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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 5, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ___________
Commission file number 0-17098
KINDERCARE LEARNING CENTERS, INC.
(Exact name of registrant as specified in its charter)
Delaware 63-0941966
(State or other (I.R.S. Employer
jurisdiction of incorporation) Identification Number)
650 N.E. Holladay Street, Suite 1400
Portland, Oregon 97232
(Address of principal executive offices)
(503) 872-1300
(Registrant's telephone number, including area code)
(Former name, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing required for the past 90 days. Yes [X] No [ ]
The number of shares of registrant's common stock, $.01 par value per
share, outstanding at April 2, 1999 was 9,480,837.
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<PAGE>
KinderCare Learning Centers, Inc. and Subsidiaries
Index
Part I. Financial Information Page
Item 1. Consolidated financial statements (unaudited):
Consolidated balance sheets at March 5, 1999 and
May 29, 1998 (unaudited)................................. 2
Consolidated statements of operations for the twelve
and forty weeks ended March 5, 1999 and
March 6, 1998 (unaudited)................................ 3
Consolidated statements of stockholders' equity and
comprehensive income for the forty weeks ended
March 5, 1999 and the fiscal year
ended May 29, 1998 (unaudited)........................... 4
Consolidated statements of cash flows for the forty
weeks ended March 5, 1999 and
March 6, 1998 (unaudited)................................ 5
Notes to unaudited consolidated financial statements........ 6
Item 2. Management's discussion and analysis of
financial condition and results of operations............ 8
Part II. Other Information
Item 6. Exhibits and reports on Form 8-K............................16
Signatures....................................................................17
1
<PAGE>
PART I
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
(Unaudited)
March 5, 1999 May 29, 1998
------------- -------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 9,816 $ 11,820
Receivables, net 20,520 14,987
Prepaid expenses and supplies 6,005 4,939
Deferred income taxes 12,412 12,412
------------- -------------
Total current assets 48,753 44,158
Property and equipment, net 549,557 508,113
Deferred income taxes 12,030 12,030
Deferred financing costs and other assets 23,391 27,238
------------- -------------
$ 633,731 $ 591,539
============= =============
Liabilities and Stockholders' Equity:
Current liabilities:
Bank overdrafts $ 7,180 $ 8,184
Accounts payable 7,994 9,796
Current portion of long-term debt 5,140 1,839
Accrued expenses and other liabilities 72,385 76,221
------------- -------------
Total current liabilities 92,699 96,040
Long-term debt 433,887 401,258
Self insurance liabilities 20,263 20,922
Deferred income taxes 5,455 5,444
Other noncurrent liabilities 38,872 35,975
------------- -------------
Total liabilities 591,176 559,639
------------- -------------
Commitments and contingencies
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 9,480,837 shares at March 5, 1999
and 9,474,197 shares at May 29, 1998 95 95
Additional paid-in capital 2,144 2,009
Notes receivable from stockholders (1,128) (1,325)
Retained earnings 41,567 31,179
Accumulated other comprehensive income (123) (58)
------------- -------------
Total stockholders' equity 42,555 31,900
------------- -------------
$ 633,731 $ 591,539
============= =============
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
(Unaudited)
Twelve Weeks Ended Forty Weeks Ended
------------------------------ ------------------------------
March 5, 1999 March 6, 1998 March 5, 1999 March 6, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues, net $ 143,039 $ 134,823 $ 477,550 $ 450,972
------------- ------------- ------------- -------------
Operating expenses:
Salaries, wages and benefits 78,904 73,872 263,740 247,638
Depreciation 8,886 7,730 27,061 26,898
Rent 7,147 7,060 22,629 21,099
Provision for doubtful accounts 1,188 967 2,413 2,932
Other 30,664 32,469 113,954 112,369
Restructuring charges and other income, net (570) 92 (521) 4,947
------------- ------------- ------------- -------------
Total operating expenses 126,219 122,190 429,276 415,883
------------- ------------- ------------- -------------
Operating income 16,820 12,633 48,274 35,089
Investment income 139 76 390 518
Interest expense (9,559) (9,588) (32,026) (31,960)
------------- ------------- ------------- -------------
Income before income taxes 7,400 3,121 16,638 3,647
Income tax expense 2,776 1,061 6,250 1,240
------------- ------------- ------------- -------------
Net income $ 4,624 $ 2,060 $ 10,388 $ 2,407
============= ============= ============= =============
Basic net income per share $ 0.49 $ 0.22 $ 1.10 $ 0.26
============= ============= ============= =============
Diluted net income per share $ 0.48 $ 0.22 $ 1.08 $ 0.26
============= ============= ============= =============
Weighted average common shares outstanding
9,480,000 9,386,000 9,476,000 9,374,000
============= ============= ============= =============
Weighted average common shares outstanding
and potential common shares 9,587,000 9,413,000 9,591,000 9,382,000
============= ============= ============= =============
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Dollars in thousands)
(Unaudited)
Accumulated
Common Stock Additional Stockholders' Other
---------------------- Paid-in Notes Retained Comprehensive
Shares Amount Capital Receivable Earnings Income Total
---------- --------- ----------- ------------ ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at May 30, 1997 9,368,421 $ 94 $ -- $ -- $ 27,753 $ (140) $ 27,707
---------- --------- ----------- ------------ ---------- -------------- ----------
Comprehensive income:
Net income -- -- -- -- 3,426 -- 3,426
Cumulative translation adjustment -- -- -- -- -- 82 82
---------- --------- ----------- ------------ ---------- -------------- ----------
Total comprehensive income -- -- -- -- 3,426 82 3,508
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
---------- --------- ----------- ------------ ---------- -------------- ----------
Comprehensive income:
Net income -- -- -- -- 10,388 -- 10,388
Cumulative translation adjustment -- -- -- -- -- (65) (65)
---------- --------- ----------- ------------ ---------- -------------- ----------
Total comprehensive income -- -- -- -- 10,388 (65) 10,323
Issuance of common stock 6,640 -- 135 (110) -- -- 25
Proceeds from collection of notes
receivable -- -- -- 307 -- -- 307
---------- --------- ----------- ------------ ---------- -------------- ----------
Balance at March 5, 1999 9,480,837 $ 95 $ 2,144 $ (1,128) $ 41,567 $ (123) $ 42,555
========== ========= =========== ============ ========== ============== ==========
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Forty Weeks Ended
--------------------------------
March 5, 1999 March 6, 1998
------------- -------------
<S> <C> <C>
Cash flows from operations:
Net income $ 10,388 $ 2,407
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 27,061 26,898
Provision for doubtful accounts 2,413 2,932
Amortization of deferred financing costs and other assets 2,376 2,377
(Gain) loss on sales and disposals of property and
equipment, net (402) 7
Changes in operating assets and liabilities:
Increase in receivables (8,708) (6,801)
Increase in prepaid expenses and supplies (1,066) (9)
(Increase) decrease in other assets 1,058 (1,414)
Decrease in accounts payable, accrued expenses
and other liabilities (3,389) (5,221)
Other, net (65) 53
------------- -------------
Net cash provided by operating activities 29,666 21,229
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (69,427) (59,461)
Proceeds from sales of property and equipment 1,324 840
Proceeds from collection of notes receivable 1,175 597
------------- -------------
Net cash used by investing activities (66,928) (58,024)
------------- -------------
Cash flows from financing activities:
Proceeds from long-term borrowings 50,000 20,000
Proceeds from issuance of common stock 25 520
Proceeds from collection of stockholders' notes receivable 307 --
Payments on long-term borrowings (14,070) (1,589)
Bank overdrafts (1,004) 3,075
------------- -------------
Net cash provided by financing activities 35,258 22,006
------------- -------------
Decrease in cash and cash equivalents (2,004) (14,789)
Cash and cash equivalents at the beginning of the period 11,820 24,150
------------- -------------
Cash and cash equivalents at the end of the period $ 9,816 $ 9,361
============= =============
Supplemental cash flow information:
Interest paid $ 35,585 $ 34,628
Income taxes paid (refunded), net 834 (45)
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
5
<PAGE>
KinderCare Learning Centers, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Nature of Business and Basis of Presentation
KinderCare Learning Centers, Inc. ("KinderCare") is the leading for-profit
provider of early childhood care and educational services in the United States.
At March 5, 1999, KinderCare operated a total of 1,151 centers, with 1,149
centers in 39 states in the United States and two centers in the United Kingdom.
The consolidated financial statements include the financial statements of
KinderCare and its wholly owned subsidiaries: Mini-Skools Limited; KinderCare
Development Corp.; KinderCare Real Estate Corp.; KinderCare Learning Centres
Limited and KinderCare Properties Limited. All significant intercompany balances
and transactions have been eliminated in consolidation.
