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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)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 333-42137
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 Street, 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
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] 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 the registrant's knowledge, in definitive proxy or 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, but without
conceding, that all executive officers and directors are "affiliates") at
August 23, 2002 was $9,727,538.
The number of shares of the registrant's common stock, $.01 par value per
share, outstanding at August 23, 2002 was 19,699,514.
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KinderCare Learning Centers, Inc. and Subsidiaries
Index
Part I........................................................................ 1
Item 1. Business........................................................ 1
Item 2. Properties......................................................15
Item 3. Legal Proceedings...............................................17
Item 4. Submission of Matters to a Vote of Security Holders.............17
Part II.......................................................................18
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters...................................18
Item 6. Selected Historical Consolidated Financial and Other Data.......20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......33
Item 8. Financial Statements and Supplementary Data.....................34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...........................54
Part III......................................................................55
Item 10. Directors and Executive Officers of the Registrant..............55
Item 11. Executive Compensation..........................................58
Item 12. Security Ownership of Certain Beneficial Owners.................61
Item 13. Certain Relationships and Related Transactions..................63
Part IV.......................................................................65
Item 14. Exhibits and Financial Statement Schedules......................65
Signatures....................................................................69
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PART I
ITEM 1. BUSINESS
Forward-Looking Statements
KinderCare has made statements in this report that constitute
forward-looking statements as that term is defined in the federal securities
laws. These forward-looking statements concern our operations, economic
performance and financial condition and include statements regarding:
opportunities for growth; the number of early childhood education and care
centers expected to be added in future years; the profitability of newly opened
centers; capital expenditure levels; the ability to refinance or incur
additional indebtedness; strategic acquisitions, investments, alliances and
other transactions; changes in operating systems and policies and their intended
results; our expectations and goals for increasing center revenue and improving
our operational efficiencies; changes in the regulatory environment; the
potential benefit of tax incentives for child care programs;our projected cash
flow; and our marketing efforts to sell and lease back centers. The
forward-looking statements are subject to various known and unknown risks,
uncertainties and other factors. When we use words such as "believes,"
"expects," "anticipates," "plans," "estimates" or similar expressions we are
making forward-looking statements.
Although we believe that our forward-looking statements are based on
reasonable assumptions, our expected results may not be achieved. Actual results
may differ materially from our expectations. Important factors that could cause
actual results to differ from expectations include, among others:
o the effects of general economic conditions;
o competitive conditions in the child care and early education industries;
o various factors affecting occupancy levels, including, but not limited
to, the reduction in or changes to the general labor force that would
reduce the need for child care services;
o the availability of a qualified labor pool, the impact of labor
organization efforts and the impact of government regulations concerning
labor and employment issues;
o federal and state regulations regarding changes in child care assistance
programs, welfare reform, transportation safety, minimum wage increases
and licensing standards;
o the loss of government funding for child care assistance programs;
o our inability to successfully execute our growth strategy;
o the availability of financing or additional capital;
o our difficulty in meeting or inability to meet our obligations to repay
our indebtedness;
o the availability of sites and/or licensing or zoning requirements that
may make us unable to open new centers;
o our ability to integrate acquisitions;
o our inability to successfully defend against or counter negative
publicity associated with claims involving alleged incidents at our
centers;
o our inability to obtain insurance at the same levels;
o the effects of potential environmental contamination existing on any
real property owned or leased by us; and
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o other risk factors that are discussed in this report and, from time to
time, in our other Securities and Exchange Commission reports and
filings.
We caution you that these risks may not be exhaustive. We operate in a
continually changing business environment and new risks emerge from time to
time.
You should not rely upon forward-looking statements except as statements of
our present intentions and of our present expectations which may or may not
occur. You should read these cautionary statements as being applicable to all
forward-looking statements wherever they appear. We assume no obligation to
update or revise the forward-looking statements or to update the reasons why
actual results could differ from those projected in the forward-looking
statements.
Overview
KinderCare is the leading for-profit provider of early childhood education
and care in the United States. At August 23, 2002, we served approximately
119,000 children and their families at 1,261 child care centers. At our
child care centers, we provide educational services to infants and children up
to twelve years of age. However, the majority of the children are from six weeks
to five years old. The total licensed capacity at our centers was approximately
166,000 at August 23, 2002.
We operate child care centers under two brands as follows:
o KinderCare - At August 23, 2002, we operated 1,189 KinderCare centers.
The brand was established in 1969 and operates centers in 39 states, as
well as two centers located in the United Kingdom.
o Mulberry - We operated 72 Mulberry centers and 12 before- and
after-school programs at August 23, 2002. Mulberry operates primarily in
the northeast region of the United States and southern California. We
acquired Mulberry in April 2001.
Within each brand we operate two types of centers: community centers and
employer-sponsored centers. The vast majority are community centers. Our
employer-sponsored centers partner with companies to provide on-site or
near-site education and child care for the families of their employees.
Our centers are open year round. The hours vary by location, although
Monday through Friday from 6:30 a.m. to 6:00 p.m. is typical. Children are
usually enrolled on a weekly basis for either full- or half-day sessions. Hourly
enrollment is permitted where capacity allows. Tuition rates vary for children
of different ages and by location.
Center-based child care continues to be our primary business. However, we
have also acquired, invested in or entered into alliances with more broad-based
education companies. These companies provide educational content and services to
children, teenagers and young adults, as described below:
Distance Learning. Our subsidiary, KC Distance Learning, Inc., is based in
Bloomsburg, Pennsylvania. KC Distance Learning operates three business units as
follows:
o Keystone National High School, an accredited correspondence-based high
school program;
o Keystone eSchool, which provides the on-line delivery of most of the
same courses as Keystone National High School; and
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o the Learning and Evaluation Center, which provides subject extension or
make-up and extra credit courses to high school students.
KC Distance Learning sells and/or delivers its high school curriculum over
the kcdistancelearning.com, keystonehighschool.com and creditmakeup.com
websites. The information on our websites is not incorporated by reference in
this report.
Charter Schools. Charter schools have emerged as a publicly-funded
alternative to public schools in those states that have passed enabling
legislation. We have a minority equity investment in and have made a loan to
Chancellor Beacon Academies, Inc., a charter school management company based in
Westborough, Massachusetts. At August 23, 2002, Chancellor Beacon operates
charter and private schools primarily in the northeastern region of the United
States.
Educational Content and Delivery for Public Schools. We have a minority
equity investment in Voyager Expanded Learning, Inc., which is based in Dallas,
Texas. Voyager developed Universal Literacy Systems(TM), a reading program for
students in grades kindergarten through six. They also provide summer school
programs to elementary and middle schools.
Educational Content and Delivery Within Our Centers. We partner with
Gateway Learning Corporation to deliver the Hooked on Phonics(R) reading and
literacy program in selected centers. Hooked on Phonics enhances the educational
services offered to children four years and older attending our centers. During
fiscal year 2002, over 800 of our centers offered the four-week program.
Our principal executive offices are located at 650 N.E. Holladay Street,
Suite 1400, Portland, Oregon 97232. Our telephone number is (503) 872-1300. Our
website addresses include kindercare.com, kindercareatwork.com,
mulberrychildcare.com, kcdistancelearning.com, keystonehighschool.com and
creditmakeup.com. The information on our websites is not incorporated by
reference in this report.
Business Strategy
We are pursuing a business strategy containing the following key elements:
Continue to Open and Acquire Centers. We plan to expand by opening
approximately 30 to 35 new centers per year. We target locations where we
believe the market for center-based child care will support tuition rates higher
than our current average rates. We believe there continue to be opportunities to
locate centers in many attractive markets across the United States. During
fiscal year 2002, we opened 35 new centers. We have opened six new centers from
the end of fiscal year 2002 to August 23, 2002.
We also plan to continue making selective acquisitions of existing
high-quality regional operators. We believe our strong market position enhances
our opportunities to capitalize on consolidation of the highly fragmented child
care segment of the education industry.
Capitalize on Strong Brand Identity and Reputation. Our high quality
educational and child care services, developed over 30 years, have resulted in a
strong brand identity and reputation in an industry where personal trust and
parent referrals play an important role in attracting new customers. We believe
this brand recognition enhances our new center marketing efforts and encourages
potential customers to try our centers. Throughout all of our communications, we
reinforce our image as the market leader with a caring, well-trained staff and
high quality resources. These communications include informational brochures,
parent handbooks, advertising and marketing materials.
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We believe our market position makes us an attractive strategic partner for
companies with compatible products and services and our large, nationwide
customer base gives us a valuable distribution network for these companies'
products and services. Such companies include Hooked on Phonics(R) and Portrait
Industries. Our market position also gives us the ability to spread the costs of
programs and services over a large number of centers.
Pursue Strategic Growth Through Acquisitions and Investments. We plan to
continue to pursue opportunities with companies in our industry that offer
educational content and services to children, teenagers and adults. These
opportunities may include acquisitions, investments and alliances. We believe
these opportunities would complement our center-based educational services and
would make us a more competitive and broad-based education company. The areas we
plan to pursue include the following:
o Educational content and services,
o Distance learning,
o Charter schools, and
o Private schools.
Expand Employer-Sponsored Child Care Services. Due to the changing
demographics of today's workforce and the prevalence of dual career families, a
growing number of companies are providing child care benefits in the form of
subsidies or availability. We attempt to meet this need by partnering with
companies to provide on-site or near-site child care to attract and retain
employees. We intend to pursue growth in this area through expanded
relationships with our existing customers, as well as expansion of our customer
base through internal growth, selective acquisitions and strategic alliances.
Increase Existing Center Revenue. We have ongoing initiatives to increase
center revenue by:
o sharing best practices;
o providing incentives for center directors;
o using targeted marketing;
o recruiting, retaining and training qualified staff; and
o maintaining competitive tuition pricing.
In order to better support our centers, we implemented a center visitation
program in fiscal year 2002. The program requires management to visit centers
and provides an automated way to collect best practices and assess quality.
In fiscal year 2003, we expanded our bonus program to reward center
directors for enrollment growth, in addition to overall operating profit
performance.
Our local marketing efforts include direct mail solicitation, telephone
directory and internet yellow pages and customer referrals. These methods
communicate to parents our commitment to quality care. We emphasize our
nurturing environment, educational programs, quality staff and excellent
facilities and equipment.
We focus on recruiting and retaining high quality center personnel. We
believe a high quality teaching and administrative staff is a key factor in
customer retention and increasing center occupancy.
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Tuition rates are typically adjusted company-wide each year in the fall.
However, we implement market specific rate increases in centers where the
quality of our services, demand and other market conditions support such
increases. See "Tuition."
Further Enhance Our Educational Programs. We have developed high quality
proprietary curricula of age-specific learning programs based on the latest
educational research. All of our educational programs are designed to respond to
the needs of the children and parents we serve and to prepare children for
success in school and in life. We provide curriculum-specific training for our
staff to enable effective delivery of our programs. We periodically revise our
educational programs to take advantage of the latest developments in early
childhood education.
Improve Our Operational Efficiencies. We believe strong overhead controls
will help us to contain costs. In fiscal year 2002, we implemented an automated
labor management tool to assist center directors in scheduling and meeting labor
productivity targets. We also commenced a roll-out at the end of fiscal year
2002 of an automated purchasing system. The purchasing system allows us to limit
the types of items available for purchase and track expenditures against budget
at the point of purchase. We plan to continue our focus on center-level
economics, which makes each center director accountable for center expenditures.
We believe this focus has a positive effect on cost control at our centers.
Increase Number of Accredited Centers. Although not mandated by any
regulatory authority, we pursue accreditation of our centers by the National
Association for the Education of Young Children, referred to as NAEYC. NAEYC is
a national organization that has established comprehensive criteria for
providing quality early childhood education and care. We believe that the
accreditation process strengthens the quality of our centers by motivating the
teaching staff and enhancing their understanding of developmentally-appropriate
early childhood practices. At August 23, 2002, we had 510 accredited centers and
approximately 500 centers in various stages of the accreditation process.
Educational Programs
We have developed a complete array of educational programs, including five
separate proprietary age-specific curricula. Our educational programs recognize
the importance of using high quality, research-based curriculum materials
designed to create a rich and nurturing learning environment for children. The
programs are revised on a rotating basis to take advantage of the latest
research in child development.
Our educational programs and materials are designed to respond to the needs
of our children, parents and families and to prepare children for success in
school and in life. Specifically, we focus on the development of the whole
child: physically, socially, emotionally, cognitively and linguistically.
Training. We provide curriculum-specific training for teachers and
caregivers to assist them in effectively delivering our programs. Each
curriculum is designed to provide teachers with the necessary materials and
enhancements to enable effective delivery based on the resources and needs of
the local community. We emphasize selection of staff who are caring adults
responsive to the needs of children. We strive to give each teacher the
opportunity, training and resources to effectively implement the best in
developmentally and age appropriate practice. Opportunities for professional
growth are available through company-wide training such as the Certificate of
Excellence Program. We also make available more advanced training opportunities,
including tuition reimbursement for employment-related college courses or course
work in obtaining a Child Development Associate credential.
Infant and Toddler Curricula. Our infant and toddler program, Welcome to
Learning(R), is designed for children ages six weeks to two years. The infant
component, for children from six weeks to
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15 months, is based on building relationships with the child and the family and
focuses on providing a safe and nurturing environment. The toddler component
lets children from 12 to 24 months feel free to explore and discover the world
around them.
Two-Year-Old Curriculum. Our Early Learning Curriculum focuses on using the
latest research in brain development to provide learning experiences for
children during one of their most critical developmental stages. This curriculum
provides children with opportunities to explore and discover the world around
them with both daily and long-term extended activities and projects. The Early
Learning Curriculum is offered for children from 24 to 36 months.
Preschool Curricula. We have two preschool programs designed for children
three to five years of age. Both programs use research-based goals and
objectives as their framework to provide a high quality learning experience for
children. Through collaboration with Gateway Learning Corporation, Hooked on
Phonics(R) is offered as a program enhancement. This reading and literacy
program is available, for a fee, in selected centers.
The Preschool Readiness Curriculum focuses on three-year-olds. Monthly
themes are divided into two-week units to allow children extended time for
in-depth exploration and discovery. Curriculum activities emphasize emerging
readiness skills in reading and language development. Specially designed
LetterBooks are used to introduce children to phonics and letter and word
recognition. Discovery areas support children's learning of basic math and
science concepts, computer awareness, creative arts, blocks, cooking and
homeliving.
The Preschool at KinderCare curriculum focuses on four-year-olds. It
teaches children to enjoy learning through hands-on involvement and stimulating
activities. Monthly themes are divided into one-week units providing a
comprehensive array of activities relevant to the lives of older preschoolers.
Curriculum materials build pre-reading, writing and language skills. Discovery
areas provide opportunities for exploration and choice based on children's
interests.
Kindergarten Curriculum. For five-year-olds, we offer the Kindergarten at
KinderCare ... Journey to Discovery(R) program. The thematic program
incorporates resources developed by The DLM Early Childhood Program, published
by McGraw-Hill Companies. Children learn through play, hands-on exploration,
activities and experiences that are real world and sensory in nature. This
curriculum emphasizes reading development, beginning math concepts and those
skills necessary to give children the confidence to succeed in school. Our
kindergarten is offered in approximately two-thirds of our child care centers
and meets state requirements for instructional curriculum prior to first grade.
School-Age Curriculum. Our KC Imagination Highway(R) program is a
project-based curriculum designed for children ages six to twelve. The program
includes a number of challenging activities and projects designed to stimulate
the imagination of elementary school-agers through researching, designing,
building, decorating and presenting. This program meets the needs of parents
looking for content rich after-school experiences that keep school-age children
interested and involved.
Summer Curriculum. We offer a summer program called Summer ExplorationsSM
to elementary school-agers. This program is a fun-filled, academic-based
curriculum of 10 weekly themes selected from the following 15 topics:
o Abracadabra o Mega Machines
o Act It Out o Outer Space
o American Pride o Rap, Rhythm & Rock
o At Head of the Class o Science Mania
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o Can You Dig It o Tournament of Games
o Cartooning o Up, Up & Away
o Crazy Creations o Wild, Wild Wilderness
o Foodle For Your Noodle
Accreditation. We continue to stress the importance of offering high
quality programs and services to children and families. Currently, we have 510
centers accredited by NAEYC. See "Business Strategy, Increase Number of
Accredited Centers."
Employer-Sponsored Child Care Services
Through KinderCare At Work(R), we offer a more flexible format for our
services by individually evaluating the needs of each sponsoring company to find
the appropriate format to fit its needs for on-site or near-site employee child
care. Our current relationships with employers include centers owned or leased
by us and various forms of management contracts. The management contracts
generally provide for a three- to five-year initial period with renewal options
ranging from two to five years. Our compensation under existing agreements is
generally based on a fixed fee with annual escalations. KinderCare At Work(R)
can also assist organizations in one or more aspects of implementing a child
care related benefit, including needs assessments, financial analysis,
architectural design and development plans.
At August 23, 2002, we operated 47 on-site/near-site employer-sponsored
early childhood education and care centers for 43 different employers, including
Universal Studios Florida, Saturn, Fred Meyer, LEGO Systems and several other
businesses, universities and hospitals. Of the 47 employer-sponsored centers, 42
were owned or leased by us and five were operated under management fee
contracts.
We also offer back-up child care, a program that utilizes our existing
centers to provide back-up child care services to the employees of subscribed
employers. Current clients include Universal Studios Florida, Prudential, US
Cellular and KPMG.
KinderCare At Work's(R) website address is kindercareatwork.com. The
information on our websites is not incorporated by reference into this report.
Marketing, Advertising and Promotions
We conduct our marketing efforts through various promotional activities and
customer referral programs. Additionally, we utilize targeted direct mail,
telephone and internet yellow pages advertising, access to informative and
user-friendly websites and newspaper and magazine advertisements. We continually
evaluate the effectiveness of our marketing efforts and attempt to use the most
cost-effective means of advertising. We have improved our ability to gain
information about our current and potential customers to better target our
direct marketing efforts and have focused more attention on marketing to our
existing customers in an effort to increase retention of those customers. We
offer ongoing sales and service training that focuses on enrollment and
retention of families. Currently, interested customers can call toll-free or
access our internet websites, kindercare.com and mulberrychildcare.com, to
locate their nearest center or obtain information. The information on our
websites is not incorporated by reference in this report.
We have focused on center-specific marketing opportunities such as (1)
choosing sites that are convenient for customers in order to encourage drive-by
identification, (2) renovating our existing centers
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to enhance their curb appeal and (3) upgrading the signage at our centers to a
uniform standard to enhance customer recognition of our centers.
Our local marketing programs 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. We also sponsor a referral program under which parents receive
tuition credits for every new customer referral that leads to a new enrollment.
Our center directors and field operations management are encouraged to market to
parents via local speaking engagements and interaction with local regulatory
agencies that may then refer potential customers. We hold parent orientation
meetings in the fall at which center directors and staff explain our educational
programs, as well as policies and procedures. We also periodically hold open
house events and have established parent forums to involve parents in center
activities and events.
