. Addresses
9
<PAGE>
for notice to either party are as shown on the signature page of this Agreement,
or as subsequently modified by written notice.
15. Severability. The provisions of this Agreement shall be severable if
any of the provisions hereof (including any provisions within a single section,
paragraph or sentence) are held by a court of competent jurisdiction to be
invalid, void or otherwise unenforceable, and the remaining provisions shall
remain enforceable to the fullest extent permitted by law. Furthermore, to the
fullest extent possible, the provisions of this Agreement (including without
limitation each portion of this Agreement containing any provision held to be
invalid, void or otherwise unenforceable, that is not itself valid, void or
unenforceable) shall be construed so as to give effect to the intent manifested
by the provision held invalid, illegal or unenforceable.
16. Choice of Law. This Agreement, and all rights, remedies, liabilities,
powers and duties of the parties to this Agreement, shall be governed by and
construed in accordance with the laws of the State of Delaware without regard to
principles of conflicts of laws.
17. Subrogation. If any payment is made under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
18. Amendment and Termination. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed to be or shall constitute a waiver of any other provisions
hereof (whether or not similar), nor shall such waiver constitute a continuing
waiver.
19. Integration and Entire Agreement. This Agreement sets forth the entire
understanding between the parties hereto and supersedes and merges all previous
written and oral negotiations, commitments, understandings and agreements
relating to the subject matter hereof between the parties hereto.
20. No Construction as Employment Agreement. Nothing contained in this
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries or affiliated entities.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Indemnification
Agreement as of the date first above written.
KINDERCARE LEARNING CENTERS, INC.
By:___________________________________
Name:_________________________________
Title:________________________________
Address: KinderCare Learning Centers, Inc.
650 NE Holladay, Suite 1400
Portland, Oregon 97232
AGREED TO AND ACCEPTED
______________________________________
______________________________________
______________________________________
______________________________________
______________________________________
11
<TABLE>
<CAPTION>
SUBSIDIARIES OF KINDERCARE LEARNINGS CENTERS, INC.
--------------------------------------------------
State or Jurisdiction of Approximate Percentage
Name of Subsidiary Incorporation of Voting Securities Owned
- ------------------ ------------------------ --------------------------
<S> <C> <C>
KinderCare Development Corp. Delaware 100%
KinderCare Learning Centres Limited Delaware 100%
KinderCare Properties Limited Delaware 100%
KinderCare Real Estate Corporation Delaware 100%
Mini-Skools, Inc. Delaware 100%
</TABLE>
EXHIBIT 23(a)
The Board of Directors and Stockholders
KinderCare Learning Centers, Inc.:
We consent to the incorporation by reference in Registration Statements Nos.
333-42137 and 333-57445 on Form S-8 of KinderCare Learning Centers, Inc. of our
report dated July 24, 1998, appearing in this Annual Report on Form 10-K of
KinderCare Learning Centers, Inc. for the year ended May 29, 1998.
/s/ DELOITTE & TOUCHE LLP
Portland, Oregon
August 20, 1998
EXHIBIT 23(b)
The Board of Directors and Stockholders
KinderCare Learning Centers, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
333-42137 and 333-57445) on Form S-8 of KinderCare Learning Centers, Inc. of our
report dated August 9, 1996 relating to the consolidated statements of
operations, stockholders' equity, and cash flows of KinderCare Learning Centers,
Inc. and subsidiaries for the year ended May 31, 1996, which report appears in
the May 29, 1998 annual report on Form 10-K of KinderCare Learning Centers,
Inc.
/s/ KPMG PEAT MARWICK LLP
Atlanta, Georgia
August 20, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-29-1998
<PERIOD-START> MAY-31-1997
<PERIOD-END> MAY-29-1998
<CASH> 11,820
<SECURITIES> 0
<RECEIVABLES> 18,682
<ALLOWANCES> 3,695
<INVENTORY> 0
<CURRENT-ASSETS> 44,158
<PP&E> 637,339
<DEPRECIATION> 129,226
<TOTAL-ASSETS> 591,539
<CURRENT-LIABILITIES> 96,040
<BONDS> 401,258
0
0
<COMMON> 95
<OTHER-SE> 31,805
<TOTAL-LIABILITY-AND-EQUITY> 591,539
<SALES> 0
<TOTAL-REVENUES> 597,070
<CGS> 0
<TOTAL-COSTS> 551,577
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,529
<INTEREST-EXPENSE> 40,677
<INCOME-PRETAX> 5,428
<INCOME-TAX> 2,002
<INCOME-CONTINUING> 3,426
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,426
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
</TABLE>