The unaudited consolidated financial statements reflect, in the opinion of
management, all adjustments, all of which are of a normal recurring nature,
necessary to present fairly the financial position of KinderCare at March 5,
1999 and the results of operations and cash flows for each of the twelve and
forty week periods ended March 5, 1999 and March 6, 1998. Interim results are
not necessarily indicative of results to be expected for a full fiscal year. The
unaudited consolidated financial statements should be read in conjunction with
the annual consolidated financial statements and notes thereto included in
KinderCare's Form 10-K for the fiscal year ended May 29, 1998.
Fiscal Year
KinderCare'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 1999 and 1998 fiscal years are each 52 weeks long.
References to fiscal 1999 and fiscal 1998 are to the fiscal years ended May 28,
1999 and May 29, 1998, respectively.
Comprehensive Income
Effective May 30, 1998, KinderCare adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income.
KinderCare has disclosed comprehensive income and its components on the face of
the consolidated statement of stockholders' equity and comprehensive income for
all periods presented.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("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. The new standard becomes effective for KinderCare's fiscal
year end 1999 reporting and requires that comparative information from earlier
years be restated to conform to the requirements of this standard. KinderCare
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 KinderCare's fiscal year 2001. KinderCare does not believe
the adoption of SFAS No. 133 will have a material impact on KinderCare's
financial position or results of operations.
6
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
2. Restructuring Charges and Other Income, net
During fiscal year 1997, KinderCare decided to relocate its corporate
offices from Montgomery, Alabama to Portland, Oregon in fiscal 1998. In
connection with the relocation, KinderCare recognized $0.6 and $5.4 million in
restructuring charges during the twelve and forty weeks ended March 6, 1998,
respectively. Expenses incurred were primarily for the retention, recruitment
and relocation of employees and travel costs related to the office relocation.
During the twelve weeks ended March 5, 1999, the remaining relocation reserve
balance related to employee termination benefits of $0.6 million was reversed
following a favorable determination in an arbitration proceeding.
During the twelve weeks ended March 6, 1998, KinderCare, as a member of the
Presidential Life Global Class Action, received a $0.5 million payment, net of
attorney's fees, as settlement of a claim in the United States District Court in
New York.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included elsewhere in this
document. KinderCare's fiscal year ends on the Friday closest to May 31. The
information presented herein refers to the twelve weeks ended March 5, 1999
("third quarter of fiscal 1999") and March 6, 1998 ("third quarter of fiscal
1998") and the forty weeks ended March 5, 1999 and March 6, 1998.
Occupancy, a measure of the utilization of center capacity, is defined by
KinderCare as the full-time equivalent ("FTE") attendance at all of KinderCare's
centers divided by the sum of the licensed capacity of all of KinderCare'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 1.0 FTE, while a
part-time child enrolled for a half-day equates to 0.5 FTE. The FTE measurement
of center capacity utilization does not necessarily reflect the actual number of
full-time and part-time children enrolled.
Average tuition rate is defined by KinderCare as 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.
Results of Operations
Third Quarter of Fiscal 1999 compared to Third Quarter of Fiscal 1998
The following table shows the comparative operating results of KinderCare
(dollars in thousands):
<TABLE>
<CAPTION>
Change
Twelve Weeks Percent Twelve Weeks Percent Amount
Ended of Ended of Increase/
March 5, 1999 Revenues March 6, 1998 Revenues (Decrease)
------------- ---------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues, net $ 143,039 100.0% $ 134,823 100.0% $ 8,216
------------- ---------- ------------- ---------- ------------
Operating expenses:
Salaries, wages and benefits:
Center expense 73,122 51.1 68,308 50.7 4,814
Field and corporate expense 5,782 4.0 5,564 4.1 218
------------- ---------- ------------- ---------- ------------
Total salaries, wages and
benefits 78,904 55.1 73,872 54.8 5,032
Depreciation 8,886 6.2 7,730 5.7 1,156
Rent 7,147 5.0 7,060 5.2 87
Other 31,852 22.3 33,436 24.8 (1,584)
Restructuring charges and other
income, net (570) (0.4) 92 0.1 (662)
------------- ---------- ------------- ---------- ------------
Total operating expenses 126,219 88.2 122,190 90.6 4,029
------------- ---------- ------------- ---------- ------------
Operating income $ 16,820 11.8% $ 12,633 9.4% $ 4,187
============= ========== ============= ========== ============
</TABLE>
Revenues, net - Net revenues increased $8.2 million, or 6.1%, to $143.0
million in the third quarter of fiscal 1999 from the comparable quarter last
year. The increase in net revenues is primarily attributable to a Company-wide
tuition increase implemented in the first and second quarters of fiscal 1999.
The average tuition rate increased $6.44, or 6.0%, to $114.50 for the third
quarter of fiscal 1999 from $108.06 for the third quarter of fiscal 1998.
KinderCare continually evaluates its tuition structure and may implement further
changes during the fiscal year at targeted local levels. Occupancy declined 0.6
percentage points to 67.6% for the third quarter of fiscal 1999 from 68.2% for
the third quarter of fiscal 1998. The decline is primarily a result of the
increased rate of opening new centers. New centers tend to open with lower than
average enrollment and will grow enrollment over
8
<PAGE>
a two to three year maturity cycle. During the third quarter of fiscal 1999,
centers opened within the current and two most previous fiscal years contributed
incremental net revenues of $5.4 million over the comparable quarter last year.
The increase in net revenues was offset in part by an incremental reduction of
$2.1 million due to the closure of certain centers.
During the third quarter of fiscal 1999, KinderCare opened nine community
centers and closed or sold seven centers. During the third quarter of fiscal
1998, KinderCare opened three community centers and closed six centers. Total
licensed capacity was approximately 145,000 and 142,000 at the end of the third
quarter of fiscal 1999 and 1998, respectively.
Salaries, wages and benefits - Salaries, wages and benefits, which include
bonus incentives, increased $5.0 million, or 6.8%, to $78.9 million in the third
quarter of fiscal 1999 from the comparable quarter last year. The expense
directly associated with the centers was $73.1 million in the third quarter of
fiscal 1999, an increase of $4.8 million from the third quarter of fiscal 1998.
The center level increase is primarily attributable to increased staff wage
rates and, to a lesser degree, increased hours and rising health benefit costs.
The expense related to field management and corporate administration was $5.8
million in the third quarter of fiscal 1999, an increase of $0.2 million from
the third quarter of fiscal 1998. Higher salary expense related to field
management has been incurred as a result of the addition of certain field
management positions during fiscal 1998 and 1999.
At the center level, salaries, wages and benefits expense, as a percentage
of net revenues, increased to 51.1% for the third quarter of fiscal 1999 from
50.7% for the comparable quarter last year, due to the higher wage rates
discussed above. Total salaries, wages and benefits expense, as a percentage of
net revenues, increased to 55.1% for the third quarter of fiscal 1999 from 54.8%
for the comparable quarter last year.
Depreciation - Depreciation expense increased $1.2 million to $8.9 million
in the third quarter of fiscal 1999 from the comparable quarter last year. The
increase is a result of the accelerated development of new centers. Subsequent
to the third quarter of fiscal 1998, 35 centers were opened, 31 of which were
owned by KinderCare. Of the 29 centers closed subsequent to the third quarter of
fiscal 1998, 28 were leased and, therefore, had a relatively low depreciable
asset base.
Rent - Rent expense increased $0.1 million to $7.1 million in the third
quarter of fiscal 1999 from the comparable quarter last year. The rental rates
experienced on center leases entered into currently and renewed center leases
are higher than those experienced in previous periods.
Other operating expenses - Other operating expenses decreased $1.6 million,
or 4.7%, to $31.9 million in the third quarter of fiscal 1999 from the
comparable quarter last year. 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 due primarily to
reduced expense related to insurance and marketing, offset by increased center
pre-opening costs. As a percentage of net revenues, other operating expenses
decreased to 22.3% for the third quarter of fiscal 1999 from 24.8% for the
comparable quarter last year. The improvement in other operating expenses, as a
percentage of net revenues, is due to effective overall cost control by
management.
Restructuring charges and other income, net - During fiscal year 1997,
KinderCare decided to relocate its corporate offices from Montgomery, Alabama to
Portland, Oregon in fiscal 1998. In connection with the relocation, KinderCare
recognized $0.6 million in restructuring charges during the third quarter of
fiscal 1998. Expenses incurred were primarily for the retention, recruitment and
relocation of employees and travel costs related to the office relocation.