Our center pre-opening marketing effort includes direct mail and newspaper
support, as well as local public relations support. Every new center hosts an
open house and provides individualized center tours where parents and children
can talk with staff, visit classrooms and play with educational toys and
computers.
Tuition
We determine tuition charges based upon a number of factors, including the
age of the child, full- or part-time attendance, location and competition.
Tuition is generally collected on a weekly basis, in advance. Tuition rates are
typically adjusted company-wide each year in the fall. However, we may adjust
individual center rates at any time based on competitive position, occupancy
levels and consumer demand. Our focus on center-level economics has enabled us
to better implement market specific increases in rates without losing occupancy
in centers where the quality of our services, demand and other market conditions
support such increases. Our weighted average tuition rate on a weekly basis was
as follows:
o Fiscal Year 2002 $137.72
o Fiscal Year 2001 $129.34
o Fiscal Year 2000 $120.75
Seasonality
New enrollments are generally highest during the traditional fall "back to
school" period and after the calendar year-end holidays. Enrollment generally
decreases 5% to 10% during the summer months and calendar year-end holidays.
Site Selection for New Centers
We seek to identify attractive new sites for our centers in large,
metropolitan markets and smaller, growth markets that meet our operating and
financial goals. We look for sites where we believe the market for our services
will support tuition rates higher than our current average rates. Our real
estate department performs comprehensive studies of geographic markets to
determine potential areas for new center development. These studies include
analysis of land prices, development costs, competitors, tuition pricing and
demographic data such as population, age, household income and employment
levels. In addition, we review 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 center.
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We target sites that offer convenience for our customers, are located in
appealing markets and provide opportunities for drive-by interest. We make
specific site location decisions for new centers based upon a detailed site
analysis that includes feasibility and demographic studies, as well as
comprehensive financial modeling. Within a prospective area, we often analyze
several alternative sites. Each potential site is evaluated against our
standards for location, convenience, visibility, traffic patterns, size, layout,
affordability and functionality, as well as potential competition.
Our real estate and development staff work closely with our operations,
purchasing, human resources and marketing personnel to streamline the new center
opening process. We believe this results in a more efficient transition of new
centers from the construction phase to field operation.
Our Real Estate Asset Management Program
At August 23, 2002, we owned 764, or 61%, of our 1,261 centers. Those
owned centers have an approximate net book value of $544.5 million, which
includes land, building and equipment costs.
During the fourth quarter of fiscal year 2002, we began marketing efforts
to sell centers to individual real estate investors and then lease them back.
The Board of Directors has authorized sales of up to $150.0 million, which we
expect will represent 65 to 75 centers. The resulting leases are expected to be
classified as operating leases. We would continue to manage the operations of
any centers that are sold in such transactions. By August 23, 2002, we had
completed sales totaling $15.9 million and were in the process of negotiating
another $55.0 million of sales. We expect this effort to continue into fiscal
year 2004, assuming the market for such transactions remains favorable.
During fiscal years 2001 and 2000, we used a synthetic lease facility to
construct 44 centers. The related leases are classified as operating leases for
financial reporting purposes. See "Liquidity and Capital Resources."
We routinely analyze the profitability of our existing centers through a
detailed evaluation that considers leased versus owned status, lease options,
operating history, premises expense, capital requirements, area demographics,
competition and site assessment. Through this evaluation process, our asset
management staff formulates a plan for the property reflecting our strategic
direction and marketing objectives. If a center continues to underperform, exit
strategies are employed in an attempt to minimize our financial liability. We
make an effort to time center closures to minimize the negative impact on
affected families. During fiscal year 2002, we closed 13 centers. From the end
of fiscal year 2002 to August 23, 2002, nine centers were closed.
Our asset management department also manages the disposition of all surplus
real estate owned or leased by us. These real estate assets include undeveloped
sites, unoccupied buildings and closed centers. We disposed of seven surplus
properties in fiscal year 2002. From the end of fiscal year 2002 to August 23,
2002, two surplus properties were sold. We were in the process of marketing an
additional six surplus properties at August 23, 2002.
Employees
At August 23, 2002, we employed approximately 27,000 people. Of these
employees, over 26,000 were employed in our centers. Center employees include
the following:
o center directors,
o assistant directors,
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o regular full- and part-time teachers,
o temporary and substitute teachers
o teachers' aides, and
o non-teaching staff, including cooks and van drivers.
There are approximately 310 employees in the corporate headquarters and
330 field management and support personnel. Approximately 6.6% of our
27,000 employees, including all management and supervisory personnel, are
salaried. All other employees are paid on an hourly basis. We do not have an
agreement with any labor union and believe that we have good relations with our
employees.
Human Resources
Regional and Center Personnel. At August 23, 2002, our KinderCare centers
were organized into three geographic regions, each headed by a Region Vice
President. The Region Vice Presidents are supported by a total of six region
manager and 81 area manager positions. The six region manager positions are
responsible for supervising operations in our most important geographic markets.
At August 23, 2002, our Mulberry centers were supervised by a Vice President of
Operations and nine region director positions. Region management also includes
controllers, human resource managers and accreditation managers assigned to each
region.
Individual centers are managed by a center director and, in most cases, an
assistant director. All center directors participate in periodic training
programs or meetings and must be familiar with applicable state and local
licensing regulations. During fiscal year 2002, we conducted a center director
retention survey. We believe the results of the survey reflect overall center
director satisfaction. As a result of the survey, we revised the center director
bonus plan in fiscal year 2003 to increase the focus on customer retention and
new enrollments. We continue to use the results to construct initiatives to
increase our support of the center directors, as well as improve business
performance.
Due to high employee turnover rates in the child care segment of the
education industry in general, we emphasize recruiting and retaining qualified
personnel. The turnover of personnel experienced by us and other providers in
our industry results in part from the fact that a significant portion of our
employees earn entry-level wages and are part-time employees.
Training Programs. 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. Our
basic orientation and staff training program is delivered via a video series.
Additionally, we have developed and implemented training programs to certify
personnel as teachers of various age groups in accordance with our internal
standards and in connection with our age-specific educational programs. We offer
ongoing sales and service training to center directors and area managers that
focuses on enrollment and retention of families, training on delivery of our
educational programs, health and safety related training. Center staff also
participate in ongoing in-service training as required by state licensing
authorities, most of which is focused on education and child health and safety
related issues.
Employee Benefits. The corporate human resources department monitors
salaries and benefits for competitiveness. In fiscal year 2002, the processing
of benefits was automated company-wide. Employees can enroll, make changes and
disenroll from all benefit plans via their computers or telephones.
10
Communication and Information Systems
We have a fully automated information, communication and financial
reporting system for our centers. This system uses personal computers and links
every center and regional office to the corporate headquarters. The system is
designed to provide timely information on items such as net revenues, expenses,
enrollments, attendance, payroll and staff hours. In fiscal year 2002, we
implemented a web-based purchase order system for our centers that is integrated
into our financial systems.
Our nationwide network includes the internet and company-wide intranet and
email applications. Through the use of Netscape Navigator(R) software, our
intranet allows center directors to have immediate access to corporate
information and provides center directors with the ability to distribute
reports, update databases and revise center listings on a daily basis. We
regularly seek new uses for our intranet as a tool to communicate with our
centers. For example, in fiscal year 2002, we implemented a center visitation
program. The program provides an automated way to communicate information to the
corporate headquarters and for management to assess quality and identify best
practices.
Competition in the Child Care Segment of the Education Industry
The child care segment of the education industry is competitive and highly
fragmented, with the most important competitive factors generally based upon
reputation, location and price. Our competition consists principally of the
following:
o other for-profit, center-based child care providers;
o preschool, kindergarten and before- and after-school programs provided
by public schools;
o local nursery schools and child care centers, including
church-affiliated and other non-profit centers;
o providers of child care services that operate out of homes; and
o substitutes for organized child care, such as relatives, nannies and one
parent caring full-time for a child.
Our competition includes other large, national, for-profit companies
providing child care and education services, many of which offer child care at a
lower price than we do. These other for-profit providers continue to expand in
many of the same markets where we currently operate or plan to operate. We
compete by offering (a) high quality education and recreational programs, (b)
contemporary, well-equipped facilities, (c) trained teachers and supervisory
personnel and (d) a range of services, including infant and toddler care,
drop-in service and the transportation of older children enrolled in our before-
and after-school program between our centers and schools.
In some markets, we also face competition with respect to preschool
services and before- and after-school programs from public schools that offer
such services at little or no cost to parents. The number of school districts
offering these services is growing and we expect this form of competition to
increase in the future.
Local nursery schools, child care centers and in-home providers generally
charge less for their services than we do. Many church-affiliated and other
non-profit child care centers have lower operating expenses than we do and may
receive donations and/or other funding to subsidize operating expenses.
Consequently, operators of such centers often charge tuition rates that are less
than our rates. In addition, fees for home-based care are normally substantially
lower than fees for center-based care because
11
providers of home care are not always required to satisfy the same health,
safety, insurance or operational regulations as our centers.
Our employer-sponsored centers compete with center-based child care chains,
some of which have divisions that compete for employer-sponsorship
opportunities, and with other organizations that focus exclusively on the
work-site segment of the child care market.
Insurance
Our insurance program currently includes the following types of policies:
workers' compensation, comprehensive general liability, automobile liability,
property, excess "umbrella" liability, directors' and officers' liability and
employment practices liability. These policies provide for a variety of
coverages, are subject to various limits, and include substantial deductibles or
self-insured retentions. Special insurance is sometimes obtained with respect to
specific hazards, if deemed appropriate and available at reasonable cost.
Claims in excess of, or not included within, our coverage may be asserted.
The effects of these claims could have an adverse effect on us. We expect our
insurance costs to continue to increase in fiscal year 2003, due partially to
higher premiums. See "Item 8. Financial Statements and Supplementary Data, Note
1. Summary of Significant Accounting Policies, Self-Insurance Programs." At
August 23, 2002, approximately $23.5 million of letters of credit were
outstanding to secure obligations under retrospective and self-insurance
programs.
Governmental Laws and Regulations Affecting Us
Center Licensing Requirements. Our centers are subject to numerous state
and local regulations and licensing requirements. We have policies and
procedures in place to assist in complying 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, childrens' 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. Most jurisdictions establish requirements for background
checks or other clearance procedures for new employees of child care centers.
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 and could also lead
to sanctions against our other centers located in the same jurisdiction. In
addition, this type of action could lead to negative publicity extending beyond
that jurisdiction.
We believe that our operations are in substantial compliance with all
material regulations applicable to our business. However, there is 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 and
possibly other centers in the same jurisdiction. In addition, there may be
unforeseen changes in regulations and licensing requirements, such as changes in
the required ratio of child center staff personnel to enrolled children, that
could have a material adverse effect on our operations. States in which we
operate routinely review the adequacy of regulatory and licensing requirements
and implement changes which may significantly increase our costs to operate in
those states.
Child Care Tax Incentives. Tax incentives for child care programs can
potentially benefit us. Section 21 of the Internal Revenue Code of 1986,
referred to as the Code, provides a federal income tax credit ranging from 20%
to 30% of specified child care expenses. For eligible taxpayers with one child,
a
12
credit can be claimed on a maximum of $2,400 of eligible expenses. For eligible
taxpayers with two or more children, a credit can be claimed on a maximum of
$4,800 of eligible expenses. The maximum credit rises to 35% and the maximum
eligible expenses increase to $3,000 for one child and $6,000 for two or more
children in 2003. The fees paid to us by eligible taxpayers for child care
services qualify for these tax credits, subject to the limitations of Section 21
of the Code. However, these tax incentives are subject to change.
The Economic Growth and Tax Relief Reconciliation Act of 2001 created new
Code Section 45F. This section provides incentives to employers to offset costs
related to employer-provided child care facilities. Costs related to (a)
acquiring or constructing property used as a qualified child care center, (b)
operating an existing child care center, or (c) contracting with an independent
child care operator to care for the children of the taxpayer's employees will
qualify for the credit. An additional credit of 10% of qualified expenses for
child care resource and referral services has also been enacted. The maximum
credit available, beginning in 2002, for any taxpayer is $150,000 per tax year.
Many states offer tax credits in addition to the federal credits discussed
above. Credit programs vary by state and may apply to both the individual
taxpayer and the employer.
Child Care Assistance Programs. During fiscal year 2002, approximately
22.0% of our net 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 and the reauthorization of the Block Grant,
there is no assurance that we will benefit from any such additional funding.
Americans with Disabilities Act. The federal Americans with Disabilities
Act, referred to as the ADA, and similar state laws prohibit discrimination on
the basis of disability in public accommodations and employment. Compliance with
the ADA requires that public accommodations reasonably accommodate individuals
with disabilities and that new construction or alterations made to commercial
facilities conform to accessibility guidelines unless structurally impracticable
for new construction or technically infeasible for alterations. Non-compliance
with the ADA could result in the imposition of injunctive relief, fines, an
award of damages to private litigants and additional capital expenditures to
remedy such noncompliance. We have not experienced any material adverse impact
as a result of these laws.
Federal Transportation Regulations. In August and September of 1998, the
National Highway Transportation Safety Administration, referred to as 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 by child care
providers. 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 have affected the type of vehicle that may be purchased by
us for use in transporting children between schools and our centers. NHTSA's
interpretation and potential related changes in state and federal transportation
regulations have increased our costs to transport children because school buses
are more expensive to purchase and maintain and, in some jurisdictions, require
drivers with commercial licenses.
At August 23, 2002, we had 1,070 school buses out of a total of 2,381
vehicles used to transport children. We have ordered approximately 70 additional
school buses, which are expected to be delivered during fiscal year 2003.
13
Trademarks and Service Marks
We own and use various registered and unregistered trademarks and service
marks covering the name KinderCare, our schoolhouse logo and a number of other
names, slogans and designs, including
o Helping America's Busiest Families(SM) o Let's Move, Let's Play(R)
o I Think. I Can.(TM) o Mulberry Child Care Centers, Inc.(R)
o Kindergarten at KinderCare... o Mulberry Child Care and Preschool(R)
Journey to Discovery(R) o My Window On The World(R)
o KC Imagination Highway(R) o Razzmatazz(R)
o Keystone National High School(TM) o SmallTalk(R)
o Kid's Choice(TM) o Summer ExplorationsSM
o KinderCare At Work(R) o The Whole Child is the Whole Idea(TM)
o KinderCare Connections(TM) o Welcome To Learning(R)
o Lakemont Academy(TM) o Your Child's First Classroom(R)
A federal registration in the United States is effective for ten years and
may be renewed for ten-year periods perpetually, subject only to required
filings based on continued use of the mark by the registrant. A federal
registration provides the presumption of ownership of the mark by the registrant
and notice of its exclusive right to use such mark throughout the United States
in connection with the goods or services specified in the registration. In
addition, we have registered various trademarks and service marks in other
countries, including Canada, Germany, Japan, the People's Republic of China and
the United Kingdom. However, many of these foreign countries require us to use
the marks locally to preserve our registration rights and, because we have not
conducted business in foreign countries other than the United Kingdom, we may
not be able to maintain our registration rights in all other foreign countries.
We believe that our name and logo are important to our operations. We intend to
maintain and renew our trademark and service mark registrations in the United
States and the United Kingdom.
14
ITEM 2. PROPERTIES
Early Childhood Education and Care Centers
Of our child care centers in operation at August 23, 2002, we owned 764,
leased 492 and operated five under management contracts. We own or lease
other centers that have not yet been opened or are being held for disposition.
In addition, we own real property held for the future development of centers.
The community and employer-sponsored centers we operated at August 23, 2002
were located as follows:
Employer-
Community Sponsored
Location Centers Centers Total
---------------- --------- --------- ---------
United States:
Alabama 9 -- 9
Arizona 19 2 21
Arkansas 3 -- 3
California 136 1 137
Colorado 35 -- 35
Connecticut 16 2 18
Delaware 5 -- 5
Florida 66 7 73
Georgia 31 -- 31
Illinois 94 1 95
Indiana 25 1 26
Iowa 8 3 11
Kansas 16 -- 16
Kentucky 13 1 14
Louisiana 9 2 11
Maryland 25 1 26
Massachusetts 46 1 47
Michigan 31 2 33
Minnesota 38 -- 38
Mississippi 4 -- 4
Missouri 35 -- 35
Nebraska 10 1 11
Nevada 10 -- 10
New Hampshire 4 -- 4
New Jersey 47 4 51
New Mexico 7 -- 7
New York 7 2 9
North Carolina 33 -- 33
Ohio 77 4 81
Oklahoma 6 -- 6
Oregon 16 4 20
Pennsylvania 65 1 66
Rhode Island -- 1 1
Tennessee 21 2 23
Texas 105 1 106
Utah 6 1 7
Virginia 54 -- 54
Washington 56 1 57
Wisconsin 24 1 25
United Kingdom 2 -- 2
--------- --------- ---------
1,214 47 1,261
========= ========= =========
15
Our typical community center is a one-story, air-conditioned building
constructed based on our design and located on approximately one acre of land.
Larger capacity centers are situated on parcels ranging from one to four acres
of land. The community centers contain classrooms, play areas and complete
kitchen and bathroom facilities. The centers can accommodate from 70 to 270
children, with most centers able to accommodate 95 to 190 children. Over the
past few years, we have opened community centers that are larger in size with a
capacity ranging from 135 to 220 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 our before-
and after-school program. All community centers are equipped with computers for
children's educational programs.
KinderCare At Work(R) provides employer-sponsored child care programs
individualized for each such sponsor. Facilities are on or near the employer's
site and range in capacity from 75 to 250 children.
Center Maintenance Program
We use a centralized maintenance program to ensure consistent high-quality
maintenance of our facilities located across the country. Each of our
maintenance technicians has a van stocked with spare parts and handles
emergency, routine and preventative maintenance functions through an automated
work order system. Technicians are notified and track all work orders via palm
top computers. At August 23, 2002, specific geographic areas were supervised by
two regional directors and 13 facility managers, each of whom manages between
six and ten technicians.
Center Renovation Program
We have continued a renovation program, which includes interior and
playground renovations and signage replacements, to ensure that all of our
centers meet specified standards that we establish. We believe that our
properties are in good condition and are adequate to meet our current and
reasonably anticipated future needs.
Environmental Compliance
We are not aware of any existing environmental conditions that currently or
in the future could reasonably be expected to have a material adverse effect on
our financial position, operating results or cash flows. We have not incurred
material expenditures to address environmental conditions at any owned or leased
property. Approximately ten years ago, we established a process of obtaining
environmental assessment reports to reduce the likelihood of incurring
liabilities under applicable federal, state and local environmental laws upon
acquisition or lease of prospective new centers or sites. These assessment
reports have not revealed any environmental liability that we believe would have
a material adverse effect on us. Nevertheless, it is possible that these
assessment reports do not or will not reveal all environmental liabilities and
it is also possible that sites acquired prior to the establishment of our
current process have environmental liabilities. Additionally, from time to time,
we have conducted additional limited environmental investigations and remedial
activities at some of our former and current centers. However, we have not
undertaken an in-depth environmental review of all of our owned and leased
centers. Consequently, there may be material environmental liabilities of which
we are unaware.