During the third quarter of fiscal 1999, the remaining relocation reserve
balance related to employee termination benefits of $0.6 million was reversed
following a favorable determination in an arbitration proceeding.
During the third quarter of fiscal 1998, KinderCare, as a member of the
Presidential Life Global Class Action, received a $0.5 million payment, net of
attorney's fees, as settlement of a claim in the United States District Court in
New York.
9
<PAGE>
Operating income - Operating income increased $4.2 million to $16.8 million
in the third quarter of fiscal 1999 from the comparable quarter last year. The
increase is due primarily to the higher average tuition rate, resulting in
increased net revenues, and the effective control of operating expenses, as
discussed above.
EBITDA, defined as earnings before interest expense, income taxes,
depreciation and amortization, for the third quarter of fiscal 1999 was $25.8
million, $5.4 million above the comparable quarter last year. As a percentage of
net revenues, EBITDA for the third quarter of fiscal 1999 was 18.1% compared to
15.2% for the third quarter of fiscal 1998. Adjusted EBITDA, defined as EBITDA
exclusive of restructuring charges and other income, net and investment income
was $25.1 million in the third quarter of fiscal 1999, an increase of $4.7
million from the comparable quarter last year. As a percentage of net revenues,
Adjusted EBITDA was 17.6% for the third quarter of fiscal 1999 and 15.2% for the
third quarter of fiscal 1998. Neither EBITDA nor Adjusted EBITDA is intended to
indicate that cash flow is sufficient to fund all of KinderCare's cash needs or
represent cash flow from operations as defined by generally accepted accounting
principles. In addition, EBITDA and Adjusted EBITDA should not be used as tools
for comparison as the computation may not be similar for all companies.
Interest expense - Interest expense was $9.6 million in both the third
quarter of fiscal 1999 and 1998. KinderCare's weighted average interest rate on
its long-term debt, including amortization of deferred financing costs, was 9.6%
for the third quarter of fiscal 1999 versus 10.1% for the third quarter of
fiscal 1998.
Income tax expense - Income tax expense during the third quarter of fiscal
1999 and 1998 of $2.8 and $1.1 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, offset by tax credits.
Forty Weeks Ended March 5, 1999 compared to Forty Weeks Ended March 6, 1998
The following table shows the comparative operating results of KinderCare
(dollars in thousands):
<TABLE>
<CAPTION>
Change
Forty Weeks Percent Forty Weeks Percent Amount
Ended of Ended of Increase/
March 5, 1999 Revenues March 6, 1998 Revenues (Decrease)
------------- ---------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues, net $ 477,550 100.0% $ 450,972 100.0% $ 26,578
------------- ---------- ------------- ---------- ------------
Operating expenses:
Salaries, wages and benefits:
Center expense 245,122 51.3 230,274 51.1 14,848
Field and corporate expense 18,618 3.9 17,364 3.8 1,254
------------- ---------- ------------- ---------- ------------
Total salaries, wages and
benefits 263,740 55.2 247,638 54.9 16,102
Depreciation 27,061 5.7 26,898 5.9 163
Rent 22,629 4.7 21,099 4.7 1,530
Other 116,367 24.4 115,301 25.6 1,066
Restructuring charges and other
income, net (521) (0.1) 4,947 1.1 (5,468)
------------- ---------- ------------- ---------- ------------
Total operating expenses 429,276 89.9 415,883 92.2 13,393
------------- ---------- ------------- ---------- ------------
Operating income $ 48,274 10.1% $ 35,089 7.8% $ 13,185
============= ========== ============= ========== ============
</TABLE>
Revenues, net - Net revenues increased $26.6 million, or 5.9%, to $477.6
million in the forty weeks ended March 5, 1999 from the comparable period last
year. The increase in net revenues is primarily attributable to a Company-wide
tuition increase implemented in the first and second quarters of fiscal 1999.
The average tuition rate increased $6.58, or 6.2%, to $112.78 for the forty
weeks ended March 5, 1999 from $106.20 for the forty weeks ended March 6, 1998.
KinderCare continually evaluates its tuition structure and may implement further
changes during the fiscal year at targeted local levels. Occupancy declined 0.5
percentage points to 68.8% for the forty weeks ended March 5, 1999 from 69.3%
for the forty weeks ended March 6, 1998. The decline is primarily a result of
the increased rate of opening new centers. New centers tend to open with lower
than average enrollment and will grow enrollment over a two to three year
maturity cycle. Existing center enrollment has been relatively flat, as FTE
attendance has been adversely affected in some markets by public school
provision of preschool and full day kindergarten for some children. During the
forty weeks ended March 5, 1999, centers opened within the
10
<PAGE>
current and two most previous fiscal years contributed incremental net revenues
of $14.7 million over the comparable period last year. The increase in net
revenues was offset in part by an incremental reduction of $5.9 million due to
the closure of certain centers.
During the forty weeks ended March 5, 1999, KinderCare opened 26 centers,
25 community centers and one KinderCare At Work(R) center, and closed or sold 22
centers. During the forty weeks ended March 6, 1998, KinderCare opened 11
community centers and closed 10 centers.
Salaries, wages and benefits - Salaries, wages and benefits, which include
bonus incentives, increased $16.1 million, or 6.5%, to $263.7 million in the
forty weeks ended March 5, 1999 from the comparable period last year. The
expense directly associated with the centers was $245.1 million in the forty
weeks ended March 5, 1999, an increase of $14.8 million from the forty weeks
ended March 6, 1998. The center level increase is primarily attributable to
increased staff wage rates and, to a lesser degree, increased hours and rising
health benefit costs. The expense related to field management and corporate
administration was $18.6 million in the forty weeks ended March 5, 1999, an
increase of $1.3 million from the forty weeks ended March 6, 1998. The increase
is attributable to the addition of certain field management positions during
fiscal 1998 and 1999.
At the center level, salaries, wages and benefits expense, as a percentage
of net revenues, increased slightly to 51.3% for the forty weeks ended March 5,
1999 from 51.1% for the comparable period last year due to higher wage rates
discussed above. Total salaries, wages and benefits expense, as a percentage of
net revenues, increased to 55.2% for the forty weeks ended March 5, 1999 from
54.9% for the comparable period last year.
Depreciation - Depreciation expense increased $0.2 million to $27.1 million
in the forty weeks ended March 5, 1999 from the comparable period last year. The
increase is a result of the accelerated development of new centers. The increase
in depreciation expense was offset, during fiscal 1999, in part by $1.3 million
in reduced expenditures for the replacement of educational supplies and
equipment as a result of a capital program during fiscal 1998 to upgrade the
quantity and quality of such items in each center.
Rent - Rent expense increased $1.5 million to $22.6 million in the forty
weeks ended March 5, 1999 from the comparable period last year. The increase is
primarily a result of KinderCare's occupancy of its new headquarters in
Portland, Oregon during the second quarter of fiscal 1998. In addition, the
rental rates experienced on center leases entered into currently and renewed
center leases are higher than those experienced in previous periods.
Other operating expenses - Other operating expenses increased $1.1 million,
or 0.9%, to $116.4 million in the forty weeks ended March 5, 1999 from the
comparable period last year. The increase is due primarily to increased center
pre-opening costs and taxes and licenses, offset by reduced expenses related to
insurance. As a percentage of net revenues, other operating expenses decreased
to 24.4% for the forty weeks ended March 5, 1999 from 25.6% for the comparable
period last year. The improvement in other operating expenses, as a percentage
of net revenues, is due to effective overall cost control by management.
Restructuring charges and other income, net - During fiscal year 1997,
KinderCare decided to relocate its corporate offices from Montgomery, Alabama to
Portland, Oregon in fiscal 1998. In connection with the relocation, KinderCare
recognized $5.4 million in restructuring charges during the forty weeks ended
March 6, 1998. Expenses incurred were primarily for the retention, recruitment
and relocation of employees and travel costs related to the office relocation.
During the third quarter of fiscal 1999, the remaining relocation reserve
balance related to employee termination benefits of $0.6 million was reversed
following a favorable determination in an arbitration proceeding.
During the third quarter of fiscal 1998, KinderCare, as a member of the
Presidential Life Global Class Action, received a $0.5 million payment, net of
attorney's fees, as settlement of a claim in the United States District Court in
New York.
Operating income - Operating income increased $13.2 million to $48.3
million in the forty weeks ended March 5, 1999 from the comparable period last
year. The increase is due primarily to the higher average tuition rate,
resulting in increased net revenues, the effective control of operating expenses
and the absence of significant
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restructuring charges during the forty weeks ended March 5, 1999, offset in part
by certain increased labor costs, as discussed above.
EBITDA, defined as earnings before interest expense, income taxes,
depreciation and amortization, for the forty weeks ended March 5, 1999 was $75.7
million, $13.2 million above the comparable period last year. As a percentage of
net revenues, EBITDA for the forty weeks ended March 5, 1999 was 15.9% compared
to 13.9% for the forty weeks ended March 6, 1998. Adjusted EBITDA, defined as
EBITDA exclusive of restructuring charges and other income, net and investment
income was $74.8 million in the forty weeks ended March 5, 1999, an increase of
$7.9 million from the comparable period last year. As a percentage of net
revenues, Adjusted EBITDA was 15.7% for the forty weeks ended March 5, 1999 and
14.8% for the forty weeks ended March 6, 1998. Neither EBITDA nor Adjusted
EBITDA is intended to indicate that cash flow is sufficient to fund all of
KinderCare's cash needs or represent cash flow from operations as defined by
generally accepted accounting principles. In addition, EBITDA and Adjusted
EBITDA should not be used as tools for comparison as the computation may not be
similar for all companies.
Interest expense - Interest expense was $32.0 million in both the forty
weeks ended March 5, 1999 and March 6, 1998. KinderCare's weighted average
interest rate on its long-term debt, including amortization of deferred
financing costs, was 9.9% for the forty weeks ended March 5, 1999 versus 10.3%
for the forty weeks ended March 6, 1998.
Income tax expense - Income tax expense during the forty weeks ended March
5, 1999 and March 6, 1998 of $6.3 and $1.2 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, offset by tax credits.
Liquidity and Capital Resources
KinderCare's principal sources of liquidity are cash flow generated from
operations and borrowings under the $300.0 million revolving credit facility. At
March 5, 1999, KinderCare was committed on outstanding letters of credit
totaling $42.2 million and had outstanding draws of $48.0 million under the
revolving credit facility. KinderCare's principal uses of liquidity are meeting
debt service requirements, financing KinderCare's capital expenditures and
renovations and providing working capital.
KinderCare's consolidated net cash provided by operating activities for the
forty weeks ended March 5, 1999 was $29.7 million, which represents a $8.4
million increase in net cash flow from operations from the comparable period
last year. The increase in net cash flow from operations is primarily a result
of an $8.0 million increase in net income, the components of which are discussed
above. Cash and cash equivalents totaled $9.8 million at March 5, 1999 compared
to $11.8 million at May 29, 1998.
New enrollments are generally highest in October and February, with
attendance declining 5% to 10% during the summer months and the calendar
year-end holiday period. The decreased attendance in the summer months and
during the calendar year-end holiday period may result in decreased liquidity
during these periods.
Capital Expenditures
KinderCare anticipates substantial increases in its capital expenditures
budget for the foreseeable future. During fiscal 1999, KinderCare expects to
open approximately 40 new centers. During the forty weeks ended March 5, 1999
and March 6, 1998, KinderCare opened 26 and 11 centers, respectively. Over the
next three years, KinderCare expects to increase its rate of opening and/or
acquiring new centers to approximately 50 new centers per year in the aggregate,
which KinderCare expects will be primarily community centers, and to continue
its practice of closing centers that are identified as not meeting performance
expectations.
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 $2.0 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 located based upon detailed site analyses
that include feasibility and demographic studies and financial
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modeling. No assurance can be given by KinderCare 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 is delayed for a variety of reasons, many
outside the control of KinderCare.
KinderCare also plans to make significant capital expenditures in
connection with a renovation program that is designed to bring all of the
existing facilities to a uniform standard for physical plant and equipment.
Capital expenditures, during the forty weeks ended March 5, 1999 totaled
approximately $69.4 million compared to $59.5 million in the comparable period
last year. Expenditures for new center development were $42.0 and $23.8 million
and renovations on existing facilities were $16.4 and $17.3 million during the
forty weeks ended March 5, 1999 and March 6, 1998, respectively. Purchases of
equipment and corporate information systems were $8.3 and $2.7 million,
respectively, during the forty weeks ended March 5, 1999, and $16.3 and $2.1
million, respectively, during the forty weeks ended March 6, 1998.
Capital expenditure limits under the credit facilities for fiscal 1999 are
$155.0 million. Capital expenditure limits may be increased by carryover of a
portion of unused amounts from previous periods and are subject to certain
exceptions. Also, KinderCare 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 borrowings
under the revolving credit facility will adequately provide for its working
capital and debt service needs and will be sufficient to fund KinderCare's
expected capital expenditures for the foreseeable future. Although no assurance
can be given that such sources will be sufficient, the capital expenditure
program has substantial flexibility and is subject to revision based on various
factors, including but not limited to, business conditions, changing time
constraints, cash flow requirements, debt covenants, competitive factors and
seasonality of openings. If KinderCare 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.
Governmental Laws and Regulations
In August and September of 1998, the National Highway Transportation Safety
Administration ("NHTSA") issued interpretive letters that appear to modify its
interpretation of regulations governing the sale by automobile dealers of
vehicles intended to be used for the transportation of children to and from
school. These letters indicate that dealers may no longer sell 15 passenger vans
for this use and that any vehicle designed to transport eleven persons or more
must meet federal school bus standards if it is likely to be "used
significantly" to transport children to and from school or school-related
events. These interpretations will affect the type of vehicle that may be
purchased by KinderCare in the future for use in transporting children between
schools and KinderCare's centers. KinderCare anticipates that NHTSA's recent
interpretation and potential related changes in state and federal transportation
regulations will increase the cost to KinderCare of transporting children,
because school buses are more expensive to purchase and maintain and may require
drivers who have commercial licenses.
Wage Increases
Salaries, wages and benefits represented approximately 55.2% of net
revenues for the forty weeks ended March 5, 1999. Low unemployment rates and
positive economic trends have challenged recruiting efforts and put pressure on
wage rates in many of KinderCare's markets. KinderCare 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 KinderCare will be able to increase its rates sufficiently
to offset such increased costs. KinderCare continually evaluates its wage
structure and may implement changes at targeted local levels.
Year 2000
The Year 2000 issue is the result of computer programs being written to use
two digits to define year dates. Computer programs running date-sensitive
software may recognize a date using "00" as the year 1900 rather
13
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than the year 2000. This could result in systems failure or miscalculations
causing disruptions of operations. KinderCare does not use information
technology in delivery of its services, but it uses such technology extensively
for financial reporting systems, payroll, purchasing and other important support
functions.
KinderCare has completed an inventory of all hardware, software
applications and data flow exchanges to, or from, third parties and has
identified and assigned test priorities for systems that are critical to
KinderCare's operations. KinderCare has completed testing of approximately 30%
of its critical systems, has determined that there are no material Year 2000
weaknesses in those systems and has remediated any minor weaknesses identified.
KinderCare expects to complete testing of all remaining critical systems and
remediation of any identified weaknesses by July 1999.
KinderCare's current payroll system, provided by an outside vendor, is not
Year 2000 compliant. Based primarily on other business considerations,
KinderCare has purchased a new Human Resource/Payroll software package from a
different vendor. The vendor has represented that the software is Year 2000
compliant and KinderCare plans to test the software for compliance during
software implementation. KinderCare expects to complete implementation and
testing of the new system's essential features by July 1, 1999. KinderCare
anticipates the total cost of purchasing and implementing the Human
Resource/Payroll system, most of which will be incurred in fiscal year 1999, to
be approximately $2 million and that these costs will be expensed as incurred or
will be amortized over five years in accordance with generally accepted
accounting principles.
KinderCare has sent Year 2000 compliance questionnaires to third party
vendors, utility companies and government agencies administering subsidized
tuition programs. KinderCare has also requested compliance certificates from any
vendors identified as critical. Based on a preliminary assessment of responses
received, KinderCare's critical vendors are representing that they will achieve
Year 2000 compliance. KinderCare will continue to monitor the compliance
statements of these vendors and will develop test and/or contingency plans as
deemed necessary.
KinderCare is having limited success in obtaining Year 2000 certifications
from government agencies administering subsidized tuition programs. However,
KinderCare's preliminary assessment of the Year 2000 risks is that, although
payments from those agencies may be delayed, payments ultimately will be made.
Management believes that Year 2000 failures among these agencies would not have
a material adverse effect on KinderCare's business and operations.
KinderCare is developing a contingency plan to address the foregoing, which
is expected to be complete by June 1999. KinderCare will continue to monitor its
Year 2000 risks and will make modifications to its contingency plan as
appropriate.