In addition, no assurances can be given that: future laws, ordinances or
regulations will not impose any material environmental liability; the current
environmental condition of our owned or leased centers will not be adversely
affected by conditions at locations in the vicinity of our centers (such as the
presence of leaking underground storage tanks) or by third parties unrelated to
us; or, on sites we lease to
16
others, the tenants will not violate their leases by introducing hazardous or
toxic substances into our owned or leased centers that could expose us to
liability under federal, state, or local environmental laws.
Corporate Headquarters
Our corporate office is located in Portland, Oregon. We entered into a ten
year lease of approximately 73,000 square feet of office space, commencing on
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. On July 15,
2000, we signed an amendment to our lease to add 5,000 square feet to our
corporate office space in July 2000 and an additional 2,300 square feet in July
2001. Rent for the additional space is calculated at $23.00 per square foot for
the remainder of the first five years of the lease and will increase to $26.50
per square foot for the second five years of the lease term.
ITEM 3. LEGAL PROCEEDINGS
We do not believe that there are any pending or threatened legal
proceedings that, if adversely determined, would have a material adverse effect
on our business or operations. However, we are subject to claims and litigation
arising in the ordinary course of business, including claims and litigation
involving allegations of physical or sexual abuse of children. We have notice of
such allegations that have not yet resulted in claims or litigation. Although we
cannot be assured of the ultimate outcome of the allegations, claims or lawsuits
of which we are aware, we believe that none of these allegations, claims or
lawsuits, either individually or in the aggregate, will have a material adverse
effect on our financial position, operating results or cash flows. In addition,
we cannot predict the negative impact of publicity that may be associated with
any such allegation, claim or lawsuit.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCK HOLDER MATTERS
Stock Split
On July 15, 2002, the Board of Directors authorized a 2-for-1 stock split
of our common stock and an increase of the authorized common shares to 10.0
million shares. The 2-for-1 stock split was effective August 19, 2002 for
stockholders of record on August 9, 2002. All of the information in this report,
including all references to the number or price of shares of common stock, gives
effect to the stock split. The information in this report also gives effect to
adjustments in the number of shares available, the number of shares subject to
options granted and the exercise price of those options under our stock option
plan, in each case, to reflect the stock split.
Market Information
In February 1997, affiliates of Kohlberg Kravis Roberts & Co., referred to
as KKR, became owners of 15.7 million shares of our common stock in a
recapitalization transaction. Since then, our common stock has been traded in
the over-the-counter market in the "pink sheets" published by the National
Quotation Bureau. It is listed on the OTC Bulletin Board under the symbol
"KDCR."
The market for our common stock must be characterized as very limited due
to the very low trading volume, the small number of brokerage firms acting as
market makers and the sporadic nature of the trading activity. The average
weekly trading volume during fiscal year 2002 was less than 1,000 shares. The
following table sets forth, for the periods indicated, information with respect
to the high and low bid quotations for our common stock as reported by a market
maker for our common stock. The quotations represent inter-dealer quotations
without retail markups, markdowns or commissions and may not represent actual
transactions.
Common Stock
----------------------
High Bid Low Bid
--------- ---------
Fiscal year ended May 31, 2002:
First quarter $ 13.00 $ 12.75
Second quarter 15.00 12.75
Third quarter 15.00 8.00
Fourth quarter 11.50 8.50
Fiscal year ended June 1, 2001:
First quarter $ 12.00 $ 11.00
Second quarter 11.06 10.50
Third quarter 11.00 11.00
Fourth quarter 12.88 9.75
See "Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters, Securities Authorized for Issuance
under Equity Compensation Plans."
Approximate Number of Security Holders
At August 23, 2002, there were 134 holders of record of our common stock.
18
Dividend Policy
During the past three fiscal years, we have not declared or paid any cash
dividends or distributions on our capital stock. We do not intend to pay any
cash dividends for the foreseeable future. We intend to retain earnings, if any,
for the future operation and expansion of our business. Any determination to pay
dividends in the future will be at the discretion of our Board of Directors and
will be dependent upon our results of operations, financial condition,
contractual restrictions, restrictions imposed by applicable law and other
factors deemed relevant by our Board of Directors. Further, our credit
facilities and the indenture governing our senior subordinated notes currently
contain limitations on our ability to declare or pay cash dividends on our
common stock. Future indebtedness or loan arrangements incurred by us may also
prohibit or restrict our ability to pay dividends and make distributions to our
stockholders.
19
ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth selected historical consolidated financial
and other data, with dollars in thousands, except per share amounts and child
care center data. Our fiscal year ends on the Friday closest to May 31. The
fiscal years are typically comprised of 52 weeks. However, fiscal year 2000
included 53 weeks. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Item 8. Financial Statements
and Supplementary Data" included elsewhere in this report.
Fiscal Year Ended (a)
--------------------------------------------------------------
May 31, June 1, June 2, 2000 May 28, May 29,
2002 2001 (53 Weeks) 1999 1998
---------- ---------- ------------ ---------- ----------
Statement of Operations Data:
Revenues, net......................... $ 829,434 $ 743,397 $ 696,846 $ 632,985 $ 597,070
Operating expenses, exclusive of
restructuring and other charges,
net............................... 756,307 668,532 619,756 565,238 546,376
Restructuring and other charges,
net(b).............................. -- (100) -- 4,157 5,201
---------- ---------- ------------ ---------- ----------
Total operating expenses............ 756,307 668,432 619,756 569,395 551,577
---------- ---------- ------------ ---------- ----------
Operating income.................. 73,127 74,965 77,090 63,590 45,493
Investment income..................... 560 582 386 490 612
Interest expense...................... (44,078) (48,820) (45,375) (41,843) (40,677)
Loss on minority investment........... (2,265) -- -- -- --
---------- ---------- ------------ ---------- ----------
Income before income taxes and
cumulative effect of a change in
accounting principle............ 27,344 26,727 32,101 22,237 5,428
Income tax expense.................... 10,801 10,266 12,138 8,711 2,002
---------- ---------- ------------ ---------- ----------
Income before cumulative effect of
a change in accounting principle.. 16,543 16,461 19,963 13,526 3,426
Cumulative effect of a change in
accounting principle, net of
income taxes (c).................. -- (790) -- -- --
---------- ---------- ------------ ---------- ----------
Net income........................ $ 16,543 $ 15,671 $ 19,963 $ 13,526 $ 3,426
========== ========== ============ ========== ==========
Net income per share (d):
Basic income before cumulative
effect of a change in accounting
principle......................... $ 0.83 $ 0.86 $ 1.05 $ 0.71 $ 0.18
Cumulative effect of a change in
accounting principle, net........... -- (0.04) -- -- --
---------- ---------- ------------ ---------- ----------
Net income........................ $ 0.83 $ 0.82 $ 1.05 $ 0.71 $ 0.18
========== ========== ============ ========== ==========
Diluted income before cumulative
effect of a change in accounting
principle......................... $ 0.82 $ 0.85 $ 1.04 $ 0.70 $ 0.18
Cumulative effect of a change in
accounting principle, net........... -- (0.04) -- -- --
---------- ---------- ------------ ---------- ----------
Net income........................ $ 0.82 $ 0.81 $ 1.04 $ 0.70 $ 0.18
========== ========== ============ ========== ==========
Balance Sheet Data (at end of period):
Property and equipment, net........... $ 702,160 $ 666,227 $ 613,206 $ 566,365 $ 508,113
Total assets.......................... 844,185 805,367 695,570 638,797 591,539
Total long-term obligations,
including current portion........... 549,240 540,602 475,175 441,371 415,368
Stockholders' equity.................. 123,269 106,731 76,673 51,790 31,900
Other Financial Data:
EBITDAR (e)........................... $ 181,540 $ 160,737 $ 147,081 $ 134,667 $ 121,232
EBITDAR margin........................ 21.9% 21.6% 21.1% 21.3% 20.3%
EBITDA (e)............................ 132,420 121,497 117,132 105,131 93,247
EBITDA margin......................... 16.0% 16.3% 16.8% 16.6% 15.6%
Cash flows from operations............ 87,466 69,671 61,197 61,810 56,577
Depreciation and amortization......... 59,293 46,632 40,042 37,384 42,553
Capital expenditures.................. 95,843 94,269 82,473 92,139 84,954
Child Care Center Data:
Number of centers at end of fiscal
year................................ 1,264 1,242 1,169 1,160 1,147
Center licensed capacity at end of
fiscal year......................... 166,000 162,000 150,000 146,000 143,000
Occupancy (f)......................... 65.6% 68.3% 69.8% 69.9% 70.6%
Average tuition rate (g).............. $ 137.72 $ 129.34 $ 120.75 $ 113.45 $ 106.81
See accompanying notes to selected historical consolidated financial and other
data.
20
Notes to Selected Historical Consolidated Financial and Other Data
(a) Our fiscal year ends on the Friday closest to May 31. Typically, the fiscal
years are comprised of 52 weeks. Fiscal year 2000, however, included 53
weeks.
(b) Restructuring and other charges, net, included the following, with dollars
in thousands:
Fiscal Year Ended
--------------------------------------------------------------
May 31, June 1, June 2, 2000 May 28, May 29,
2002 2001 (53 Weeks) 1999 1998
---------- ---------- ------------ ---------- ----------
Restructuring charges, net....... $ -- $ (100) $ -- $ 3,561 $ 5,697
Offering costs................... -- -- -- 596 --
Gain on litigation settlement.... -- -- -- -- (496)
---------- ---------- ------------ ---------- ----------
$ -- $ (100) $ -- $ 4,157 $ 5,201
========== ========== ============ ========== ==========
(c) In fiscal year 2001, we adopted Securities and Exchange Commission Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements, the impact of which was recorded as a cumulative effect of a
change in accounting principle.
(d) The per share amounts have been adjusted to reflect the 2-for-1 stock
split, which was effective August 19, 2002.
(e) EBITDAR and EBITDA were calculated as follows, with dollars in thousands:
Fiscal Year Ended
--------------------------------------------------------------
May 31, June 1, June 2, 2000 May 28, May 29,
2002 2001 (53 Weeks) 1999 1998
---------- ---------- ------------ ---------- ----------
Net income....................... $ 16,543 $ 15,671 $ 19,963 $ 13,526 $ 3,426
Interest expense, net............ 43,518 48,238 44,989 41,353 40,065
Income taxes..................... 10,801 10,266 12,138 8,711 2,002
Depreciation and amortization.... 59,293 46,632 40,042 37,384 42,553
Restructuring and other charges,
net ............................. -- (100) -- 4,157 5,201
Loss on minority investment...... 2,265 -- -- -- --
Cumulative effect of a change in
accounting principle.......... -- 790 -- -- --
---------- ---------- ------------ ---------- ----------
EBITDA..................... 132,420 121,497 117,132 105,131 93,247
Rent............................. 49,120 39,240 29,949 29,536 27,985
---------- ---------- ------------ ---------- ----------
EBITDAR.................... $ 181,540 $ 160,737 $ 147,081 $ 134,667 $ 121,232
========== ========== ============ ========== ==========
EBITDAR and EBITDA are not intended to indicate that cash flow is
sufficient to fund all of our cash needs or represent cash flow from
operations as defined by accounting principles generally accepted in the
United States of America. In addition, EBITDAR and EBITDA should not be
used as a tool for comparison as the computation may not be the same for
all companies.
(f) Occupancy is a measure of the utilization of center capacity. We calculate
occupancy as the full-time equivalent, or FTE, attendance at all of the
centers divided by the sum of the centers' licensed capacity. FTE
attendance is not a strict head count. Rather, the methodology determines
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 five half-days equates 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.
21
(g) We calculate the average tuition rate as net revenues, exclusive of fees
and non-tuition income, divided by FTE attendance for the related time
period. The average tuition rate represents the approximate weighted
average tuition rate at all of the centers paid by parents for children to
attend the centers five full days during a week. However, the occupancy mix
between full- and part-time children at each center can significantly
affect these averages with respect to any specific center.
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 the related notes included elsewhere in
this report. Our fiscal year ends on the Friday closest to May 31. The
information presented refers to the 52 weeks ended May 31, 2002 as "fiscal
2002," the 52 weeks ended June 1, 2001 as "fiscal 2001," and the 53 weeks ended
June 2, 2000 as "fiscal 2000." Typically, our first fiscal quarter has 16 weeks
and the remaining quarters each have 12 weeks. However, the fourth quarter of
fiscal 2000 included 13 weeks.
A center is included in comparable center net revenues when it has been
open and operated by us at least one year and it has not been rebuilt or
permanently relocated within that year. Therefore, a center is considered
comparable during the first quarter it has prior year net revenues.
Non-comparable centers include those that have been closed during the past year.
Fiscal 2002 compared to Fiscal 2001
The following table shows the comparative operating results of KinderCare,
with dollars in thousands, except rate:
Change
Fiscal Year Percent Fiscal Year Percent Amount
Ended of Ended of Increase/
May 31, 2002 Revenues June 1, 2001 Revenues (Decrease)
------------- -------- ------------ -------- ----------
Revenues, net.................... $ 829,434 100.0% $ 743,397 100.0% $ 86,037
------------- -------- ------------ -------- ----------
Operating expenses:
Salaries, wages and benefits:
Center expense............... 428,848 51.7 379,352 51.0 49,496
Region and corporate
expense.................. 31,943 3.9 28,638 3.9 3,305
------------- -------- ------------ -------- ----------
Total salaries, wages
and benefits............. 460,791 55.6 407,990 54.9 52,801
Depreciation and amortization.. 59,293 7.1 46,632 6.3 12,661
Rent........................... 49,120 5.9 39,240 5.2 9,880
Other.......................... 187,103 22.6 174,670 23.5 12,433
Restructuring charges
(reversals).................. -- -- (100) 0.0 100
------------- -------- ------------ -------- ----------
Total operating expenses..... 756,307 91.2 668,432 89.9 87,875
------------- -------- ------------ -------- ----------
Operating income........... $ 73,127 8.8% $ 74,965 10.1% $ (1,838)
============= ======== ============ ======== ==========
Occupancy........................ 65.6% 68.3% (2.7)%
Average tuition rate............. $ 137.72 $ 129.34 $ 8.38
Revenues, net. Net revenues increased $86.0 million, or 11.6%, from the
same period last year to $829.4 million in fiscal 2002. The increase was
primarily due to the acquisition of the Mulberry centers in the fourth quarter
of fiscal 2001 and the additional net revenues generated by the newly opened
centers.
22
Comparable center net revenues increased $6.1 million, or 0.8%. During fiscal
2002 and 2001, we opened, acquired and closed centers as follows:
Fiscal Year Ended
---------------------------
May 31, 2002 June 1, 2001
------------ ------------
Number of centers at the beginning of the
fiscal year............................... 1,242 1,169
Openings..................................... 35 44
Acquisitions................................. -- 75
Closures..................................... (13) (46)
------------ ------------
Number of centers at the end of the
fiscal year............................ 1,264 1,242
============ ============
The average tuition rate increased $8.38, or 6.5%, to $137.72 in fiscal
2002 due primarily to tuition increases. Occupancy declined to 65.6% from 68.3%
for the same period last year due to reduced full-time equivalent attendance
within the older center population. Total center licensed capacity was 166,000
and 162,000 at the end of fiscal 2002 and 2001, respectively. See "Item 6.
Selected Historical Consolidated Financial and Other Data, Notes (e) and (f)"
for descriptions of average tuition rate and occupancy.
Salaries, wages and benefits. Expenses for salaries, wages and benefits
increased $52.8 million, or 12.9%, from the same period last year to $460.8
million. Total salaries, wages and benefits expense as a percentage of net
revenues was 55.6% for fiscal 2002 compared to 54.9% for fiscal 2001.
The expense directly associated with the centers was $428.8 million, an
increase of $49.5 million from the same period last year. The increase was
primarily due to costs from the acquired and newly opened centers and overall
higher wage rates. See "Inflation and Wage Increases." At the center level,
salaries, wages and benefits expense as a percentage of net revenues increased
to 51.7% from 51.0% for the same period last year due primarily to higher
medical insurance costs.
The expense related to region management and corporate administration was
$31.9 million, an increase of $3.3 million from the same period last year. The
increase was primarily due to the addition of the Mulberry region management
during the fourth quarter of fiscal 2001. We also added six region managers in
fiscal 2002 to provide greater oversight to our most important geographic
markets. See "Item 1. Business, Human Resources."
Depreciation and amortization. Depreciation and amortization expense
increased $12.7 million from the same period last year to $59.3 million.
Depreciation increased due to the acquisition of the Mulberry centers, increased
capital spending, particularly for new center development, and a $3.6 million
asset impairment charge.
During the fourth quarter of fiscal 2002, 38 underperforming centers and
certain undeveloped properties were determined to be impaired, which resulted in
an impairment charge of $3.6 million for the fiscal year compared to $1.0
million last year. Underperforming centers are those with estimated future cash
flows less than the net book value of the center. We performed an undiscounted
cash flow analysis and determined that 38 centers were impaired primarily as a
result of occupancy declines at individual centers.
Amortization of goodwill and other intangible assets increased $2.2 million
as a result of the acquisition of Mulberry in the fourth quarter of fiscal 2001.
See "Recently Issued Accounting Pronouncements."
23
Rent. Rent expense increased $9.9 million from the same period last year to
$49.1 million. The increase was primarily due to the acquisition of the Mulberry
leased centers in the fourth quarter of fiscal 2001 and rent from the synthetic
lease facility used to finance new center construction during fiscal 2001 and
2000. See "Liquidity and Capital Resources."
The rental rates experienced on new and renewed center leases are higher
than those experienced in previous fiscal periods. See "Item 2. Properties."
Other operating expenses. Other operating expenses increased $12.4 million,
or 7.1%, from the same period last year, to $187.1 million. The increase was due
primarily to additional center level costs from the acquired and newly opened
centers. Other operating expenses as a percentage of net revenues declined to
22.6% from 23.5% for the same period last year as a result of cost controls over
variable center level and corporate expenditures.
Other operating expenses include costs directly associated with the
centers, such as food, insurance, transportation, janitorial, maintenance,
utilities and marketing costs, and expenses related to field management and
corporate administration.
Operating income. Operating income was $73.1 million, a decrease of $1.8
million, or 2.5%, from the same period last year. The decreased operating income
was primarily due to the $3.6 million impairment charge discussed above, higher
insurance costs and rent expense. Operating income was positively impacted by
the control of variable center level and corporate expenditures. Operating
income as a percentage of net revenues was 8.8% compared to 10.1% for the same
period last year.
Interest expense. Interest expense was $44.1 million compared to $48.8
million for the same period last year. The decrease was substantially
attributable to lower interest rates, offset partially by additional borrowings.