KinderCare has not incurred significant incremental costs specifically in
connection with its Year 2000 project and all upgrades and system replacements
made in connection with its Year 2000 project were part of previously planned
software and hardware upgrades. In order to achieve Year 2000 compliance,
KinderCare has needed and expects that it will continue to need, only existing
employees who otherwise have been assigned to planned upgrades of KinderCare's
software and hardware. Although KinderCare has engaged a Year 2000 consultant to
validate its testing methodology and to conduct a readiness review, the costs
are expected to be immaterial.
Notwithstanding KinderCare's progress to date, there are several ways in
which its systems could still be affected by the Year 2000 problem. First, the
software code KinderCare uses in its information systems may not in fact be Year
2000 compliant in all instances. Second, KinderCare may be unable to complete
the remaining upgrades to its information technology systems by the year 2000.
Third, even if KinderCare completes the system upgrades by the year 2000, it may
be unable to fully test and monitor the upgrades, making it difficult for
KinderCare to identify and remedy any problems that might exist. Fourth,
KinderCare's vendors, governmental agencies and other third parties with which
KinderCare does business may be unable to achieve Year 2000 compliance in time.
KinderCare is still collecting information necessary to evaluate its most
reasonably likely worst-case Year 2000 scenario. However, management currently
believes that the most reasonably likely worst-case scenario
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resulting from KinderCare's inability, or the inability of KinderCare vendors or
government agencies to become Year 2000 compliant, includes the following
adverse effects:
o Vendor Problems. KinderCare may be unable to receive materials and supplies
due to Year 2000-related failures on the part of its suppliers causing
KinderCare to be unable to meet its scheduled new center openings. In
addition, suppliers of food and other products necessary to operate
existing centers could be affected. Although KinderCare believes that it
could obtain these supplies from alternate sources, that would likely
result in increased costs.
o Payment Delays. As discussed above, payments from governmental agencies
administering tuition programs could be delayed, requiring KinderCare to
fund cash flow requirements through additional borrowings.
KinderCare's assessment of its Year 2000 compliance is based on numerous
assumptions about future events, including third party modification plans and
other factors. However, there can be no guarantee that this assessment is
correct and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes and similar
uncertainties.
Forward Looking Statements
When used in this report, press releases and elsewhere by management or
KinderCare 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 KinderCare'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 KinderCare, 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
KinderCare'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
KinderCare or those entities with which KinderCare 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. KinderCare 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.
15
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PART II
Item 6. Exhibits and reports on Form 8-K
(a) Exhibit:
10(a) - Restated KinderCare Learning Centers, Inc. Nonqualified
Deferred Compensation Plan Effective January 1, 1999
10(b) - Form of Executive Split Dollar Life Insurance Agreement
27 - Financial Data Schedule
(b) Reports on Form 8-K: None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this to be signed on its behalf by the undersigned,
thereunto duly authorized:
KINDERCARE LEARNING CENTERS, INC.
(Registrant)
Date: April 6, 1999 /s/ DAVID J. JOHNSON
----------------------------------
David J. Johnson
Chairman of the Board of Directors
and Chief Executive Officer
Date: April 6, 1999 /s/ DAN R. JACKSON
----------------------------------
Dan R. Jackson
Vice President, Financial Control
and Planning (Principal Financial
and Accounting Officer)
17
CONFORMED COPY
RESTATED
KINDERCARE LEARNING CENTERS, INC.
NONQUALIFIED DEFERRED COMPENSATION PLAN
January 1, 1999
KinderCare Learning Centers, Inc.
a Delaware corporation
650 NE Holladay, Suite 1400
Portland, OR 97232 Company
<PAGE>
TABLE OF CONTENTS
Section Page
- ------- ----
1. Purposes; Administration; Plan Year.................................. 1
2. Eligibility.......................................................... 1
3. Compensation Deferral................................................ 2
4. Deferred Compensation Account........................................ 3
5. Irrevocable Trust.................................................... 4
6. Time and Manner of Payment........................................... 5
7. Withdrawals.......................................................... 7
8. Death, Disability and Change in Control.............................. 8
9. Termination; Amendment...............................................10
10. Claims Procedure.....................................................11
11. General Provisions...................................................12
12. Effective Date.......................................................13
ii
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INDEX OF TERMS
Term Section Page
Committee 1.2 1
Company Preamble 1
Company Match 3.3 3
Deferral election 3.1 2
Deferred compensation account 4.1 3
Disabled 8.6 9
Eligible employee 2.1 1
Employer 1.1 1
Guideline fund 5.2 4
Participant 2.3 2
Payment Date 6.2 5
Plan Year 1.3 1
Unforseen emergency 7.2 7
Vesting 6.1 5
iii
<PAGE>
RESTATED
KINDERCARE LEARNING CENTERS, INC.
NONQUALIFIED DEFERRED COMPENSATION PLAN
January 1, 1999
KinderCare Learning Centers, Inc.
a Delaware corporation
650 NE Holladay, Suite 1400
Portland, OR 97232 Company
The Company adopted and maintains the Restated KinderCare Learning
Centers, Inc. Nonqualified Deferred Compensation Plan, effective August 1, 1996.
The Company adopts this Amendment and Restatement to add a Company Match,
provide a schedule for vesting of the Company Match, provide for limited
withdrawals and implement editorial and administrative changes.
1. Purposes; Administration; Plan Year
1.1 This plan is adopted to permit eligible employees of Employers to
defer all or a portion of what would otherwise be current compensation. The plan
shall apply to the Company and affiliates of the Company designated by the
Committee under 6.7. The term "Employer" refers to the Company and all
designated affiliates.
1.2 This plan shall be administered by an Administrative Committee
(Committee) appointed by the Compensation Committee of the Board of Directors of
the Company. The Committee shall interpret the plan and make determinations
about participation and benefits. Any decision by the Committee within its
authority shall be final and binding on all parties. The Committee may delegate
all or part of its authority.
1.3 The Plan Year shall be a calendar year.
2. Eligibility
2.1 An employee of an Employer shall be eligible to participate for a
Plan Year if the employee is designated by the Committee to participate in the
plan. Participation shall be restricted to a select group of management or
highly compensated employees as designated by the Committee
<PAGE>
2.2 An employee eligible under 2.1 may participate in elective
deferrals by filing a deferral election as follows:
(a) An employee who is eligible on the effective date of the plan
or who later becomes eligible during a year may participate with
respect to future compensation by filing an election within 30 days
after being notified of eligibility by the Committee.
(b) Except as provided in (a), an election for a year must be
filed before the start of the year.
2.3 A person having an account under the plan shall be known as a
participant.
3. Compensation Deferral
3.1 An eligible employee may elect for each Plan Year (or part Plan
Year under 2.2(a)) to defer a portion of regular or bonus compensation or
severance pay paid for the year or part year as follows:
(a) The amount deferred may be expressed as a dollar amount, a
percentage of regular salary, bonus or severance pay or a percentage
of bonus over a certain dollar amount.
(b) An expressed percentage shall apply to any pay changes in the
year. A stated dollar amount shall not be affected by pay changes.
Separate percentages or dollar amounts may be stated for salary,
bonuses and severance pay.
(c) A bonus deferral shall be governed by the election for the
year for which the bonus is earned, not the year in which the bonus is
paid.
3.2 Deferral elections under the plan shall be made in writing to the
Committee on a form provided for that purpose. Elections shall be effective as
follows:
(a) An election by a person first becoming eligible for
participation shall be effective for the year the participant becomes
eligible if made within 30 days after notice of eligibility.
2
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(b) Except as provided in (a), an election shall be effective for
the Plan Year starting after the Plan Year in which the election is
received by the Committee. An election shall be irrevocable for the
first Plan Year for which it is effective.
(c) An election may be effective indefinitely or for one or more
years as specified in the election. A new election is required to
continue deferrals after an election expires. A continuing election
may be revoked or changed by a new election under (b).
3.3 The Company shall match the amount deferred by each eligible
employee under 3.1 for each year as follows:
(a) The Company's Match shall be 20 percent of the eligible
employee's matchable deferrals under (b) for the year.
(b) For (a), an eligible employee's deferrals shall be ignored
for purposes of the Match to the extent they exceed 5 percent of the
eligible employee's compensation.
4. Deferred Compensation and Matching Contribution Accounts
4.1 Amounts of deferred compensation and the Company Match shall be
credited by Employer on its books to Deferred Compensation Accounts and Matching
Contribution Accounts.
(a) The Committee shall adjust all accounts in accordance with
the elected guidelines at reasonable times determined by the
Committee.
(b) When an account is in pay status, the Committee may require
use of a cash equivalent guideline fund to the extent necessary to
allow more frequent adjustments to coincide with the timing of pay
distributions.
(c) At any time when the Committee has established no guideline
investment funds, each participant's accounts shall accrue interest at
the Federal overnight funds rate.
4.2 Employer shall make guideline investment credits to each
participant's accounts, until the account have been entirely paid out, as
follows:
3
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(a) The Committee shall establish guideline investment funds with
investment objectives fixed by the Committee. The guideline funds may
parallel the investment funds available under any irrevocable trust
established under Section 5, below.
(b) Each participant shall, under procedures established by the
Committee, elect the guideline fund or funds for the participant's
accounts under this plan. In the absence of a proper election, a
balanced guideline fund will be used. Participant elections may be
changed at such times and subject to such limits as may be fixed by
the Committee.
4.3 Each participant's accounts shall be maintained on the books of
the Employer until full payment has been made to the participant or
beneficiaries under Sections 7, 8 and 9 and the following shall apply subject to
5.3:
(a) Employer shall not be obligated to set aside or earmark any
funds for the accounts, which shall be purely a bookkeeping device.
(b) All amounts of deferred compensation under this plan shall
remain at all times the unrestricted assets of Employer, and the
promise to pay the deferred amounts shall at all times remain unfunded
as to the participants.
5. Irrevocable Trust
5.1 Employer may but shall not be required to establish an irrevocable
trust to assume the liabilities to participants in certain circumstances, and
may transfer cash to such a trust.
5.2 If Employer creates a trust under 5.1, assets transferred to the
trust shall be invested as follows:
(a) Investment of such assets shall be at the absolute discretion
of the Committee, the trustee, or both on a shared basis, as provided
in the trust.
(b) The guideline investment funds under 4.3 shall be purely for
measuring the amount of time-value credits.
4
<PAGE>
(c) Neither employer nor the trustee shall be required to invest
in such funds in accordance with participants' elections. Employer and
the trustee may, however, choose, in their discretion, to invest in
the elected guideline funds in accordance with the elections, and
shall incur no liability for doing so.
5.3 The trust under 5.1 shall be a grantor's trust and all assets held
in trust shall be assets of Employer subject to the trust terms. All assets of
the trust shall at all times be subject to the claims of creditors of Employer
in circumstances described in the trust. Participants will not receive a vested
priority interest in the trust assets ahead of such creditors. Participants'
interests in the trust will be governed by the trust terms at all times.
6. Time and Manner of Payment
6.1 Deferred Compensation Accounts and Matching Contribution Accounts
shall become vested as follows:
(a) The Matching Contribution Account shall be vested according
to the eligible employee's Years of Service under the KinderCare
Learning Centers, Inc. Savings and Investment Plan (Savings and
Investment Plan) as follows:
Years of Service Percent Vested
Less than 1 -0-
1 20%
2 40%
3 60%
4 80%
5 or more 100%
(b) An eligible employee who, while employed by Employer, dies,
becomes disabled as defined in the Savings and Investment Plan or
reaches age 65 shall be fully vested.
(c) Deferred Compensation Accounts shall be fully vested at all
times.
6.2 Subject to 6.5, 7.1 and 8, a participant's Payment Date shall be
one of the following as selected under 6.5:
5
<PAGE>
(a) The date the participant terminates employment under 6.7 for
any reason.
(b) The date the participant has terminated employment under 6.7
and has reached an age up to 70 specified in the deferral election.
(c) A specified date that is not earlier than one year after the
close of the Plan Year to which the deferral election applies.
6.3 A participant whose employment terminates before attainment of age
65 for any reason other than disability or death shall receive only the Deferred
Compensation Account and the vested portion of the Matching Contribution Account
under 6.1.
6.4 A participant's vested accounts shall be paid in one of the
following ways as selected under 6.5 and 6.6:
(a) In a lump sum within 30 days after the Payment Date.
(b) In a lump sum within 30 days after the January 1 following
the Payment Date.
(c) In installments under 6.4 over a period up to 15 years
starting the first of the month after the Payment Date.
(d) In installments under 6.4 over a period up to 15 years
starting the January 1 following the Payment Date.
6.5 In the deferral election a participant shall select the Payment
Date under 6.2 and the form of payment under 6.4 for Deferred Compensation and
Matching Contribution Accounts, as follows:
(a) Subject to (b), the selection shall be made in the deferral
election.
(b) If a participant has selected a lump sum under 6.4 (a) or
(b), the selection may be changed to installment payments under 6.4
(a) or (b) by a later irrevocable election made at least one year
before the lump sum otherwise would have been payable.
6
<PAGE>
(c) Except as provided in (b), the selection shall be irrevocable
for the portion of both accounts attributable to amounts subject to
the deferral election.
(d) If different selections are made in deferral elections
applicable to different years, the accounts shall be appropriately
divided for distribution.
6.6 If installments are selected, the payout period shall be specified
in the deferral election. The installment size shall be fixed on the benefit
starting date and each later January 1 as though equal installments were to be
paid for the balance of the payment period including investment guideline
credits at a rate estimated as of the date of calculation. Installments may be
monthly, quarterly or annually, as elected by the participant before payments
start. If a participant fails to make an election within 30 days after
notification that an election must be made, installment payments shall
automatically be made on an annual basis.
6.7 A participant terminates employment when no longer employed by an
Employer or an affiliate of an Employer. An affiliate is a corporation or other
entity that has been designated an affiliate for this purpose by the Committee.
6.8 The Employer may withhold from any payments any income tax or
other amounts as required by law. Payments are generally not subject to FICA or
FUTA tax or related withholding.
7. Withdrawals
7.1 Before the Payment Date, upon approval of the Committee, a
participant may withdraw up to 100 percent of the amount of the vested interest
under 6.1, as follows:
(a) The amount reasonably necessary to meet an unforeseen
emergency under 7.2, as determined by the Committee.
(b) At the participant's option, up to 100 percent of the amount
of the vested interest less a forfeiture of 10 percent of the amount
withdrawn.
7.2 "Unforseen emergency" means a participant's severe financial
hardship that cannot be met from other reasonably available resources and is
caused by one or more of the following:
7
<PAGE>
(a) Illness or accident of the participant or a dependent under
Internal Revenue Code section 152(a).
(b) Loss of the participant's property due to casualty.
(c) Other similar extraordinary and unforeseeable circumstances
arising as a result of events beyond the control of the participant.
7.3 Other resources are reasonably available if assets can be
liquidated without that itself creating severe financial hardship, if insurance
or other reimbursement is available or if deferrals under this plan can be
stopped.
7.4 The Committee shall establish guidelines and procedures for
implementing withdrawals. An application for withdrawal shall be written, shall
be signed by the participant and shall include a statement of the facts causing
the financial hardship and any other facts as may be required by the Committee.
7.5 The withdrawal date shall be fixed by the Committee. The Committee
may require a minimum advance notice and may limit the amount, time and
frequency of withdrawals.
8. Death, Disability and Change in Control
8.1 A Participant's accounts shall be payable under this Section as
follows, regardless of the provisions of Section 6:
(a) In the event of the participant's death or disability.
(b) If selected in the participant's deferral election, in the
event of a change in control under 8.8.
8.2 On death the accounts shall be paid under 8.3 within 30 days as
follows:
(a) If the recipient is the surviving spouse and the participant
had selected installment payout, by installments in accordance with
the selection.
(b) In all other cases, by a lump sum.
8
<PAGE>
8.3 An amount payable on death of a participant shall be paid to the
participant's beneficiary in the following order of priority:
(a) To the surviving beneficiaries designated by the participant
in writing to the Committee.
(b) To the surviving beneficiaries designated by the participant
to receive death benefits under any retirement plan maintained by the
Company in which the participant participates.
(c) To the participant's surviving spouse.
(d) To the participant's surviving children in equal shares.
(e) To the participant's estate.
8.4 If a surviving spouse is receiving installments and dies when a
balance remains, the balance shall be paid in a lump sum to the spouse's estate.
8.5 If a participant is temporarily disabled while employed or is
receiving long-term disability benefits under a plan described in 8.6 the
following shall apply:
(a) The participant shall be treated as employed until age 65,
and no payments will be made from the accounts before age 65 except as
provided below.
(b) If disability benefits stop and disability continues, the
accounts shall be paid in accordance with the election under Section
6.
(c) If the participant dies, the provisions applicable to death
shall be followed.
(d) If the participant ceases to be disabled and does not resume
employment, the provisions applicable to termination shall be
followed.
8.6 A participant is disabled if the Committee determines that either
of the following applies:
9
<PAGE>
(a) The participant is eligible to receive long-term disability
benefits under a plan maintained by Employer or an affiliate or would
have been eligible if covered by the plan.
(b) In the absence of a plan under (a), the participant is
permanently and totally disabled on the basis of criteria established
by the Committee.