Our weighted average interest rate on our long-term debt, including amortization
of deferred financing costs, was 7.8% and 9.7% for fiscal 2002 and fiscal 2001,
respectively.
Loss on minority investment. During the fourth quarter of fiscal 2002, we
wrote down the net book value of a cost method investment. The write-down was
due to a reduced valuation of the subject company and dilution of our minority
investment.
Income tax expense. Income tax expense was $10.8 million, or 39.5% of
pretax income, in fiscal 2002 and $10.3 million, or 38.4% of pretax income, in
fiscal 2001. The increase in the effective tax rate was due to additional
goodwill amortization, which is not deductible for tax purposes. Income tax
expense was computed by applying estimated effective income tax rates to the
income before income taxes. Income tax expense varies from the statutory federal
income tax rate due primarily to state and foreign income taxes, offset by tax
credits.
Net income. Net income was $16.5 million, an increase of $0.9 million, or
5.6%, from the same period last year. The increase was due to lower interest
costs, offset partially by the write-down in a minority investment and a decline
in operating income due primarily to the $3.6 million asset impairment charge.
Basic and diluted net income per share were $0.83 and $0.82, respectively, for
fiscal 2002. For fiscal 2001, basic and diluted net income per share before the
cumulative effect of a change in accounting principle were $0.86 and $0.85,
respectively, and were $0.82 and $0.81, respectively, after such effect.
We implemented Securities and Exchange Commission SAB No. 101 with respect
to non-refundable fee revenues in the first quarter of fiscal 2001. This
resulted in a one-time charge of $0.8 million, net of taxes, which was recorded
as a cumulative effect of a change in accounting principle.
24
Fiscal 2001 (52 Weeks) compared to Fiscal 2000 (53 Weeks)
The following table shows the comparative operating results of KinderCare,
with dollars in thousands, except rate:
Fiscal Fiscal Change
Year Ended Percent Year Ended Percent Amount
June 1, 2001 of June 2, 2000 of Increase/
(52 Weeks) Revenues (53 Weeks) Revenues (Decrease)
------------ -------- ------------ -------- ----------
Revenues, net..................... $ 743,397 100.0% $ 696,846 100.0% $ 46,551
------------ -------- ------------ -------- ----------
Operating expenses:
Salaries, wages and benefits:
Center expense................ 379,352 51.0 356,828 51.2 22,524
Region and corporate expense.. 28,638 3.9 26,891 3.9 1,747
------------ -------- ------------ -------- ----------
Total salaries, wages and
benefits................. 407,990 54.9 383,719 55.1 24,271
Depreciation and amortization.. 46,632 6.3 40,042 5.7 6,590
Rent........................... 39,240 5.2 29,949 4.3 9,291
Other.......................... 174,670 23.5 166,046 23.8 8,624
Restructuring charges
(reversals).................. (100) 0.0 -- -- (100)
------------ -------- ------------ -------- ----------
Total operating expenses..... 668,432 89.9 619,756 88.9 48,676
------------ -------- ------------ -------- ----------
Operating income........... $ 74,965 10.1% $ 77,090 11.1% $ (2,125)
============ ======== ============ ======== ==========
Occupancy...................... 68.3% 69.8% (1.5)%
Average tuition rate........... $ 129.34 $ 120.75 $ 8.59
Revenues, net. Net revenues increased $46.6 million, or 6.7%, from the same
period last year, to $743.4 million in fiscal 2001 from fiscal 2000. After
adjusting fiscal 2000 to a comparable 52-week basis, net revenues would have
increased $60.2 million, or 8.8%, in fiscal 2001. Comparable center net revenues
increased $26.2 million, or 4.0%, on an adjusted 52-week basis. During fiscal
2001 and 2000, we opened, acquired and closed centers as follows:
Fiscal Year Ended
---------------------------
June 1, 2001 June 2, 2000
------------ ------------
Number of centers at the beginning of the
fiscal year................................ 1,169 1,160
Openings..................................... 44 35
Acquisitions................................. 75 13
Closures..................................... (46) (39)
------------ ------------
Number of centers at the end of the
fiscal year............................. 1,242 1,169
============ ============
The average tuition rate increased $8.59, or 7.1%, to $129.34 in fiscal
2001 from $120.75 due to tuition increases and, to a lesser degree, higher than
average tuition rates experienced at newly opened centers. Occupancy declined to
68.3% from 69.8% for the same period last year due to reduced full-time
equivalent attendance in some of the older centers and the impact of the new
centers, which open with lower occupancy than mature centers. Total licensed
capacity was 162,000 and 150,000 at the end of fiscal 2001 and 2000,
respectively.
Salaries, wages and benefits. Expenses for salaries, wages and benefits
increased $24.3 million, or 6.3%, from the same period last year, to $408.0
million from fiscal 2000. Total salaries, wages and benefits expense as a
percentage of net revenues was 54.9% for fiscal 2001 and 55.1% for fiscal 2000.
The expense directly associated with the centers was $379.4 million, an
increase of $22.5 million from the same period last year. The increase in center
related expenses was primarily attributable to higher staff wage rates and
additional hours related to newly opened centers. At the center level, salaries,
25
wages and benefits expense as a percentage of net revenues declined slightly to
51.0% from 51.2% for the same period last year.
The expense related to region management and corporate administration was
$28.6 million, an increase of $1.7 million, or 6.5%, from the same period last
year.
Depreciation and amortization. Depreciation and amortization expense
increased $6.6 million from the same period last year to $46.6 million. The
increase was due to higher renovation spending, newly opened and acquired
centers and additional goodwill amortization as a result of acquisitions.
Rent. Rent expense increased $9.3 million from the same period last year to
$39.2 million. The increase was primarily associated with the newly opened
leased centers, many of which were financed by the synthetic lease facility. The
rental rates experienced on new and renewed center leases are higher than those
experienced in previous fiscal years.
Other operating expenses. Other operating expenses increased $8.6 million,
or 5.2%, from the same period last year, to $174.7 million. The increase was due
primarily to additional center level costs from the newly opened centers. Other
operating expenses as a percentage of net revenues declined to 23.5% from 23.8%
for the same period last year.
Restructuring charges (reversals). During the fourth quarter of fiscal
1999, the Board of Directors authorized a provision of $4.0 million for the
planned early termination of certain center operating leases. The provision
included an estimate of discounted future lease payments and anticipated
incremental costs related to closure of the centers. A total of 61
underperforming leased centers were closed: 36 in fiscal 2001 and 25 in fiscal
2000. We have paid or committed to pay $3.9 million of lease termination and
closure costs for such closed centers. During the fourth quarter of fiscal 2001,
the remaining reserve of $0.1 million was reversed.
Operating income. Operating income was $75.0 million, a decrease of $2.1
million, or 2.8%, from the same period last year. After adjusting fiscal 2000 to
a comparable 52-week basis, operating income would have increased $0.6 million
in fiscal 2001. Operating income as a percentage of net revenues was 10.1%
compared to 11.1% on a 53-week basis in fiscal 2000. Compared to fiscal 2000,
operating income was negatively impacted by the significant increase in rent
expense of $9.3 million primarily related to the synthetic lease facility used
to finance new center construction. In addition, the lower occupancy experienced
in some of the older centers negatively impacted operating income, but was
partially offset by improved labor margins and control of other operating
expenses.
Interest expense. Interest expense was $48.8 million compared to $45.4
million for the same period last year. The increase was substantially
attributable to the additional borrowings in order to fund investments,
acquisitions and capital expenditures, offset partially by lower interest rates.
Our weighted average interest rate on our long-term debt, including amortization
of deferred financing costs, was 9.7% and 10.2% for fiscal 2001 and 2000,
respectively.
Income tax expense. Income tax expense was $10.3 million, or 38.4% of
pre-tax income, in fiscal 2001, and $12.1 million, or 37.8% of pre-tax income,
in fiscal 2000. The increase in the effective tax rate was due to additional
goodwill amortization, which is not deductible for tax purposes. Income tax
expense 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 primarily to state and foreign income taxes, offset by tax credits.
26
Net income. Net income was $15.7 million compared to $20.0 million in
fiscal 2000. The decline was due to higher interest expense and the impact of
the additional week of operations in fiscal 2000. In addition, we implemented
SAB No. 101 in fiscal 2001, which resulted in the one-time deferral of $0.8
million of fee revenues, net of taxes, from the fourth quarter of the previous
fiscal year. The one-time deferral of $0.8 million was recorded as a cumulative
effect of a change in accounting principle.
For fiscal 2001, basic and diluted net income per share before the
cumulative effect of a change in accounting principle were $0.86 and $0.85,
respectively, and were $0.82 and $0.81, respectively, after such effect. Basic
and diluted net income per share were $1.05 and $1.04, respectively, for fiscal
2000.
Liquidity and Capital Resources
Our principal sources of liquidity are cash flow generated from operations
and borrowings under a $300.0 million revolving credit facility. At May 31,
2002, we had drawn $175.0 million under the revolving credit facility, had
committed to outstanding letters of credit totaling $28.5 million and had funded
$97.9 million under the synthetic lease facility discussed below. Our
availability under the revolving credit facility at May 31, 2002 was $96.5
million. The revolving credit facility is scheduled to terminate on February 13,
2004.
Our consolidated net cash provided by operating activities for fiscal 2002
was $87.5 million compared to $69.7 million in the same period last year. The
increase in net cash flow was due to the increase in earnings, see the
calculation of EBITDAR below. Cash and cash equivalents totaled $8.6 million at
May 31, 2002, compared to $3.7 million at June 1, 2001, and the ratio of current
assets to current liabilities was 0.46 to one at May 31, 2002 versus 0.41 to one
at June 1, 2001.
EBITDAR is earnings, adjusted for the cumulative effect of a change in
accounting principle, loss on minority investment and restructuring charges,
before interest, taxes, depreciation, amortization and rent. EBITDAR was
calculated as follows, with dollars in thousands:
Fiscal Year Ended
------------------------------------------
June 2, 2000
May 31, 2002 June 1, 2001 (53 weeks)
------------ ------------ ------------
Net income........................ $ 16,543 $ 15,671 $ 19,963
Interest expense, net............. 43,518 48,238 44,989
Income tax expense................ 10,801 10,266 12,138
Depreciation and amortization..... 59,293 46,632 40,042
Restructuring charge (reversals).. -- (100) --
Loss on minority investment....... 2,265 -- --
Cumulative effect of a change in
accounting principle, net of
tax.......................... -- 790 --
------------ ------------ ------------
EBITDA....................... 132,420 121,497 117,132
Rent expense...................... 49,120 39,240 29,949
------------ ------------ ------------
EBITDAR........................ $ 181,540 $ 160,737 $ 147,081
============ ============ ============
EBITDAR - percent of revenues.. 21.9% 21.6% 21.1%
During fiscal 2002, EBITDAR increased $20.8 million, or 12.9%, from fiscal
2001 due to the addition of the Mulberry centers and the additional contribution
from the newer centers. During fiscal 2001, EBITDAR increased $13.7 million, or
9.3%, from fiscal 2000. After adjusting fiscal 2000 to a comparable 52-week
basis, EBITDAR would have increased $16.3 million in fiscal 2001. The fiscal
2001 increase was due to improved labor margins and control of other operating
expenses. EBITDAR is not intended to indicate that cash flow is sufficient to
fund all of our cash needs or represent cash flow from operations as defined by
accounting principles generally accepted in the United States of America.
27
In addition, EBITDAR should not be used as a tool for comparison as the
computation may not be the same for all companies.
Our principal uses of liquidity are meeting debt service requirements,
financing capital expenditures and providing working capital. In 1997, we
borrowed $50.0 million under a term loan facility and issued $300.0 million of
9.5% senior subordinated notes due 2009. The term loan facility will mature on
February 13, 2006 and provides for nominal annual amortization. During the
second quarter of fiscal 2000, we acquired $10.0 million aggregate principal
amount of our 9.5% senior subordinated notes at an aggregate price of $9.6
million. This transaction resulted in the write-off of deferred financing costs
of $0.3 million and a gain of approximately $0.1 million.
In fiscal 2001, our acquisition spending, including transaction fees, for
Mulberry, NLKK, a distance learning company, and two independently operated
centers totaled $32.4 million in cash. In addition to the cash payments, we
issued 860,000 shares of our common stock to the sellers of Mulberry and assumed
$3.3 million of debt. In August 2002, 119,838 of the 860,000 shares were
returned to us, which included 99,152 shares that were released from an
indemnity escrow and 20,686 shares that were redeemed from certain former
shareholders of Mulberry. In fiscal 2000, we paid $9.5 million for a regional
child care operator.
We made minority investments of $10.1 million in fiscal 2001 and $5.5
million in fiscal 2000 in two education-based companies. During fiscal 2001,
notes receivable of $4.8 million were issued to us by one of the companies in
which we hold a minority investment. During fiscal 2002, $2.2 million of such
notes were converted into additional stock of the subject company. During the
fourth quarter of fiscal 2002, we wrote down the net book value of a cost method
minority investment by $2.3 million.
In fiscal 2000, we entered into a $100.0 million synthetic lease facility
under which a syndicate of lenders financed construction of 44 centers for lease
to us for a three to five year period, which may be extended, subject to the
consent of the lessors. The related leases are classified as operating leases
for financial reporting purposes. We do not consolidate the assets or
liabilities related to the synthetic lease in our consolidated financial
statements.
The synthetic lease facility closed to draws on February 13, 2001 and, at
May 31, 2002, $97.9 million had been funded through the facility. We have the
option to purchase the centers for $97.9 million at the end of the lease term,
which is February 13, 2004. We are required to notify the lessors by May 14,
2003, as to whether we will be exercising our option to purchase the centers at
the end of the lease term. If we do not elect to exercise our purchase option,
then we are required to market the leased centers for sale to third parties. In
addition, we would pay the lessors a guaranteed residual amount of up to $82.2
million. The guaranteed residual amount that we may have to pay would be reduced
to the extent the net sales proceeds from the centers exceed $15.7 million. Any
such payment of the guaranteed residual amount to the lessors would be
recognized as rental expense when and if payment becomes probable.
The synthetic lease facility includes covenants and restrictions that are
substantially identical to those in our credit facility. In the event of certain
defaults under the terms of the synthetic lease facility, all amounts under the
synthetic lease facility, including the full property cost of the leased
centers, may become immediately due and payable.
In June 2002, the Financial Accounting Standards Board issued an Exposure
Draft of a proposed Interpretation, Consolidation of Certain Special Purpose
Entities. If the Interpretation is issued as proposed, we expect to be required
to consolidate the synthetic lease facility during our fiscal year 2004. Upon
consolidation, we would record the assets as property and equipment and the
lease liability as an
28
obligation. The impact to our statement of operations would be reduced rent
expense and increased depreciation and interest expense.
During the fourth quarter of fiscal year 2002, we began marketing efforts
to sell centers to individual real estate investors and then lease them back.
The Board of Directors has authorized sales of up to $150.0 million, which we
expect will represent 65 to 75 centers. The resulting leases are expected to be
classified as operating leases. We would continue to manage the operations of
any centers that are sold in such transactions. By May 31, 2002, we had
completed sales totaling $9.5 million. Subsequent to May 31, 2002, we closed
$6.4 million in sales and are currently in the process of negotiating another
$55.0 million of sales. We expect this effort to continue into fiscal year 2004,
assuming the market for such transactions remains favorable. See "Item 8.
Financial Statements and Supplementary Data, Note 7. Long-Term Debt."
We expect to fund future new center development through the revolving
credit facility and sale-leaseback proceeds, although alternative forms of
funding continue to be evaluated and new arrangements may be entered into in the
future.
We have certain contractual obligations and commercial commitments.
Contractual obligations are those that will require cash payments in accordance
with the terms of a contract, such as a borrowing or lease agreement. Commercial
commitments represent potential obligations for performance in the event of
demands by third parties or other contingent events, such as lines of credit.
Our contractual obligations and commercial commitments at May 31, 2002 were as
follows, with dollars in thousands:
Fiscal Year
-----------------------------------------------------------------------------
Total 2003 2004 2005 2006 2007 Thereafter
---------- --------- --------- --------- --------- --------- ----------
Long-term debt..... $ 357,317 $ 6,237 $ 1,144 $ 4,554 $ 46,417 $ 263 $ 298,702
Capital lease
obligations...... 31,092 2,803 2,529 2,234 2,290 2,400 18,836
Operating leases... 390,599 39,516 132,725 28,520 25,818 24,216 139,804
Line of credit..... 175,000 -- 175,000 -- -- -- --
Standby letters
of credit........ 28,498 28,498 -- -- -- -- --
Other commitments.. 13,663 13,585 78 -- -- -- --
---------- --------- --------- --------- --------- --------- ----------
$ 996,169 $ 90,639 $ 311,476 $ 35,308 $ 74,525 $ 26,879 $ 457,342
========== ========= ========= ========= ========= ========= ==========
Other commitments include center development commitments and obligations to
purchase vehicles.
We may experience decreased liquidity during the summer months and the
calendar year-end holidays due to decreased attendance during these periods. See
"Item 1. Business, Seasonality."
We utilized approximately $29.3 million of net operating loss carryforwards
to offset taxable income in our 2000 through 2002 fiscal years. Approximately
$5.7 million of net operating loss carryforwards are available to be utilized in
future fiscal years. If such net operating loss carryforwards were reduced due
to a change of control or otherwise, we would be required to pay additional
taxes and interest, which would reduce available cash.
We believe that cash flow generated from operations and borrowings under
the revolving credit facility will adequately provide for our working capital
and debt service needs and will be sufficient to fund our expected capital
expenditures for the foreseeable future. Any future acquisitions, joint ventures
or similar transactions may require additional capital, and such capital may not
be available to us on acceptable terms or at all. Although no assurance can be
given that such sources of capital 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, cash flow
requirements, debt covenants, competitive factors and seasonality of openings.
If we experience a lack of working capital, it may reduce
29
our future capital expenditures. If these expenditures were substantially
reduced, in management's opinion, our operations and cash flow would be
adversely impacted.
Capital Expenditures
During fiscal 2002 and 2001, we opened 35 and 44 new centers, respectively.
We expect to open approximately 30 to 35 new centers in fiscal 2003 and to
continue our practice of closing centers that are identified as not meeting
performance expectations. In addition, we may acquire existing centers from
local or regional early childhood education and care providers. We may not be
able to successfully negotiate and acquire sites and/or previously constructed
centers, meet our targets for new center additions or meet targeted deadlines
for development of new centers.
New centers are located based upon detailed site analyses that include
feasibility and demographic studies and financial modeling. The length of time
from site selection to construction and, finally, the opening of a community
center ranges from 16 to 24 months. Frequently, new site negotiations are
delayed or canceled or construction is delayed for a variety of reasons, many of
which are outside our control. The average total cost per community center
typically ranges from $1.8 million to $2.6 million depending on the size and
location of the center. However, the actual costs of a particular center may
vary from such range.