8.7 In the event of a change in control, all unpaid deferred
compensation represented by both the Deferred Compensation Accounts and the
Matching Contribution Accounts, including deferred compensation being paid in
installments, shall be paid as soon as administratively feasible after the date
of the change in control.
8.8 For 8.7, a change in control is the acquisition after August 1,
1997 by any person (as such term is used in Sections 13(d) and 14(d)(2) of the
Securities and Exchange Act of 1934, as amended), together with affiliates and
associates of such person, whether by purchase, tender offer, exchange,
reclassification, recapitalization, merger or otherwise, of a sufficient number
of shares of the voting securities of the Company to provide such person with 50
percent or more of the combined voting power of the Company's then outstanding
voting securities.
9. Termination; Amendment
9.1 The Company may terminate this plan effective the first day of any
month after notice to the participants or earlier as provided in 11.4. On
termination the following shall apply except as provided in 9.3:
(a) Amounts deferred through the last month before the effective
date of termination shall remain deferred and be credited to the
accounts in accordance with the plan.
(b) Deferral elections shall terminate as of the effective date
of termination, and no further deferrals shall be allowed.
(c) Amounts in an account shall remain to the credit of the
account, shall continue to receive investment guideline credits and
shall be paid out in accordance with Sections 6, 7 and 8.
9.2 The Company may amend this plan effective the first day of any
month by notice to the participants. An amendment may be retroactive within the
Plan Year in which notice is given except that the right of participants to
defer compensation may not be reduced for the portion of the Plan Year through
the month in which the notice is given.
10
<PAGE>
9.3 If the Internal Revenue Service issues a final ruling that any
amounts deferred under this plan will be subject to current income tax, all
amounts to which the ruling is applicable shall be paid to the participants
within 30 days.
10. Claims Procedure
10.1 Any person claiming a benefit, requesting an interpretation or
ruling under the plan, or requesting information under the plan shall present
the request in writing to the Committee, which shall respond in writing as soon
as practicable.
10.2 If the claim or request is denied, the written notice of denial
shall state:
(a) The reasons for denial, with specific reference to the plan
provisions on which the denial is based.
(b) A description of any additional materials or information
required and an explanation of why it is necessary.
10.3 The initial notice of denial shall normally be given within 90
days after receipt of the claim. If special circumstances require an extension
of time, the claimant shall be so notified and the time limit shall be 180 days.
10.4 Any person whose claim or request is denied or who has not
received a response within 30 days may request review by notice in writing to
the Committee. The original decision shall be reviewed by the Committee which
may, but shall not be required to, grant the claimant a hearing. On review,
whether or not there is a hearing, the claimant may have representation, examine
pertinent documents and submit issues and comments in writing.
10.5 The decision on review shall ordinarily be made within 60 days.
If an extension of time is required for a hearing or other special
circumstances, the claimant shall be notified and the time limit shall be 120
days. The decision shall be in writing and shall state the reasons and the
relevant plan provisions. Subject to 10.6, all decisions on review shall be
final and bind all parties concerned.
10.6 If Employer creates a trust under 5.1, a decision of the
Committee shall be subject to review by the Trustee to the extent provided for
under the trust.
11
<PAGE>
11. General Provisions
11.1 If suit or action is instituted to enforce any rights under this
plan, the prevailing party may recover from the other party reasonable
attorneys' fees at trial and on any appeal.
11.2 Any notice or directions under this plan shall be in writing and
shall be effective when actually delivered or, if mailed, when deposited postage
prepaid as first class. Mail shall be directed to the Company at the address
stated in this plan, to the participant at the address stated in the deferral
election or to such other address as a party may specify by notice to the other
parties. Notices to an Employer or the Committee shall be sent to the Company's
address.
11.3 The rights of a participant under this plan are personal. Except
for the limited provisions of 8.3 and 11.5, no interest of a participant or any
beneficiary or representative of a participant may be directly or indirectly
transferred, encumbered, seized by legal process or in any other way subjected
to the claims of any creditor.
11.4 If an Employer merges, consolidates, or otherwise reorganizes or
if its assets or business are acquired by another company, this plan shall
continue with respect to those eligible employees who continue in the employ of
the successor company. The transition of Employers shall not be considered a
termination of employment for purposes of this plan. In such an event, however,
a successor corporation may terminate this plan as to its employees on the
effective date of the succession by notice to eligible employees within 30 days
after the succession.
11.5 The Committee may decide that because of the mental or physical
condition of a person entitled to payments, or because of other relevant
factors, it is in the person's best interest to make payments to others for the
benefit of the person entitled to payment. In that event the Committee may in
its discretion direct that payments be made to one or more of the following:
(a) To a parent or spouse or a child of legal age.
(b) To a legal guardian.
(c) To one furnishing maintenance, support, or hospitalization.
12
<PAGE>
12. Effective Date
This plan Restatement shall be effective as of January 1, 1999.
KinderCare Learning Centers, Inc.
By EDWARD L. BREWINGTON
--------------------------------------
Executed: February 11, 1999
13
SPLIT DOLLAR LIFE INSURANCE AGREEMENT
THIS AGREEMENT is made as of December 1, 1998, between KinderCare Learning
Centers, Inc., a Delaware corporation (the "Corporation"), and
_______________________ (the "Owner").
Recitals:
A. The Owner is a valued employee of the Corporation.
B. The Owner owns the life insurance policy (the "Policy") on the life of
the Owner, as shown on Exhibit A attached hereto. The insurance company issuing
the Policy is called the "Insurer."
C. The Corporation wishes the Owner to continue his/her employment with the
Corporation and, as an inducement thereto, the Corporation is willing to assist
the Owner in the payment of premiums for the Policy as provided in this
Agreement.
D. The parties intend that this Agreement constitute a plan of split dollar
life insurance under Revenue Ruling 64-328, 1964-2 C.B. 11, and Revenue Ruling
66-110, 1966-1 C.B. 12.
THEREFORE, for value received, the parties agree:
1. Premium Payments. Until this Agreement is terminated, the Corporation
and the Owner shall make payments as provided in this section.
1.1. The Corporation shall timely pay all premiums on the Policy.
1.2. For purposes of this Agreement, the "Corporation's Interest" in
the Policy is an amount equal to the total premiums paid by the Corporation on
the Policy from the date of this Agreement to the date as of which the
Corporation's Interest is being determined, reduced by any prior payments to the
Corporation in reduction of its Interest in the Policy.
2. Ownership of the Policy. The Owner is the owner of the Policy. The Owner
agrees not to exercise his/her ownership rights in the Policy in any way that
would prevent the Corporation from recovering its Interest in the Policy in
accordance with this Agreement.
<PAGE>
Split Dollar Life Insurance Agreement
Page 2 of 9
3. Corporation's Rights.
3.1. In consideration of the Corporation's payment of premiums as
provided in Section 1, and as collateral security for the payment of the
Corporation's Interest, the Owner hereby collaterally assigns to the Corporation
the following rights in the Policy:
(a) The right to receive, upon the partial or total surrender of
the Policy by the Owner, the cash surrender proceeds up to the amount of the
Corporation's Interest in the Policy; and
(b) The right to receive, upon the death of the Owner, the net
proceeds of the Policy up to the amount of the Corporation's Interest in the
Policy.
3.2. To evidence the assignment of rights in the Policy by the Owner
to the Corporation, the Corporation and the Owner shall execute and file with
the Insurer a Collateral Assignment of Policy, which shall be in the form of
Exhibit B attached to this Agreement or in such other form as may be acceptable
to the parties and the Insurer. As between the Owner and the Corporation, this
Agreement shall take precedence over any provision of the Collateral Assignment
in the case of a conflict between the terms of this Agreement and the Collateral
Assignment. Upon full payment to the Corporation of the amount of its Interest
in the Policy, the Corporation shall release the collateral assignment of the
Policy.
3.3. The parties agree that benefits under the Policy may be paid by
the Insurer either by separate checks to the Corporation and Owner, or by a
joint check. In the latter instance, the Owner and the Corporation agree that
the benefits shall be divided as provided in this Agreement.
4. Termination of this Agreement.
4.1. Events of Termination. This Agreement shall terminate upon the
happening of any of the following events:
<PAGE>
Split Dollar Life Insurance Agreement
Page 3 of 9
(a) Full payment by the Owner to the Corporation of the
Corporation's Interest in the Policy;
(b) Termination of the Owner's employment with the Corporation
for any reason;
(c) Surrender, lapse, or other termination of the Policy by the
Owner;
(d) Written notice of termination either from the Owner to the
Corporation or from the Corporation to the Owner; or
(e) Death of the Owner.