Our new centers typically have a licensed capacity of 180, while the
centers constructed during fiscal 1997 and earlier have an average licensed
capacity of 125. When mature, these larger centers are designed to generate
higher revenues, operating income and margins than our older centers. These new
centers also have higher average costs of construction and typically take three
to four years to reach maturity. On average, our new centers should begin to
produce positive EBITDAR by the end of the first year of operation and begin to
produce positive net income by the end of the second year of operation.
Accordingly, as more new centers are developed and opened, profitability will be
negatively impacted in the short-term but is expected to be enhanced in the
long-term once these new, more profitable centers achieve anticipated levels.
We continue to make capital expenditures in connection with a renovation
program, which includes interior and playground renovations and signage
replacements. The program is designed to bring all of our existing facilities to
a company standard for plant and equipment and to enhance the curb appeal of
these centers.
Capital expenditures included the following, with dollars in thousands:
Fiscal Year Ended
--------------------------------------
May 31, June 1, June 2, 2000
2002 2001 (53 Weeks)
---------- ---------- ------------
New center development.......... $ 63,990 $ 44,254 $ 36,631
Renovation of existing
facilities.................... 18,979 37,829 36,646
Equipment purchases............. 9,508 7,993 6,208
Information systems purchases... 3,366 4,193 2,988
---------- ---------- ------------
$ 95,843 $ 94,269 $ 82,473
========== ========== ============
During fiscal 2001 and 2000, we used a synthetic lease facility to
construct 44 centers. The related leases are classified as operating leases for
financial reporting purposes. See "Liquidity and Capital Resources." The cost of
these centers were not included in our capital expenditures.
Capital expenditure limits under our credit facilities for fiscal year 2003
are $190.0 million. Capital expenditure limits may be increased by carryover of
a portion of unused amounts from previous
30
periods and are subject to exceptions. Also, we have some ability to incur
additional indebtedness, including through mortgages or sale-leaseback
transactions, subject to the limitations imposed by the indenture under which
the senior subordinated notes were issued and the credit facilities.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires that
management make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Predicting future events is
inherently an imprecise activity and as such requires the use of judgment.
Actual results may vary from estimates in amounts that may be material to the
financial statements.
For a description of our significant accounting policies, see "Item 8.
Financial Statements and Supplementary Data, Note 1. Summary of Significant
Accounting Policies." The following accounting estimates and related policies
are considered critical to the preparation of our financial statements due to
the business judgment and estimation processes involved in their application.
Revenue recognition. Tuition revenues, net of discounts, and other revenues
are recognized as services are performed. Certain fees may be received in
advance of services being rendered, in which case the fee revenue is deferred
and recognized over the appropriate time period. Our net revenues meet the
criteria of SAB No. 101, including the existence of an arrangement, the
rendering of services, a determinable fee and probable collection.
Accounts receivable. Our accounts receivable are comprised primarily of
tuition due from governmental agencies, parents and employers. Accounts
receivable are presented at estimated net realizable value. We use estimates in
determining the collectibility of our accounts receivable and must rely on our
evaluation of historical trends, governmental funding levels, specific customer
issues and current economic trends to arrive at appropriate reserves. Material
differences may result in the amount and timing of bad debt expense if actual
experience differs significantly from management estimates.
Long-lived and intangible assets. Under the requirements of Statement of
Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment
of Long-Lived Assets, we assess the potential impairment of property and
equipment, identifiable intangibles and acquired goodwill whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. An asset's value is impaired if our estimate of the aggregate
future cash flows, undiscounted and without interest charges, to be generated by
the asset are less than the carrying value of the asset. Such cash flows
consider factors such as expected future operating income and historical trends,
as well as the effects of demand and competition. To the extent impairment has
occurred, the loss will be measured as the excess of the carrying amount of the
asset over the fair value of the asset. Such estimates require the use of
judgment and numerous subjective assumptions, which, if actual experience
varies, could result in material differences in the requirements for impairment
charges. Impairment charges were $3.6, $1.0 and $1.1 million in fiscal 2002,
2001 and 2000, respectively, and were included as a component of decpreciation
expense. We will adopt SFAS No. 142, Goodwill and Other Intangible Assets, and
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in
fiscal year 2003. See "Recently Issued Accounting Pronouncements."
Self-insurance obligations. We self-insure a portion of our general
liability, workers' compensation, auto, property and employee medical insurance
programs. We purchase stop loss coverage at varying levels in order to mitigate
our potential future losses. The nature of these liabilities, which may not
fully manifest themselves for several years, requires significant judgment. We
estimate the obligations for liabilities incurred but not yet reported or paid
based on available claims data and
31
historical trends and experience, as well as future projections of ultimate
losses, expenses, premiums and administrative costs. The accrued obligations for
these self-insurance programs were $35.5 and $31.5 million at May 31, 2002 and
June 1, 2001, respectively, see "Item 8. Financial Statements and Supplementary
Data, Note 1. Summary of Significant Accounting Policies, Self-Insurance
Programs." Our internal estimates are reviewed annually by a third party
actuary. While we believe that the amounts accrued for these obligations are
sufficient, any significant increase in the number of claims and costs
associated with claims made under these programs could have a material adverse
effect on our financial position, cash flows or results of operations.
Income taxes. Accounting for income taxes requires us to estimate our
income taxes in each jurisdiction in which we operate. Due to differences in the
recognition of items included in income for accounting and tax purposes,
temporary differences arise which are recorded as deferred tax assets or
liabilities. We estimate the likelihood of recovery of these assets, which is
dependent on future levels of profitability and enacted tax rates. Should any
amounts be determined not to be recoverable, or assumptions change, we would be
required to take a charge, which could have a material effect on our financial
position or results of operations.
Recently Issued Accounting Pronouncements
SFAS No. 142, Goodwill and Other Intangible Assets, requires discontinuing
the amortization of goodwill and other intangible assets with indefinite useful
lives. Instead, these assets must be tested at least annually for impairment and
written down to their fair market values as necessary. SFAS No. 142 is effective
the first day of our fiscal year 2003. Goodwill amortization was $2.8 million
during fiscal 2002. We expect such amortization to cease in fiscal year 2003.
However, we are still evaluating the impact of the adoption of all of the
provisions of SFAS No. 142 and have not yet determined the impact of adoption on
our financial position and results of operations.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, addresses accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of and
the accounting and reporting provisions of Accounting Principles Board Opinion
("APB") No. 30, Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment of business.
SFAS No. 144 modifies the accounting and reporting for long-lived assets to be
disposed of by sale and it broadens the presentation of discontinued operations
to include more disposal transactions. We believe that most of our future center
closures will now be categorized as discontinued operations. SFAS No. 144
becomes effective for our fiscal year 2003. However, we are still evaluating
SFAS No. 144 and have not yet determined the impact of adoption on our financial
position and results of operations.
SFAS No. 145, Recission of SFAS Nos. 4, 44 and 64, Amendment of SFAS No. 13
and Technical Corrections, requires analyzing gains and losses from the
extinguishment of debt to determine if they should be classified as an
extraordinary item or interest expense. SFAS No. 145 also requires that certain
lease modifications having economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
SFAS No. 145 is effective the first day of our fiscal year 2003. We are still
evaluating the impact of the adoption of SFAS No. 145, but we do not expect a
material effect on our financial position or results of operations.
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, requires recording costs associated with exit or disposal activities
at their fair values when a liability has been incurred, rather than at the date
of commitment to an exit or disposal plan. SFAS No. 146 is effective for
32
disposal activities initiated after December 31, 2002. We are evaluating SFAS
No. 146 and have not yet determined the impact of adoption on our financial
position and results of operations.
Seasonality
See "Item 1. Business, Seasonality."
Governmental Laws and Regulations Affecting Us
See "Item 1. Business, Governmental Laws and Regulations Affecting Us."
Inflation and Wage Increases
We do not believe that the effect of inflation on the results of our
operations has been significant in recent periods, including the last three
fiscal years.
Expenses for salaries, wages and benefits represented approximately 55.6%
of net revenues for fiscal 2002. We believe that, through increases in our
tuition rates, we can recover any future increase in expenses caused by
adjustments to the federal or state minimum wage rates or other market
adjustments. However, we may not be able to increase our rates sufficiently to
offset such increased costs. We continually evaluate our wage structure and may
implement changes at targeted local levels.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our consolidated
financial position, results of operations or cash flows. We are exposed to
market risk in the areas of interest rates and foreign currency exchange rates.
Interest Rates
Our exposure to market risk for changes in interest rates relates primarily
to debt obligations. We have no cash flow exposure due to rate changes on our
9.5% senior subordinated notes aggregating $290.0 million at May 31, 2002. We
also have no cash flow exposure on certain industrial revenue bonds, mortgages
and notes payable aggregating $7.2 million at May 31, 2002. However, we have
cash flow exposure on our revolving credit facility, our term loan facility and
certain industrial revenue bonds subject to variable LIBOR or adjusted base rate
pricing aggregating $235.1 million at May 31, 2002. Accordingly, a 1% change in
the LIBOR rate and the adjusted base rate would have resulted in interest
expense changing by approximately $2.3, $2.2 and $1.4 million in fiscal 2002,
2001 and 2000, respectively.
We have cash flow exposure on our synthetic lease facility subject to
variable LIBOR pricing. We also have cash flow exposure on our vehicle leases
with variable interest rates. A 1% change in the LIBOR rate and the interest
rate defined in the vehicle lease agreement would have resulted in rent expense
changing by approximately $1.5, $2.1 and $2.8 million in fiscal 2002, 2001 and
2000, respectively.
Foreign Exchange Risk
We are exposed to foreign exchange risk to the extent of fluctuations in
the United Kingdom pound sterling. Based upon the relative size of our
operations in the United Kingdom, we do not believe that the reasonably possible
near-term change in the related exchange rate would have a material effect on
our financial position, results of operations and cash flows.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
May 31, 2002 June 1, 2001
------------ ------------
Assets
Current assets:
Cash and cash equivalents.............................. $ 8,619 $ 3,657
Receivables, net....................................... 31,657 28,523
Prepaid expenses and supplies.......................... 9,948 7,835
Deferred income taxes.................................. 13,904 13,514
------------ ------------
Total current assets................................ 64,128 53,529
Property and equipment, net............................... 702,160 666,227
Deferred income taxes..................................... 8 358
Goodwill.................................................. 42,565 44,100
Other assets.............................................. 35,324 41,153
------------ ------------
$ 844,185 $ 805,367
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Bank overdrafts........................................ $ 9,779 $ 9,328
Accounts payable....................................... 9,836 8,296
Current portion of long-term debt...................... 6,237 2,588
Accrued expenses and other liabilities................. 112,667 108,796
------------ ------------
Total current liabilities........................... 138,519 129,008
Long-term debt............................................ 526,080 524,370
Long-term self-insurance liabilities...................... 15,723 15,819
Deferred income taxes..................................... 12,208 5,737
Other noncurrent liabilities.............................. 28,386 23,702
------------ ------------
Total liabilities................................... 720,916 698,636
------------ ------------
Commitments and contingencies (Notes 7 and 13)
Stockholders' equity:
Preferred stock, $.01 par value; authorized 10,000,000
shares; none outstanding............................ -- --
Common stock, $.01 par value; authorized 100,000,000
shares; issued and outstanding 19,819,352 shares.... 198 198
Additional paid-in capital............................. 28,107 28,107
Notes receivable from stockholders..................... (1,426) (1,355)
Retained earnings...................................... 96,882 80,339
Accumulated other comprehensive loss................... (492) (558)
------------ ------------
Total stockholders' equity.......................... 123,269 106,731
------------ ------------
$ 844,185 $ 805,367
============ ============
See accompanying notes to consolidated financial statements.
34
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
Fiscal Year Ended
------------------------------------------
May 31, 2002 June 1, 2001 June 2, 2000
------------ ------------ ------------
Revenues, net............................. $ 829,434 $ 743,397 $ 696,846
------------ ------------ ------------
Operating expenses:
Salaries, wages and benefits........... 460,791 407,990 383,719
Depreciation and amortization.......... 59,293 46,632 40,042
Rent................................... 49,120 39,240 29,949
Provision for doubtful accounts........ 7,499 6,394 5,107
Other.................................. 179,604 168,276 160,939
Restructuring charges (reversals)...... -- (100) --
------------ ------------ ------------
Total operating expenses........... 756,307 668,432 619,756
------------ ------------ ------------
Operating income..................... 73,127 74,965 77,090
Investment income......................... 560 582 386
Interest expense.......................... (44,078) (48,820) (45,375)
Loss on minority investment.............. (2,265) -- --
------------ ------------ ------------
Income before income taxes and
cumulative effect of a change in
accounting principle, net.......... 27,344 26,727 32,101
Income tax expense........................ 10,801 10,266 12,138
------------ ------------ ------------
Income before cumulative effect of a 16,543 16,461 19,963
change in accounting principle, net..
Cumulative effect of a change in
accounting principle, net of income
tax benefit of $484................. -- (790) --
------------ ------------ ------------
Net income........................... $ 16,543 $ 15,671 $ 19,963
============ ============ ============
Net income per share:
Basic income before cumulative effect of
a change in accounting principle, net... $ 0.83 $ 0.86 $ 1.05
Cumulative effect of a change in
accounting principle, net of taxes..... -- (0.04) --
------------ ------------ ------------
Net income......................... $ 0.83 $ 0.82 $ 1.05
============ ============ ============
Diluted income before cumulative effect of
a change in accounting principle, net.. $ 0.82 $ 0.85 $ 1.04
Cumulative effect of a change in
accounting principle, net of taxes... -- (0.04) --
------------ ------------ ------------
Net income......................... $ 0.82 $ 0.81 $ 1.04
============ ============ ============
Weighted average common shares outstanding:
Basic................................... 19,819,352 19,072,726 18,953,920
Diluted................................. 20,110,688 19,274,502 19,194,170
See accompanying notes to consolidated financial statements.
35
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Dollars in thousands)
Notes Accumulated
Common Stock Additional Receivable Other
------------------- Paid-in from Retained Comprehensive
Shares Amount Capital Stockholders Earnings Loss Total
---------- ------- ---------- ------------ -------- ------------- ---------
Balance at May 28, 1999................ 18,961,674 $ 190 $ 8,260 $ (1,128) $ 44,705 $ (237) $ 51,790
Comprehensive income:
Net income........................... -- -- -- -- 19,963 -- 19,963
Cumulative translation adjustment.... -- -- -- -- -- (176) (176)
---------
Total comprehensive income......... 19,787
Issuance of common stock............... 40,216 -- 452 (338) -- -- 114
Repurchase of common stock............. (38,016) -- (396) -- -- -- (396)
Proceeds from collection of
stockholders' notes receivable....... -- -- -- 280 -- -- 280
Reversal of pre-fresh start
contingency.......................... -- -- 5,098 -- -- -- 5,098
---------- ------- ---------- ------------ -------- ------------- ---------
Balance at June 2, 2000............ 18,963,874 190 13,414 (1,186) 64,668 (413) 76,673
Comprehensive income:
Net income........................... -- -- -- -- 15,671 -- 15,671
Cumulative translation adjustment.... -- -- -- -- -- (145) (145)
---------
Total comprehensive income......... 15,526
Issuance of common stock............... 882,024 8 12,074 (264) -- -- 11,818
Repurchase of common stock............. (26,546) -- (324) -- -- -- (324)
Proceeds from collection of
stockholders' notes receivable....... -- -- -- 95 -- -- 95
Reversal of pre-fresh start
contingency.......................... -- -- 2,943 -- -- -- 2,943
---------- ------- ---------- ------------ -------- ------------- ---------
Balance at June 1, 2001............ 19,819,352 198 28,107 (1,355) 80,339 (558) 106,731
Comprehensive income:
Net income........................... -- -- -- -- 16,543 -- 16,543
Cumulative translation adjustment.... -- -- -- -- -- 66 66
---------
Total comprehensive income......... 16,609
Proceeds from collection of
stockholders' notes receivable....... -- -- -- 35 -- -- 35
Issuances of stockholders' notes
receivable........................... -- -- -- (106) -- -- (106)
---------- ------- ---------- ------------ -------- ------------- ---------
Balance at May 31, 2002............ 19,819,352 $ 198 $ 28,107 $ (1,426) $ 96,882 $ (492) $ 123,269
========== ======= ========== ============ ======== ============= =========
See accompanying notes to consolidated financial statements.
36
KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
Fiscal Year Ended
------------------------------------------
May 31, 2002 June 1, 2001 June 2, 2000
------------ ------------ ------------
Cash flows from operations:
Net income............................... $ 16,543 $ 15,671 $ 19,963
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation......................... 55,968 45,480 40,042
Amortization of deferred financing
costs, goodwill and other
intangible assets................ 6,311 4,132 3,056
Provision for doubtful accounts...... 7,499 6,394 5,107
Loss on minority investment.......... 2,265 -- --
Gain on sales and disposals of
property and equipment............. (529) (1,125) (680)
Deferred tax expense (benefit)....... 6,431 (116) 4,271
Changes in operating assets and
liabilities:
Increase in receivables............ (10,387) (9,492) (10,102)
Decrease (increase) in prepaid
expenses and supplies............ (2,113) 273 (1,188)
Decrease (increase) in other
assets........................... (1,485) 3,852 (5,611)
Increase in accounts payable,
accrued expenses and other
liabilities...................... 6,897 4,747 6,515
Other, net........................... 66 (145) (176)
------------ ------------ ------------
Net cash provided by operating
activities........................... 87,466 69,671 61,197
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment...... (95,843) (94,269) (82,473)
Acquisitions of previously constructed
centers................................ -- (17,257) (9,490)
Acquisition of new subsidiary, net of
cash acquired.......................... -- (15,189) --
Investments accounted for under the
cost method............................ -- (10,074) (5,460)
Issuance of notes receivable............. -- (4,836) --
Proceeds from sales of property and
equipment.............................. 8,862 7,948 1,709
Proceeds from collection of notes
receivable............................. 26 145 63
------------ ------------ ------------
Net cash used by investing activities.. (86,955) (133,532) (95,651)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term borrowings....... 57,128 108,000 78,000
Payments on long-term borrowings......... (51,769) (44,836) (43,349)
Payments on capital leases............... (1,288) (1,647) (1,258)
Proceeds from issuance of common stock... -- 270 452
Proceeds from collection of
stockholders' notes receivable......... 35 95 280
Repurchases of common stock.............. -- (324) (396)
Issuances of stockholders' notes
receivable............................. (106) (264) (338)
Bank overdrafts.......................... 451 4,779 (3,242)
------------ ------------ ------------
Net cash provided by financing
activities........................... 4,451 66,073 30,149
------------ ------------ ------------
Increase (decrease) in cash and
cash equivalents................... 4,962 2,212 (4,305)
Cash and cash equivalents at the
beginning of the fiscal year........... 3,657 1,445 5,750
------------ ------------ ------------
Cash and cash equivalents at the end of
the fiscal year........................ $ 8,619 $ 3,657 $ 1,445
============ ============ ============
Supplemental cash flow information:
Interest paid............................ $ 41,360 $ 45,415 $ 41,193
Income taxes paid, net................... 11,614 12,552 3,387
Non-cash financial activities:
Property and equipment under capital
leases................................. $ 4,390 $ 559 $ 410
See accompanying notes to consolidated financial statements.