4.2. Rights Upon Termination. Upon termination of this Agreement:
(a) The obligation of the Corporation to pay premiums on the
Policy shall cease; and
(b) If the Agreement is terminated under paragraph (e) of section
4.1, the Corporation shall be entitled to receive an amount equal to the
Corporation's Interest in the Policy.
(c) If the Agreement is terminated under paragraph (b), (c) or
(d) of section 4.1, the Owner shall, within 60 days after the date of
termination, pay to the Corporation an amount equal to the Corporation's
Interest in the Policy. If full payment of this amount is not received by the
Corporation within that 60 day period, then the Owner shall immediately transfer
complete ownership of the Policy to the Corporation.
5. The Insurer. The Insurer shall be bound only by the provisions of the
Policy and the Collateral Assignment. Any payments made or actions taken by the
Insurer in accordance with the Policy shall fully discharge the Insurer from
liability. The Insurer shall not be bound by or deemed to have notice of the
provisions of this Agreement.
6. ERISA Provisions. The following provisions are part of this Agreement
and are intended to meet the requirements of the Employee Retirement Income
Security Act of 1974:
<PAGE>
Split Dollar Life Insurance Agreement
Page 4 of 9
6.1. Named Fiduciary. The "named fiduciary" and "plan administrator"
is the Corporation.
6.2. Funding Policy. The funding policy under this Agreement is that
all premiums on the Policy be remitted to the Insurer when due.
6.3. Basis of Payment of Benefits. Direct payment by the Insurer is
the basis of payment of benefits under this Agreement, with those benefits in
turn being based on the payment of premiums as provided in this Agreement.
6.4. Claims Procedure.
(a) Claim. A person who believes that he or she is being denied a
claim for benefits to which he or she is entitled under this Agreement (a
"Claimant") may file a written request for such benefit with the Corporation,
setting forth the claim. The request must be addressed to the "Vice President of
Human Resources" of the Corporation at the Corporation's then principal place of
business.
(b) Decision on a Claim. If a claim is denied, the Corporation
shall deliver a written explanation to the Claimant, setting forth: (1) the
specific reason or reasons for the denial; (2) references to the pertinent
provisions of this Agreement on which the denial is based; (3) a description of
any additional material or information necessary for the Claimant to perfect the
claim and an explanation of why that material or information is necessary; (4)
appropriate information as to the steps to be taken if the Claimant wishes to
submit the claim for review; and (5) the time limit for requesting a review of
the claim under section 6.4(c). The written explanation shall be delivered to
the Claimant within 90 days after receipt of the claim by the Corporation.
(c) Review of a Denied Claim. A Claimant shall have 60 days
following receipt of the denial of a claim to request a review of the denial. A
request for review shall be in writing and addressed to the Vice President of
Human Resources at the Corporation's then principal place of business. The
Claimant may submit pertinent documents and written issues and comments. The
Vice President of Human Resources shall review the denial of the claim, and
shall furnish the Claimant with a decision on review within 60 days after
receipt of the Claimant's request for review. The decision on review shall be in
writing, shall be written in a manner calculated to be understood by the
claimant, and shall include specific reasons for the decision and specific
references to the pertinent provisions of this Agreement on which the decision
is based. If the written decision on review is not furnished to the Claimant
within the 60 day period, the claim shall be deemed denied on review.
<PAGE>
Split Dollar Life Insurance Agreement
Page 6 of 9
7. Assignment. Either party may assign all or any of its rights in the
Policy and this Agreement, without the consent of the other party. If a party
assigns all of its rights and obligations under this Agreement in accordance
with this section, then the assignee shall be substituted for the assignor as a
party under this Agreement.
8. Amendment. This Agreement may be amended by, but only by, a written
instrument signed by each of the parties.
9. Binding Effect. This Agreement shall be binding upon, and shall inure to
the benefit of, the Corporation and the Owner and their respective successors
and permitted assigns.
10. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Oregon.
IN WITNESS WHEREOF, the parties have signed this Agreement effective on the
date first above written.
KinderCare Learning Centers, Inc., a
Delaware corporation
By: _____________________________________
Print
Name: ___________________________________
Title: __________________________________
_________________________________________
Name
<PAGE>
Split Dollar Life Insurance Agreement
Page 7 of 9
EXHIBIT A
Description of Life Insurance Policy
- --------------------------------------------------------------------------------
Insurer Policy Number Face Amount
- --------------------------------------------------------------------------------
Security Life of Denver
- --------------------------------------------------------------------------------
<PAGE>
Split Dollar Life Insurance Agreement
Page 8 of 9
EXHIBIT B
Form of Collateral Assignment
COLLATERAL ASSIGNMENT
THIS ASSIGNMENT is made on December __, 1998, by __________, as Assignor,
to KinderCare Learning Centers, Inc., a Delaware corporation, as Assignee.
FOR VALUE RECEIVED, the Assignor hereby collaterally assigns to Assignee,
its successors and assigns, the following specific rights in and to life
insurance policy number ___________ (the "Policy") issued by Security Life of
Denver (the "Insurer") in the face amount of ________ on the life of
_________________ (the "Insured"):
1. This Assignment is made, and the Policy shall be held, as collateral
security for all obligations of the Assignor to Assignee pursuant to that
certain Split Dollar Life Insurance Agreement, dated December 1, 1998, between
Assignor and Assignee with respect to the Policy (the "Agreement"). This
Assignment is subject to all of the terms and conditions of the Policy and to
all superior liens, if any, which the Insurer may have against the Policy.
2. The Assignee shall have the following rights in and to the Policy:
(a) The right to receive, upon the surrender of the Policy by the
Assignor, the cash surrender proceeds up to the amount of the Assignee's
"Interest in the Policy" (as defined in the Agreement); and
(b) The right to receive, upon the death of the Insured, the net
proceeds of the Policy up to the amount of the Assignee's Interest in the
Policy.
3. Except as specifically granted in this Collateral Assignment, the
Assignor shall retain all incidents of ownership in the Policy, subject to the
terms of the Agreement.
4. The Assignee shall, upon request of the Assignor, forward the Policy to
the Insurer, without unreasonable delay, for endorsement of any designation or
change of beneficiary, any election of optional mode of settlement, or the
exercise of any other right reserved by the Assignor.
5. The Insurer shall be bound only by the provisions of, and endorsements
to, the Policy. The Insurer is not a party to the Agreement, and
<PAGE>
Split Dollar Life Insurance Agreement
Page 9 of 9
shall not be bound by or deemed to have notice of the provisions of the
Agreement, and the Agreement is not incorporated into this Collateral
Assignment. Any payments made or actions taken by the Insurer in accordance with
the Policy shall fully discharge the Insurer from all liability. The Insurer is
hereby authorized to recognize the Assignee's claim to rights hereunder without
investigating the reason for any action taken by the Assignee, the validity or
amount of any of the liabilities of the Assignor to the Assignee under the
Agreement, the existence of any default under the Agreement, the giving of any
notice, or the application to be made by the Assignee of any proceeds paid by
the Insurer to the Assignee pursuant to this Collateral Assignment, and the sole
signature of the Assignee shall be sufficient for the exercise of any rights
under the Policy assigned hereby, and the receipt of the Assignee for any sums
received by it shall be a full discharge and release therefor to the Insurer.
IN WITNESS WHEREOF, the Assignor and Assignee have signed this Collateral
Assignment on the date first written above.
"ASSIGNOR"
_________________________________________
"ASSIGNEE"
KinderCare Learning Centers, Inc.,
a Delaware corporation
By: _____________________________________
Name: ___________________________________
Title: __________________________________
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> MAY-28-1999
<PERIOD-START> MAY-30-1998
<PERIOD-END> MAR-05-1999
<EXCHANGE-RATE> 1
<CASH> 9,816
<SECURITIES> 0
<RECEIVABLES> 24,427
<ALLOWANCES> 3,907
<INVENTORY> 0
<CURRENT-ASSETS> 48,753
<PP&E> 702,053
<DEPRECIATION> 152,496
<TOTAL-ASSETS> 633,731
<CURRENT-LIABILITIES> 92,699
<BONDS> 433,887
0
0
<COMMON> 95
<OTHER-SE> 42,460
<TOTAL-LIABILITY-AND-EQUITY> 633,731
<SALES> 0
<TOTAL-REVENUES> 477,550
<CGS> 0
<TOTAL-COSTS> 429,276
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,413
<INTEREST-EXPENSE> 32,026
<INCOME-PRETAX> 16,638
<INCOME-TAX> 6,250
<INCOME-CONTINUING> 10,388
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,388
<EPS-PRIMARY> 1.10
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</TABLE>