37
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 is the leading
for-profit provider of educational services and care for children between the
ages of six weeks and twelve years in the United States. At May 31, 2002, we
operated a total of 1,264 early childhood education and care centers and served
approximately 129,000 children and their families. Of the 1,264 centers, 1,262
were located in 39 states within the United States and two centers were located
in the United Kingdom.
On October 3, 1996, we entered into an Agreement and Plan of Merger with
KCLC Acquisition Corp., referred to as KCLC. KCLC was a wholly owned subsidiary
of KLC Associates, L.P., referred to as the Partnership, a partnership formed at
the direction of Kohlberg Kravis Roberts & Co., referred to as KKR, a private
investment firm. Pursuant to the merger agreement, on February 13, 1997, KCLC
was merged with and into us and we continued as the surviving corporation. Upon
completion of the merger, affiliates of KKR owned 15,657,894 shares. At May 31,
2002, the Partnership owned 79.0% of our outstanding common stock.
The consolidated financial statements include the financial statements of
KinderCare and our wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Fiscal Year. References to fiscal 2002, fiscal 2001 and fiscal 2000 are to
the 52 weeks ended May 31, 2002, the 52 weeks ended June 1, 2001 and the 53
weeks ended June 2, 2000, respectively. Our fiscal year ends on the Friday
closest to May 31. Typically, the first quarter is 16 weeks long and the second,
third and fourth quarters are each 12 weeks long. Fiscal 2000, however, was 53
weeks long with 13 weeks in the fourth quarter.
Revenue Recognition. We recognize revenue for child care services as earned
in accordance with Staff Accounting Bulletin ("SAB") No. 101, Revenue
Recognition in Financial Statements. Net revenues include tuition, fees and
non-tuition income, reduced by discounts. We receive fees for reservation,
registration, education and other services. Non-tuition income is primarily
comprised of field trip revenue. Registration and education fees are amortized
over the estimated average enrollment period, not to exceed 12 months. Tuition,
other fees and non-tuition income are recognized as the related service is
provided.
On June 3, 2000, we implemented SAB No. 101. As a result of that
implementation, a non-recurring charge of $0.8 million, net of income tax
benefit of $0.5 million, was recorded in the first quarter of fiscal 2001
related to non-refundable registration and education fee revenues that were
originally recognized in the fourth quarter of fiscal 2000. This one-time charge
was recorded as a cumulative effect of a change in accounting principle.
Advertising. Costs incurred to produce media advertising for seasonal
campaigns are expensed during the quarter in which the advertising first takes
place. Costs related to website development are capitalized or expensed in
accordance with Statement of Position No. 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. Other advertising
costs are expensed as incurred. Advertising costs were $12.1, $12.5 and $12.1
million during fiscal 2002, 2001 and 2000, respectively.
38
Cash and Cash Equivalents. Cash and cash equivalents consist of cash held
in banks and liquid investments with maturities, at the date of acquisition, not
exceeding 90 days.
Property and Equipment. Property and equipment are stated at cost. Interest
and overhead costs incurred in the construction of buildings and leasehold
improvements are capitalized. 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 we have the unqualified right to exercise the option and
expects to exercise such option.
Our property and equipment is depreciated using the following estimated
useful lives:
Life
--------------
Buildings........................................ 10 to 40 years
Building renovations............................. 2 to 15 years
Leasehold improvements........................... 2 to 15 years
Computer equipment............................... 3 to 5 years
All other equipment.............................. 3 to 10 years
Asset Impairments. Long-lived assets and certain identifiable intangibles
to be held and used are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. We regularly evaluate 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, we record an impairment charge, if necessary, to reduce the
carrying value to estimated fair value. During fiscal 2002, 2001 and 2000,
impairment charges of $3.6, $1.0 and $1.1 million, respectively, were recorded
with respect to certain underperforming and undeveloped centers. The impairment
charge was included as a component of depreciation expense in the statement of
operations.
Deferred Financing Costs. Deferred financing costs are amortized on a
straight-line basis over the lives of the related debt facilities. Such method
approximates the effective yield method.
Investments. Investments, wherein we do not exert significant influence or
own over 20% of the investee's voting stock, are accounted for under the cost
method.
Self-Insurance Programs. We are self-insured for certain levels of general
liability, workers' compensation, auto, 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 incurred. A
summary of self-insurance liabilities was as follows, with dollars in thousands:
May 31, 2002 June 1, 2001 June 2, 2000
------------ ------------ ------------
Balance at the beginning of the
fiscal year........................ $ 31,483 $ 29,485 $ 30,341
Expense.............................. 31,754 23,592 20,790
Claims paid.......................... (27,764) (21,594) (21,646)
------------ ------------ ------------
Balance at the end of the fiscal
year............................. 35,473 31,483 29,485
Less current portion of
self-insurance liabilities......... 19,750 15,664 14,271
------------ ------------ ------------
Long-term portion of self-
insurance liabilities.......... $ 15,723 $ 15,819 $ 15,214
============ ============ ============
Income Taxes. Income tax expense is based on pre-tax financial accounting
income. Deferred income taxes result primarily from the expected tax
consequences of temporary differences between
39
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
established.
Stock-Based Compensation. We measure compensation expense for our
stock-based employee compensation plans using the method prescribed by
Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued
to Employees, and provide, if material, pro forma disclosures of net income and
earnings per share as if the method prescribed by Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation,
had been applied in measuring compensation expense.
Comprehensive Income. Comprehensive income does not include the reversal of
certain contingency accruals as a result of fresh-start reporting related to our
emergence from bankruptcy in March 1993. Such contingency accruals represent
reserves equal to the tax benefit of pre-bankruptcy income tax net operating
loss carryforwards. The tax benefits were reserved due to uncertainty associated
with their future realization. As realization of these benefits becomes more
likely than not, the reserve is reversed from other liabilities and credited to
additional paid-in capital. Up to an additional $9.5 million may be reversed in
future periods.
Net Income per Share. The difference between basic and diluted net income
per share was a result of the dilutive effect of options, which are considered
potential common shares. A summary of the weighted average common shares was as
follows:
Fiscal Year Ended
------------------------------------------
May 31, 2002 June 1, 2001 June 2, 2000
------------ ------------ ------------
Basic weighted average common
shares outstanding................... 19,819,352 19,072,726 18,953,920
Dilutive effect of options............. 291,336 201,776 240,250
------------ ------------ ------------
Diluted weighted average common
common shares outstanding............ 20,110,688 19,274,502 19,194,170
============ ============ ============
Shares excluded from potential
shares due to their anti-dilutive
effect............................. 299,060 394,910 185,000
============ ============ ============
Reporting for Segments. We operate in one reportable segment.
Derivative Instruments and Hedging Activities. SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended, established
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
We adopted SFAS No. 133 on June 2, 2001 with no resulting impact on our
financial position or results of operations.
Recently Issued Accounting Pronouncements. We adopted SFAS No. 141,
Business Combinations, during the first quarter of fiscal 2002. SFAS No. 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting.
SFAS No. 142, Goodwill and Other Intangible Assets, requires discontinuing
the amortization of goodwill and other intangible assets with indefinite useful
lives. Instead, these assets must be tested at least annually for impairment and
written down to their fair market values as necessary. SFAS No. 142 is effective
the first day of our fiscal year 2003. Goodwill amortization was $2.8, $1.2 and
$0.1 million during fiscal 2002, 2001 and 2000, respectively. We expect such
amortization of goodwill to cease in fiscal year 2003. However, we are still
evaluating the impact of the adoption of all of the provisions of
40
SFAS No. 142 and have not yet determined the impact of adoption on our financial
position and results of operations.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, addresses accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of and
the accounting and reporting provisions of APB No. 30, Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions for
the disposal of a segment of business. SFAS No. 144 modifies the accounting and
reporting for long-lived assets to be disposed of by sale and it broadens the
presentation of discontinued operations to include more disposal transactions.
We believe that most of our future center closures will now be categorized as
discontinued operations. SFAS No. 144 becomes effective for our fiscal year
2003. However, we are still evaluating SFAS No. 144 and have not yet determined
the impact of adoption on our financial position and results of operations.
SFAS No. 145, Recission of SFAS Nos. 4, 44 and 64, Amendment of SFAS No. 13
and Technical Corrections, requires analyzing gains and losses from the
extinguishment of debt to determine if they should be classified as an
extraordinary item or interest expense. SFAS No. 145 also requires that certain
lease modifications having economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
SFAS No. 145 is effective the first day of our fiscal year 2003. We are still
evaluating the impact of the adoption of SFAS No. 145, but we do not expect a
material effect on our financial position or results of operations.
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, requires recording costs associated with exit or disposal activities
at their fair values when a liability has been incurred, rather than at the date
of commitment to an exit or disposal plan. SFAS No. 146 is effective for
disposal activities initiated after December 31, 2002. We are evaluating SFAS
No. 146 and have not yet determined the impact of adoption on our financial
position and results of operations.
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
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. Receivables
Receivables consisted of the following, with dollars in thousands:
May 31, 2002 June 1, 2001
------------ ------------
Tuition............................ $ 33,996 $ 32,037
Allowance for doubtful accounts.... (6,381) (5,713)
------------ ------------
27,615 26,324
Other.............................. 4,042 2,199
------------ ------------
$ 31,657 $ 28,523
============ ============
41
3. Prepaid Expenses and Supplies
Prepaid expenses and supplies consisted of the following, with dollars in
thousands:
May 31, 2002 June 1, 2001
------------ ------------
Inventories........................ $ 4,167 $ 4,001
Prepaid rent....................... 2,211 2,104
Other.............................. 3,570 1,730
------------ ------------
$ 9,948 $ 7,835
============ ============
4. Property and Equipment
Property and equipment consisted of the following, with dollars in
thousands:
May 31, 2002 June 1, 2001
------------ ------------
Land.................................. $ 166,110 $ 160,158
Buildings and leasehold improvements.. 578,544 505,528
Equipment............................. 193,308 175,991
Construction in progress.............. 34,641 58,234
------------ ------------
972,603 899,911
Accumulated depreciation and
amortization........................ (270,443) (233,684)
------------ ------------
$ 702,160 $ 666,227
============ ============
5. Other Assets
Other assets consisted of the following, with dollars in thousands:
May 31, 2002 June 1, 2001
------------ ------------
Minority investments, cost method..... $ 15,757 $ 15,554
Deferred financing costs.............. 11,405 14,390
Notes receivable...................... 2,548 4,779
Other................................. 5,614 6,430
------------ ------------
$ 35,324 $ 41,153
============ ============
6. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following, with
dollars in thousands:
May 31, 2002 June 1, 2001
------------ ------------
Accrued compensation, benefits and
related taxes.............................. $ 30,589 $ 28,151
Deferred revenue............................. 20,032 18,483
Current portion of self-insurance
liabilities................................ 19,750 15,664
Accrued interest............................. 8,975 9,257
Accrued property taxes....................... 8,879 8,293
Accrued income taxes......................... 5,854 12,667
Current portion of caital lease obligations.. 854 1,668
Other........................................ 17,734 14,613
------------ ------------
$ 112,667 $ 108,796
============ ============
42
7. Long-Term Debt
Long-term debt consisted of the following, with dollars in thousands:
May 31, 2002 June 1, 2001
------------ ------------
Secured:
Borrowings under revolving credit facility, interest at:
o May 31, 2002 - adjusted LIBOR plus 1.50%, from
3.34% to 3.67%
o June 1, 2001:
- adjusted LIBOR plus 1.50%, from 5.56% to 5.85%
- alternative base rate plus 0.25%, equal to 7.25%...... $ 175,000 $ 167,000
Term loan facility, interest at adjusted LIBOR
plus 2.50%, equal to 4.43% and 6.56%, respectively.......... 47,500 48,000
Industrial refunding revenue bonds at variable rates of
interest from 1.60% to 2.50% and 4.10% to 5.00%,
respectively, supported by letters of credit,
maturing calendar 2002 to 2009......................... 12,598 12,598
Industrial revenue bonds secured by real property with
maturities to calendar 2005 at interest rates of 3.33%
to 4.55% and 4.90% to 9.75%, respectively................. 3,846 4,033
Real and personal property mortgages payable in monthly
installments through calendar 2005, interest rates of
8.00% to 8.25%............................................ 920 2,164
Unsecured:
Senior subordinated notes due calendar 2009, interest at
9.5%, payable semi-annually................................. 290,000 290,000
Notes payable in monthly installments through calendar
2008, interest rate of 8.00%................................ 2,453 3,163
------------ ------------
532,317 526,958
Less current portion of long-term debt.......................... 6,237 2,588
------------ ------------
$ 526,080 $ 524,370
============ ============
Credit Facilities. We have credit facilities that are provided by a
syndicate of financial institutions. The credit facilities consist of the $90.0
million term loan facility, of which $50.0 million was drawn in 1997 and $40.0
million has since expired, and the $300.0 million revolving credit facility. The
revolving credit facility includes borrowing capacity of up to $75.0 million for
letters of credit and up to $25.0 million for selected short-term borrowings.
The term loan facility will mature on February 13, 2006 and provides for $0.5
million annual interim amortization. The revolving credit facility is scheduled
to terminate on February 13, 2004. Our obligations under the credit facilities
are guaranteed by our subsidiaries and secured by a pledge of our subsidiaries'
stock.
The credit facilities bear interest, at our option, at either of the
following rates, which may be adjusted in quarterly increments based on the
achievement of performance goals:
o an adjusted LIBOR rate plus
o in the case of the term loan facility, a debt to EBITDA-dependent
rate ranging from 2.50% to 3.00%.
o in the case of the revolving credit facility, a debt to EBITDA or
EBITDA to interest expense-dependent rate ranging from 1.25% to
2.50%.
o an alternative base rate plus
o in the case of the term loan facility, a debt to EBITDA-dependent
rate ranging from 1.25% to 1.75%.
43
o in the case of the revolving credit facility, a debt to EBITDA or
EBITDA to interest expense-dependent rate ranging from 0.00% to
1.25%.
----------------
EBITDA is defined in the credit facilities as net income before interest
expense, income taxes, depreciation and amortization.
At May 31, 2002, the amount outstanding on the term loan facility was $47.5
million and the interest rate was 4.43%, which was adjusted LIBOR plus 2.50%.
Under the revolving credit facility, the following amounts were outstanding at
the respective interest rates, with dollars in thousands, at May 31, 2002:
Adjusted LIBOR plus 1.50%:
3.67%............................... $ 65,000
3.43% .............................. 55,000
3.56%............................... 50,000
3.34%............................... 5,000
---------
$ 175,000
=========
We also pay a commitment fee on the revolving credit facility calculated at
a rate, which may be adjusted quarterly in increments based on a debt to EBITDA
or EBITDA to interest expense-dependent ratio, ranging from 0.25% to 0.50% per
year on the undrawn portion of the commitments under the credit facilities. At
May 31, 2002, the commitment fee rate was 0.30%. This fee is payable quarterly
in arrears. During fiscal 2002 and 2001, we paid commitment fees totaling $0.4
and $0.5 million, respectively.
In addition, we pay a letter of credit fee based on the face amount of each
letter of credit calculated at the rate per year then applicable to loans under
the revolving credit facility bearing interest based on adjusted LIBOR, less a
fronting fee calculated at a rate equal to 0.125% per year. At May 31, 2002, the
letter of credit fee rate was 1.50%, which included the fronting fee. These fees
are payable quarterly in arrears. In addition, we will pay customary transaction
charges in connection with any letter of credit. At May 31, 2002, we had
approximately $28.5 million committed under outstanding letters of credit.
The term loan facility will be subject to mandatory prepayment with the
proceeds of specified asset sales; specified debt issuances; and, on an annual
basis, with 50% of our excess cash flow, as defined in the credit agreement, to
the extent not reinvested in our business. The term loan facility is also
subject to mandatory prepayment with the proceeds of specified sale leaseback
transactions, child care center mortgage financings and real estate
securitization transactions involving properties owned, operated or leased on
the date of the February 13, 1997 closing of the credit facilities, but only to
the extent that such proceeds exceed $50 million in the aggregate.
The credit facilities contain customary covenants and provisions that
restrict our ability to:
o change its business,
o declare dividends,
o grant liens,
o incur additional indebtedness, and
o make capital expenditures.
44
In addition, the credit facilities provide that we must meet or exceed
defined interest coverage ratios and must not exceed leverage ratios.
Series A Through E Industrial Revenue Bonds. We are obligated to various
issuers of industrial revenue bonds, which are referred to as refunded IRBs.
Such bonds mature from calendar 2002 to 2009. The refunded IRBs were issued to
provide funds for refunding an equal principal amount of industrial revenue
bonds that were used to finance the cost of acquiring, constructing and
equipping specific centers. At May 31, 2002, the refunded IRBs bore interest at
variable rates from 1.60% to 2.50%, and each is secured by a letter of credit
under the revolving credit facility.
Other Industrial Revenue Bonds. We are also obligated to various issuers of
other industrial revenue bonds that mature to calendar 2005. The principal
amount of such IRBs was used to finance the cost of acquiring, constructing and
equipping specific child care centers. The IRBs are secured by these centers. At
May 31, 2002, the IRBs bore interest at rates of 3.33% to 4.55%.
Senior Subordinated Notes. In fiscal 1997, we issued $300.0 million
aggregate principal amount of 9.5% unsecured senior subordinated notes under an
indenture between Marine Midland Bank, as trustee, and us. During fiscal 2000,
we acquired $10.0 million aggregate principal amount of our 9.5% senior
subordinated notes at an aggregate price of $9.6 million. This transaction
resulted in the write-off of deferred financing costs of $0.3 million and a gain
of approximately $0.1 million.
The 9.5% notes are due February 15, 2009 and are general unsecured
obligations, ranked behind all existing and future indebtedness that is not
expressly ranked behind, or made equal with, the notes. The 9.5% notes bear
interest at a rate of 9.5% per year, payable semi-annually on February 15 and
August 15 of each year. The 9.5% notes may be redeemed at any time, in whole or
in part, on or after February 15, 2002 at a redemption price equal to 104.75% of
the principal amount of the notes in the first year and declining yearly to par
at February 15, 2005, plus accrued and unpaid interest, if any, to the date of
redemption.
Upon the occurrence of a change of control, we will be required to make an
offer to repurchase all notes properly tendered at a price equal to 101% of the
principal amount plus accrued and unpaid interest to the date of repurchase.
The indenture governing the notes contains covenants that limit our ability
to:
o incur additional indebtedness or liens,
o incur or repay other indebtedness,
o pay dividends or make other distributions,
o repurchase equity interests,
o consummate asset sales,
o enter into transaction with affiliates,
o merge or consolidate with any other person or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of our
assets, and
o enter into guarantees of indebtedness.
Covenants. Many of our loan agreements contain lenders' standard covenants
and restrictions. We were in compliance with all of the covenants and
restrictions of these agreements at May 31, 2002.
45
Principal Payments. The aggregate minimum annual maturities of long-term
debt for the five fiscal years subsequent to May 31, 2002 are as follows, with
dollars in thousands:
Fiscal Year:
2003........................................ $ 6,237
2004........................................ 176,144
2005........................................ 4,554
2006........................................ 46,417
2007........................................ 263
Thereafter.................................. 298,702
------------
$ 532,317
============
8. Restructuring Charges (Reversals)
During the fourth quarter of fiscal 1999, the Board of Directors authorized
a provision of $4.0 million for the planned early termination of certain center
operating leases. The provision included an estimate of discounted future lease
payments and anticipated incremental costs related to closure of the centers. A
total of 61 underperforming leased centers were closed: 36 in fiscal 2001 and 25
in fiscal 2000.
We have paid and/or entered into contractual commitments to pay $3.9
million of lease termination and closure costs for such closed centers. During
the fourth quarter of fiscal 2001, the remaining reserve of $0.1 million was
reversed.
A summary of the lease termination reserve was as follows, with dollars in
thousands:
Balance at May 28, 1999.................................. $ 4,000
Payments with respect to the closed centers.............. (1,054)
Reversal related to abandoned exit plans and remaining
reserves............................................. (1,282)
Reduction related to the extension of closure dates into
fiscal 2001.......................................... (111)
Provision related to new exit plans initiated in fiscal
2001................................................. 1,393
---------
Balance at June 2, 2000................................ 2,946
Payments with respect to the closed centers.............. (2,176)
Contractual commitments with respect to the closed
centers.................................................. (670)
Reversal of remaining reserve............................ (100)
---------
Balance at June 1, 2001................................ $ --
=========
A summary of the aggregate financial operating performance of the 61 closed
centers was as follows, with dollars in thousands:
Fiscal Year Ended
----------------------------------------
May 31, 2002 June 1, 2001 June 2, 2000
------------ ------------ ------------
Net revenues........................... $ -- $ 2,131 $ 16,188
Operating losses....................... 139 938 3,448
46
9. Income Taxes
The provision for income taxes attributable to income before income taxes
and cumulative effect of a change in accounting principle consisted of the
following, with dollars in thousands:
Fiscal Year Ended
----------------------------------------
May 31, 2002 June 1, 2001 June 2, 2000
------------ ------------ ------------
Current:
Federal................ $ 3,042 $ 7,025 $ 5,212
State.................. 1,388 3,403 2,736
Foreign................ (60) (46) (81)
------------ ------------ ------------
4,370 10,382 7,867
Deferred:
Federal................ 5,868 152 3,825
State.................. 753 23 478
Foreign................ (190) (291) (32)
------------ ------------ ------------
6,431 (116) 4,271
------------ ------------ ------------
$ 10,801 $ 10,266 $ 12,138
============ ============ ============
A reconciliation between the statutory federal income tax rate and the
effective income tax rates on income before income taxes and cumulative effect
of a change in accounting principle was as follows, with dollars in thousands:
Fiscal Year Ended
----------------------------------------
May 31, 2002 June 1, 2001 June 2, 2000
------------ ------------ ------------
Expected tax provision at the federal
rate of 35%........................ $ 9,565 $ 9,080 $ 11,235
State income taxes, net of federal
tax benefit......................... 1,330 1,258 1,565
Goodwill and other non-deductible
expenses........................... 678 272 131
Tax credits, net of valuation
adjustment............................ (780) (1,050) (1,002)
Other, net............................ 8 706 209
------------ ------------ ------------
$ 10,801 $ 10,266 $ 12,138
============ ============ ============
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities were summarized
as follows, with dollars in thousands:
May 31, 2002 June 1, 2001
------------ ------------
Deferred tax assets:
Self-insurance reserves...................... $ 11,693 $ 10,486
Net operating loss carryforwards............. 1,987 3,481
Capital loss carryforwards................... -- 76
Property and equipment, basis differences.... 226 1,082
Tax credits.................................. 7,214 8,733
Compensation payments........................ 4,668 4,211
Other........................................ 5,302 4,823
------------ ------------
Total gross deferred tax assets............ 31,090 32,892
Less valuation allowance................. (5,211) (5,395)
------------ ------------
Net deferred tax assets.................... 25,879 27,497
------------ ------------
Deferred tax liabilities:
Property and equipment, basis differences.... (14,707) (9,785)
Property and equipment, basis differences of
foreign subsidiaries....................... (5,716) (5,945)
Stock basis of foreign subsidiary............ (3,621) (3,622)
Other........................................ (131) (10)
------------ ------------
Total gross deferred tax liabilities....... (24,175) (19,362)
------------ ------------
Financial statement net deferred tax assets $ 1,704 $ 8,135
============ ============
47
The valuation allowance decreased by $0.2 million during fiscal 2002 due to
the utilization of domestic capital loss carryforwards and foreign net operating
loss carryforwards. Deferred tax assets, net of valuation allowances, have been
recognized to the extent that their realization is more likely than not.
However, the amount of the deferred tax assets considered realizable could be
adjusted in the future as estimates of taxable income or the timing thereof are
revised. If we are unable to generate sufficient taxable income in the future
through operating results, increases in the valuation allowance may be required
through an increase to tax expense in future periods. Conversely, if we
recognize taxable income of a suitable nature and in the appropriate periods,
the valuation allowance will be reduced through a decrease in tax expense in
future periods.
At May 31, 2002, we had $5.7 million of net operating losses available for
carryforward that expire over various dates through fiscal year 2022.
Utilization of the net operating losses is subject to an annual limitation. We
have tax credits available for carryforward for federal income tax purposes of
$7.2 million, which are available to offset future federal income taxes through
fiscal year 2022.
10. Benefit Plans
Stock Purchase and Option Plans. During fiscal 1997, the Board of Directors
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, referred to as the 1997 Plan. The 1997 Plan authorizes grants
of stock or stock options covering 5,000,000 shares of our 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 2001 and 2000, certain officers purchased 22,024 and 40,216
shares of restricted common stock in aggregate, respectively, under the terms of
the 1997 Plan. No shares were purchased in fiscal 2002. All of the officers,
with the exception of the CEO, have executed term notes in order to purchase
restricted stock. The term notes mature from calendar 2008 to 2011 and bear
interest at rates ranging from 2.73% to 4.44% per annum, payable semi-annually
on June 30 and December 31. At May 31, 2002, the term notes totaled $1.4 million
and are reflected as a component of stockholders' equity.
Grants or awards under the 1997 Plan are made at fair market value as
determined by the Board of Directors. Options granted during fiscal 2002, 2001
and 2000 have exercise prices ranging from $11.21 to $14.15 per share. At May
31, 2002, options outstanding had exercise prices ranging from $9.50 to $14.15.
A summary of outstanding options was as follows:
Weighted
Number Average
of Exercise
Shares Price
--------- -----------
Outstanding at May 28, 1999........ 1,474,186 $ 9.54
Granted............................ 300,540 11.42
Canceled........................... (105,042) 9.75
--------- -----------
Outstanding at June 2, 2000..... 1,669,684 9.87
Granted............................ 194,060 12.26
Canceled........................... (91,366) 9.95
--------- -----------
Outstanding at June 1, 2001..... 1,772,378 10.12
Granted............................ 125,000 13.66
Canceled........................... (35,000) 12.14
--------- -----------
Outstanding at May 31, 2002..... 1,862,378 $ 10.32
========= ===========
48
The stock options granted were non-qualified options that vest 20% per year
over a five-year period. Options outstanding at May 31, 2002 have a remaining
average contractual life of 5.8 years. Exercisable options at May 31, 2002
totaled 1,410,464 and have a weighted average exercise price of $9.75. At May
31, 2002, 2,599,322 shares were available for issuance under the 1997 Plan.
As discussed in Note 1. Summary of Significant Accounting Policies, we have
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 our stock option plans been determined based on the
estimated weighted average fair value of the options at the date of grant in
accordance with SFAS No. 123, our net income and basic and diluted net income
per share would have been as follows, with dollars in thousands, except per
share data:
Fiscal Year Ended
----------------------------------------
May 31, 2002 June 1, 2001 June 2, 2000
------------ ------------ ------------
Adjusted net income....................... $ 15,702 $ 14,695 $ 19,176
============ ============ ============
Adjusted net income per share:
Basic income per share before
cumulative effect of a change in
accounting principle, net........... $ 0.79 $ 0.81 $ 1.01
Cumulative effect of a change in
accounting principle, net of taxes.... -- (0.04) --
------------ ------------ ------------
Adjusted net income................ $ 0.79 $ 0.77 $ 1.01
============ ============ ============
Diluted income per share before $ 0.78 $ 0.80 $ 1.00
cumulative effect of a change in
accounting principle, net...........
Cumulative effect of a change in
accounting principle, net of taxes.... -- (0.04) --
------------ ------------ ------------
Adjusted net income................ $ 0.78 $ 0.76 $ 1.00
============ ============ ============
A summary of the weighted average fair values was as follows:
Fiscal Year Ended
----------------------------------------
May 31, 2002 June 1, 2001 June 2, 2000
------------ ------------ ------------
Weighted average fair value, using the
Black-Scholes option pricing model.... $ 5.55 $ 5.07 $ 4.91
Assumptions used to estimate the present
value of options at the grant date:
Volatility.......................... 36.5% 34.1% 35.1%
Risk-free rate of return............ 4.7% 6.2% 6.8%
Dividend yield...................... 0.0% 0.0% 0.0%
Number of years to exercise
options........................... 7 7 7
Savings and Investment Plan. The Board of Directors adopted the KinderCare
Learning Centers, Inc. Savings and Investment Plan, referred to as the Savings
Plan, effective January 1, 1990 and approved the restatement of the Savings Plan
effective July 1, 1998. All employees, other than highly compensated employees,
over the age of 21 are eligible to participate in the Savings Plan on the
quarterly entry date after the employee has been employed a minimum of six
months and has over 1,000 hours of service. Participants may contribute, in
increments of 1%, up to 18% of their compensation to the Savings Plan. Since
January 1, 1999, we have matched participants' contributions up to 1% of
compensation.
Nonqualified Deferred Compensation Plan. The Board of Directors adopted the
KinderCare Learning Centers, Inc. Nonqualified Deferred Compensation Plan,
effective August 1, 1996 and approved the restatement effective August 1, 1996.
Under the Nonqualified Deferred Compensation Plan, certain
49
highly compensated or key management employees are provided the opportunity to
defer receipt and income taxation of such employees' compensation. Since January
1, 1999, we have matched participants' contributions up to 1% of compensation.
Directors' Deferred Compensation Plan. On May 27, 1998, the Board of
Directors adopted the KinderCare Learning Centers, Inc. Directors' Deferred
Compensation Plan. Under this plan, non-employee members of the Board of
Directors may elect to defer receipt and income taxation of all or a portion of
their annual retainer. Any amounts deferred under the Directors' Deferred
Compensation Plan are 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 the Directors' Deferred Compensation Plan, of our common stock.
Distributions from the Directors' Deferred Compensation Plan are made in
cash and reflect the 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' Deferred Compensation Plan
occur upon the earlier of (1) the first day of the year following the director's
retirement or separation from the Board or (2) termination of the Directors'
Deferred Compensation Plan.
11. Disclosures About Fair Value of Financial Instruments
Fair value estimates, methods and assumptions are set forth below for our
financial instruments at May 31, 2002 and June 1, 2001.
Cash and cash equivalents, receivables, investments and current
liabilities. Fair value approximates the carrying value of cash and cash
equivalents, receivables and current liabilities as reflected in the
consolidated balance sheets at May 31, 2002 and June 1, 2001 because of the
short-term maturity of these instruments. Our cost method investments are
recorded at estimated fair values.
Long-term debt. The estimated fair value of our $290.0 million of 9.5%
senior subordinated notes was $290.0 and $285.7 million at May 31, 2002 and June
1, 2001, respectively, based on recent market activity. The carrying values for
our remaining long-term debt of $242.3 and $237.0 million at May 31, 2002 and
June 1, 2001, respectively, approximated market value based on current rates
that management believes could be obtained for similar debt.
12. Acquisitions
In April 2001, we acquired Mulberry Child Care Centers, Inc., referred to
as Mulberry, a child care and early education company based in Dedham,
Massachusetts. We acquired 100% of Mulberry's stock in exchange for 860,000
shares of our common stock valued at $11.8 million. In connection with the
transaction, we paid $13.1 million and assumed $3.3 million of Mulberry's debt.
In August 2002, 119,838 of the 860,000 shares were returned to us, which
included 99,152 shares that were released from an indemnity escrow and 20,686
shares that were redeemed from certain former shareholders of Mulberry. Our
subsidiary, KC Distance Learning, Inc., acquired NLKK, Inc., referred to as
NLKK, a distance learning company based in Bloomsburg, Pennsylvania in June
2000. NLKK was purchased for $15.1 million in cash. See "Consolidated Statements
of Cash Flows."
Both acquisitions were accounted for under the purchase method. The results
of operations for Mulberry and NLKK for the periods subsequent to the
acquisitions were included in our results of operations for fiscal 2002 and
2001. The purchase price for both transactions was allocated to the assets and
liabilities of the respective companies based on their estimated fair values.
Goodwill from the purchase of Mulberry totaled $26.4 million, which was
amortized using the straight-line method over 20
50
years. Goodwill from the purchase of NLKK totaled $15.2 million, which was
amortized using the straight-line method over 20 years. See "Note 1. Summary of
Significant Accounting Policies, Recently Issued Accounting Pronouncements."
13. Commitments and Contingencies
We conduct a portion of our operations from leased or subleased day care
centers. At May 31, 2002, we leased 491 operating centers under various lease
agreements that average twenty year terms. Most leases contain standard renewal
clauses. A majority of the leases contain standard covenants and restrictions,
all of which we were in compliance with at May 31, 2002. A majority of the
leases are classified as operating leases for financial reporting purposes. We
have 15 center leases that were classified as capital leases, as well as certain
equipment capital leases.
During the fourth quarter of fiscal year 2002, we began marketing efforts
to sell centers to individual real estate investors and then lease them back.
The Board of Directors has authorized sales of up to $150.0 million, which we
expect will represent 65 to 75 centers. The resulting leases are expected to be
classified as operating leases. We would continue to manage the operations of
any centers that are sold in such transactions. At May 31, 2002, we had
completed sales totaling $9.5 million. See "Note 7. Long-Term Debt."
Each vehicle in our 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, type, model and age of the vehicles leased. The vehicle leases
require that we guarantee specified residual values upon cancellation. In most
cases, we expect 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 $9.8, $11.7 and $11.1 million for fiscal 2002,
2001 and 2000, respectively.
Following is a schedule of future minimum lease payments under capital and
operating leases, that have initial or remaining non-cancelable lease terms in
excess of one year at May 31, 2002, with dollars in thousands:
Capitalized Operating
Leases Leases
----------- -----------
Fiscal Year:
2003................................. $ 2,803 $ 39,516
2004................................. 2,529 132,725
2005................................. 2,234 28,520
2006................................. 2,290 25,818
2007................................. 2,400 24,216
Subsequent years..................... 18,836 139,804
----------- -----------
31,092 $ 390,599
Less amounts representing interest... (14,169) ===========
Present value of minimum -----------
capitalized lease payments...... $ 16,923
===========
51
The present value of the future minimum lease payments for leases
classified as capital leases were as follows, with dollars in thousands:
May 31, 2002 June 1, 2001
------------ ------------
Present value of minimum capitalized lease
payments................................... $ 16,923 $ 13,644
Less current portion of capitalized lease
obligations................................ 854 1,668
------------ ------------
Long-term capitalized lease obligations.. $ 16,069 $ 11,976
============ ============
Property and equipment recorded under capital leases were $21.9 and $17.3
million at May 31, 2002 and June 1, 2001, respectively.
At May 31, 2002, we had a revolving credit facility of $300.0 million, of
which $28.5 million was committed under outstanding letters of credit and $175.0
was drawn.
In fiscal 2000, we entered into a $100.0 million synthetic lease facility
under which a syndicate of lenders financed construction of 44 centers for lease
to us for a three to five year period, which may be extended, subject to the
consent of the lessors. The related leases are classified as operating leases
for financial reporting purposes. We do not consolidate the assets or
liabilities related to the synthetic lease in our consolidated financial
statements.
The synthetic lease facility closed to draws on February 13, 2001 and, at
May 31, 2002, $97.9 million had been funded through the facility. We have the
option to purchase the centers for $97.9 million at the end of the lease term,
which is February 13, 2004. We are required to notify the lessors by May 14,
2003, as to whether or not we will be exercising our option to purchase the
centers at the end of the lease term. If we do not elect to exercise our
purchase option, then we are required to market the leased centers for sale to
third parties. In addition, we would pay the lessors a guaranteed residual
amount of up to $82.2 million. The guaranteed residual amount that we may have
to pay would be reduced to the extent the net sales proceeds from the centers
exceed $15.7 million. Any such payment of the guaranteed residual amount to the
lessors would be recognized as rental expense when and if payment becomes
probable.
The synthetic lease facility includes covenants and restrictions that are
substantially identical to those in our credit facility. In the event of certain
defaults under the terms of the synthetic lease facility, all amounts under the
synthetic lease facility, including the full property cost of the leased
centers, may become immediately due and payable.
In June 2002, the Financial Accounting Standards Board issued an Exposure
Draft of a proposed Interpretation, Consolidation of Certain Special Purpose
Entities. If the Interpretation is issued as proposed, we expect to be required
to consolidate the synthetic lease facility during our fiscal year 2004. Upon
consolidation, we would record the assets as property and equipment and the
lease liability as an obligation. The impact to our statement of operations
would be reduced rent expense and increased depreciation and interest expense.
We are presently, and are from time to time, subject to claims and
litigation arising in the ordinary course of business. We believe that none of
the claims or litigation of which we are aware will materially affect our
financial position, operating results or cash flows, although assurance cannot
be given with respect to the ultimate outcome of any such actions.
52
14. Quarterly Results (Unaudited)
A summary of results of operations for fiscal 2002 and fiscal 2001 was as
follows, with dollars in thousands, except per share data. The first quarter
contained 16 weeks and the second, third and fourth quarters each contained 12
weeks.
First Second Third Fourth
Quarter Quarter Quarter Quarter (a)
------------ ------------ ------------ ------------
Fiscal Year ended May 31, 2002
Revenues, net................... $ 248,450 $ 192,148 $ 187,600 $ 201,236
Operating income................ 11,095 19,305 21,437 21,290
Net income (loss)............... (1,770) 5,453 7,148 5,712
Net income (loss) per share:
Basic net income (loss) per
share........................ $ (0.09) $ 0.27 $ 0.36 $ 0.29
Diluted net income (loss) per
share........................ (0.09) 0.27 0.35 0.29
Fiscal Year ended June 1, 2001
Revenues, net................... $ 216,492 $ 166,901 $ 168,007 $ 191,997
Operating income ............... 14,698 17,145 19,872 23,250
Net income (loss)............... (1,045) 3,661 5,451 7,604
Net income (loss) per share:
Basic income (loss) per share
before cumulative effect of
a change in accounting
principle, net........... $ (0.01) $ 0.19 $ 0.29 $ 0.39
Cumulative effect of a change
in accounting principle,
net of taxes............... (0.04) -- -- --
------------ ------------ ------------ ------------
Net income (loss).......... $ (0.05) $ 0.19 $ 0.29 $ 0.39
============ ============ ============ ============
Diluted income (loss) per share
before cumulative effect of a
change in accounting
principle, net............... $ (0.01) $ 0.19 $ 0.28 $ 0.39
Cumulative effect of a change
in accounting principle, net
of taxes..................... (0.04) -- -- --
------------ ------------ ------------ ------------
Net income (loss).......... $ (0.05) $ 0.19 $ 0.28 $ 0.39
============ ============ ============ ============
(a) Net income during the fourth quarter of fiscal 2002 included a loss on
minority investment of $1.4 million, net of taxes. An asset impairment
charge of $2.0 million, net of taxes, was recorded during the fourth
quarter of fiscal 2002 compared to $0.3 million in the same period last
year.
15. Subsequent Event
On July 15, 2002, the Board of Directors authorized a 2-for-1 stock split
of our $0.01 par value common stock effective August 19, 2002 for stockholders
of record on August 9, 2002. All references to the number of common shares and
per share amounts within these consolidated financial statements and notes
thereto for fiscal 2002, 2001 and 2000 have been restated to reflect the stock
split. Concurrent with the stock split, the number of authorized common shares
was increased from 20.0 million to 100.0 million shares.
53
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 as of May 31, 2002 and June 1, 2001,
and the related consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for each of the years ended May 31, 2002,
June 1, 2001, and June 2, 2000. 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 auditing standards generally accepted
in the United States of America. 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 31, 2002 and June 1, 2001, and the results of their
operations and their cash flows for each of the years ended May 31, 2002, June
1, 2001, and June 2, 2000, in conformity with accounting principles generally
accepted in the United States of America.
DELOITTE & TOUCHE LLP
Portland, Oregon
July 26, 2002
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
54
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The following table sets forth information regarding our Board of
Directors. For information concerning directors' ownership of common stock, see
"Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters."
Position with Us,
Year First Elected Director,
Principal Occupation During at Least the
Name and Age Last Five Years and Other Directorships
- ---------------------------------- ---------------------------------------------------------
David J. Johnson (56)............ David J. Johnson joined us as Chief Executive Officer 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., which was 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.
Henry R. Kravis (58) (a)......... Henry R. Kravis has been on our Board since February 1997.
He is a managing member of KKR & Co. L.L.C., the limited
liability company that serves as the general partner of KKR.
He is also a director of Accel-KKR Company, Accuride
Corporation, Alliance Imaging, Inc., Amphenol Corporation,
BRW Acquisition, Inc. (Bristol West Insurance Group), Borden
Chemical, Inc., The Boyds Collection Ltd., Evenflo Company,
Inc., KSL Recreation Corporation, PRIMEDIA, Inc., Sotheby's
Holdings, Inc., U.S. Natural Resources, Inc., United
Fixtures Company and Willis Group Holdings Limited.
George R. Roberts (58) (a)....... George R. Roberts has been on our Board since February 1997.
He is a managing member of KKR & Co. L.L.C., the limited
liability company that serves as the general partner of KKR.
He is also a director of Accel-KKR Company, Accuride
Corporation, Alliance Imaging, Inc., Amphenol Corporation,
Borden Chemical, Inc., The Boyds Collection, Ltd., Dayton
Power & Light, Inc., Evenflo Company, Inc., KSL Recreation
Corporation, Owens-Illinois, Inc., PRIMEDIA, Inc., Safeway
Inc., U.S. Natural Resources, Inc., United Fixtures Company
and Willis Group Holdings Limited.
55
Position with Us,
Year First Elected Director,
Principal Occupation During at Least the
Name and Age Last Five Years and Other Directorships
- ---------------------------------- ---------------------------------------------------------
Michael W. Michelson (51)........ Michael W. Michelson has been on our Board since December
1999. He is a member of KKR & Co. L.L.C., the limited
liability company that serves as the general partner of KKR.
He is also a director of Alliance Imaging, Inc., Amphenol
Corporation, AutoZone, Inc., New South Holdings, Inc. and
Owens-Illinois, Inc.
Scott C. Nuttall (29)............ Scott C. Nuttall has been on our Board since December 1999.
Mr. Nuttall has been an executive at KKR since 1996. Prior
to that time, he was an executive at The Blackstone Group
L.P. He is also a director of Alea Group Holdings, Ltd.,
Amphenol Corporation, BRW Acquisition, Inc. (Bristol West
Insurance Group), Walter Industries Inc. and Willis Group
Holdings Limited.
Richard J. Goldstein (37)........ Richard J. Goldstein has been on our Board since May 2001.
He has been a Senior Vice President and, before that, a Vice
President of Oaktree Capital Management, LLC ("Oaktree")
since 1995. Oaktree provides investment management services
to TCW Asset Management Company, the general partner of TCW
Special Credits Fund V - The Principal Fund, pursuant to a
sub-advisory agreement. Mr. Goldstein was an Assistant Vice
President of Trust Company of the West from 1994 to 1995.
(a) Messrs. Kravis and Roberts are first cousins.
Committees of Our Board of Directors
The Board of Directors has three standing committees: (1) an audit
committee, (2) a compensation committee and (3) an executive committee.
Executive Committee. Messrs. Johnson, Michelson and Nuttall comprise the
executive committee of the Board of Directors. The executive committee exercises
authority of the Board of Directors, to the extent permitted by law, in the
management of our business between meetings of the full Board of Directors.
Audit Committee. The audit committee consists of Messrs. Michelson and
Nuttall. The Audit Committee selects and engages, on our behalf, the independent
public accountants to audit our annual financial statements, reviews and
approves the planned scope of the annual audit and reviews our internal
accounting practices and policies.
Compensation Committee. Messrs. Michelson and Nuttall serve as members of
the compensation committee. The compensation committee establishes compensation
levels for officers and performs such functions as provided under our employee
benefit programs and executive compensation programs or as delegated by the
Board of Directors with respect to such programs.
56
Executive Officers
Set forth below is information regarding our executive officers:
Name Age Position
---- --- --------
David J. Johnson.......... 56 Chief Executive Officer and Chairman of the Board
Robert Abeles............. 56 Executive Vice President, Chief Financial Officer
Edward L. Brewington...... 59 Senior Vice President, Human Resources
S. Wray Hutchinson........ 42 Senior Vice President, Operations
Dan R. Jackson............ 48 Senior Vice President, Finance
Eva M. Kripalani.......... 43 Senior Vice President, General Counsel and Secretary
Bruce A. Walters.......... 45 Senior Vice President, Chief Development Officer
David J. Johnson has been Chief Executive Officer and Chairman of the Board
since 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., which was 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.
Robert Abeles has been Executive Vice President, Chief Financial Officer
since October 1999. Mr. Abeles served as Executive Vice President, Chief
Financial Officer and Director of Transamerica Life Companies from June 1996 to
October 1998. Prior to that time, Mr. Abeles spent 24 years at First Interstate
Bank of California and served as Executive Vice President and Chief Financial
Officer from July 1990 to May 1996.
Edward L. Brewington was promoted in July 2001 to Senior Vice President,
Human Resources. He had served as Vice President, Human Resources since April
1997. From June 1993 to April 1997, Mr. Brewington was with Times Mirror where
his last position held was Vice President, Human Resources for the Times Mirror
Training Group. Prior to that time, Mr. Brewington spent 25 years with IBM in
various human resource, sales and marketing positions.
S. Wray Hutchinson was promoted to Senior Vice President, Operations in
October 2000. He had served as Vice President, Operations since April 1996. He
joined us in 1992 as District Manager in New Jersey and was later promoted to
Region Manager for the Chicago, Illinois market.
Dan R. Jackson was promoted in October 1999 to Senior Vice President,
Finance and was appointed Chief Financial Officer of KC Distance Learning, Inc.,
in June 2001. He joined us 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 financial management
positions with Harsch Investment Corporation, a real estate holding company
based in Portland, Oregon.
Eva M. Kripalani was promoted to Senior Vice President, General Counsel and
Secretary in July 2001. She had served as Vice President, General Counsel and
Secretary since July 1997. Prior to joining KinderCare, Ms. Kripalani was a
partner in the law firm of Stoel Rives LLP in Portland, Oregon, where she had
worked since 1987.
Bruce A. Walters has been Senior Vice President, Chief Development Officer
since 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.
57
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation awarded or paid to or
earned by the Chief Executive Officer and Chairman of the Board of Directors and
each of the other four most highly compensated executive officers, referred to
collectively as the Named Executive Officers:
Long-Term
Compensation
Awards-
Annual Compensation Securities All Other
Fiscal -------------------------------- Underlying Compensation
Name and Principal Position Year Salary Bonus Other Options(a) (b)(c)(d)
- ------------------------------- ------ ---------- ---------- -------- ------------ ------------
David J. Johnson............... 2002 $ 698,325 $ 416,900 $ 4,687 -- $ 112,475
Chief Executive Officer 2001 673,197 308,997 140 -- 113,172
and Chairman of the Board 2000 663,381 489,575 134 -- 113,399
Robert Abeles................... 2002 $ 268,524 $ 123,118 $ 1,684 -- $ 54,816
Executive Vice President, 2001 256,599 106,991 97 -- 54,816
Chief Financial Officer 2000 158,654 87,101 25,440 69,690 131,135
Dan R. Jackson.................. 2002 $ 223,446 $ 97,646 $ 2,816 -- $ 17,726
Senior Vice President, 2001 199,385 77,009 77 8,000 17,588
Finance 2000 186,206 90,541 61 10,000 17,505
Eva M. Kripalani................ 2002 $ 220,735 $ 84,873 $ 3,831 10,000 $ 8,918
Senior Vice President, 2001 191,404 67,158 68 6,000 9,324
General Counsel and Secretary 2000 173,625 73,834 37 -- 9,333
Bruce A. Walters................ 2002 $ 231,998 $ 88,159 $ 1,765 -- $ 15,581
Senior Vice President, 2001 223,326 70,521 60 6,000 15,580
Chief Development Officer 2000 219,065 104,275 35 -- 15,606
- ---------------
(a) Stock options granted under the 1997 Stock Purchase and Option Plan.
(b) Matching contributions under our Savings and Investment Plan and
Nonqualified Deferred Compensation Plan were as follows:
Nonqualified Deferred Savings and
Compensation Plan Investment Plan
---------------------------- ----------------------------
Fiscal Year Fiscal Year
---------------------------- ----------------------------
2002 2001 2000 2002 2001 2000
-------- -------- -------- -------- -------- --------
David J. Johnson.......... $ 10,846 $ 11,543 $ 11,430 $ -- $ -- $ 340
Robert Abeles............. -- -- -- -- -- --
Dan R. Jackson............ 3,226 2,909 2,668 -- 179 337
Eva M. Kripalani.......... 2,418 2,660 2,496 -- 164 337
Bruce A. Walters.......... 3,281 3,280 3,306 -- -- --
(c) Life insurance premiums paid on behalf of the executive officers for split
dollar life arrangements for each of fiscal years 2002, 2001 and 2000 were
as follows:
David J. Johnson.............. $ 101,629
Robert Abeles................. 54,816
Dan R. Jackson................ 14,500
Eva M. Kripalani.............. 6,500
Bruce A. Walters.............. 12,300
(d) Mr. Abeles received consideration of $76,319 for relocation costs during
fiscal year 2000.
58
1997 Stock Purchase and Option Plan
The 1997 Plan authorizes grants of stock or options to purchase shares of
authorized but unissued or reacquired shares of our common stock, subject to
adjustment to reflect events such as stock dividends, stock splits,
recapitalizations, mergers or reorganizations. 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.
A total of 5,000,000 shares of common stock have been authorized for issuance
under the 1997 Plan, and the maximum number of shares that may be granted to any
one person is 1,000,000. The 1997 Plan is intended to accomplish the following:
o promote our long term financial interests and growth by attracting and
retaining management personnel with the training, experience and ability
to enable them to make a substantial contribution to the success of our
business,
o motivate management personnel by means of growth-related incentives to
achieve long range goals, and
o further align the interests of participants with those of our other
stockholders through opportunities for increased stock or stock-based
ownership.
The compensation committee of the Board of Directors administers the 1997
Plan and determines the employees to whom grants will be made, the number of
shares of common stock subject to each grant, and the various terms of such
grants, including the period for vesting. The compensation committee of the
Board of Directors may from time to time amend the terms of any grant, but such
action may not adversely affect the rights of any participant under the 1997
Plan with respect to the options without such participant's consent, except for
either of the following:
o Adjustments made upon a change in our outstanding common stock by reason
of a stock split, spin-off, stock dividend, stock combination or
reclassification, recapitalization or merger, change of control or
similar event, and
o In the event of a merger or consolidation into another corporation, the
exchange of all or substantially all of our assets for another
corporation's securities, the acquisition by another corporation of 80%
or more of our voting stock or a recapitalization, reclassification,
liquidation or dissolution, option grants may be made exercisable for
some period of time prior to such event and then terminable upon
occurrence of such event at the discretion of the Board of Directors.
Option Grants in Fiscal Year 2002
The following table sets forth the individual option grants during the
fiscal year ended May 31, 2002 to the Named Executive Officers:
Percent of
Number of Total
Securities Options
Underlying Granted to Exercise Grant Date
Options Employees in Price Present
Granted(a) Fiscal Year Per Share Expiration Date Value(b)
---------- ------------ ---------- --------------- ------------
David J. Johnson...... -- --% $ -- -- $ --
Robert Abeles......... -- -- -- -- --
Dan R. Jackson........ -- -- -- -- --
Eva M. Kripalani...... 10,000 8.0 13.61 July 23, 2011 55,500
Bruce A. Walters...... -- -- -- -- --
- --------------
59
(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.
(b) Although we believe that it is not possible to place a value on an option,
in accordance with the rules of the Securities and Exchange Commission, a
modified Black-Scholes model of option valuation has been used to estimate
grant date present value. The actual value realized, if any, may vary
significantly from the values estimated by this model. Any further 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 of
36.5%, risk-free rate of return of 4.7%, dividend yield of 0.0% and time to
exercise of seven years.
Aggregated Option Exercises in Fiscal Year 2002 and 2002 Fiscal Year End Option
Values
The following table sets forth the unexercised options held at May 31, 2002
by the Named Executive Officers:
Value of Unexercised
Number of Unexercised "In-The-Money"
Options at May 31, 2002 Options at May 31, 2002(a)
-------------------------- --------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
David J. Johnson........... 842,106 -- $ 4,227,372 --
Robert Abeles.............. 27,876 41,814 92,270 138,404
Dan R. Jackson............. 55,374 12,400 265,441 32,404
Eva M. Kripalani........... 32,779 22,695 161,239 59,581
Bruce A. Walters........... 53,832 17,958 266,925 76,901
- -----------
(a) The value of options represents the aggregate difference between the fair
value, as determined by the Board of Directors, at May 31, 2002 of $14.52
and the applicable exercise price.
There were no shares acquired upon exercise of options during fiscal 2002.
Compensation of KinderCare's Directors
During fiscal year 2002, our non-employee directors received an annual
retainer of $30,000, paid in advance in quarterly installments. Directors who
are our employees 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 adopted the Directors' Deferred
Compensation Plan. Under this plan, non-employee members of the Board of
Directors may elect to defer receipt and income taxation of all or a portion of
their annual retainer. Any amounts deferred under the Directors' Plan are
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
the Directors' Plan, of our common stock.
60
Distributions from the Directors' Plan are made in cash and reflect the
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' Plan occur upon the earlier of (1) the first day of the year
following the director's retirement or separation from the Board or (2)
termination of the Directors' Plan.
Compensation Committee Interlocks and Insider Participation
The Board of Directors approved the appointment of a compensation committee
composed of Michael W. Michelson and Scott C. Nuttall. Mr. Michelson is a member
of KKR & Co. L.L.C., the limited liability company that serves as the general
partner of KKR, and Mr. Nuttall is an executive at KKR. See "Item 13. Certain
Relationships and Related Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information with respect to the beneficial
ownership of our common stock at August 23, 2002 by each of the following:
o each person who is known by us to beneficially own more than 5% of our
common stock,
o the Named Executive Officers,
o each of our directors, and
o all directors and executive officers as a group.
The amounts and percentages of common stock beneficially owned are reported
on the basis of regulations of the Securities and Exchange 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. Unless
otherwise noted in the footnotes to the following table, the persons named in
the table have sole voting and investment power with respect to the common stock
shown as beneficially owned by them. 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 such person has no economic interest.
The percentage of class outstanding is based on the 19,699,514 shares of common
stock outstanding as of August 23, 2002. Shares subject to option grants which
have vested or will vest prior to October 22, 2002 are deemed outstanding for
calculating the percentage ownership of the person holding the options, but are
not deemed outstanding for calculating the percentage ownership of any other
person.
61
Shares Percent of
Beneficially Class
Owned Outstanding
------------ -------------
KKR-KLC L.L.C. and affiliated entities (a)................... 15,657,894 79.5%
c/o Kohlberg Kravis Roberts & Co. L.P.
9 West 57th Street
New York, New York 10019
The TCW Group, Inc. and affiliated entities (b).............. 1,898,488 9.6%
865 South Figueroa Street
Los Angeles, California 90017
David J. Johnson (c)......................................... 1,157,896 5.6%
Robert Abeles (c)............................................ 69,690 *
Dan R. Jackson (c)........................................... 76,884 *
Eva M. Kripalani (c)......................................... 59,664 *
Bruce A. Walters (c)......................................... 94,504 *
Henry R. Kravis (a).......................................... -- --
George R. Roberts (a)........................................ -- --
Michael W. Michelson (a)..................................... -- --
Nils P. Brous (a)............................................ -- --
Scott C. Nuttall(a).......................................... -- --
Richard J. Goldstein (b)..................................... -- --
All directors and executive officers as a group
(13 individuals)(d)........................................ 1,585,518 7.6%
- --------------
* Percentage of shares of common stock beneficially owned does not exceed one
percent.
(a) Shares of common stock shown as beneficially owned by KKR-KLC L.L.C. are
directly held by KLC Associates, L.P. KKR-KLC L.L.C. is the sole general
partner of KKR Associates (KLC), L.P., which is the sole general partner of
KLC Associates, L.P., 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, Paul E.
Raether, Michael W. Michelson, James H. Greene, Jr., Perry Golkin, Scott M.
Stuart and Edward A. Gilhuly. Messrs. Kravis and Roberts are members of the
Executive Committee of KKR-KLC L.L.C. and are directors of KinderCare. Mr.
Michelson is also a director of KinderCare. 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. Of the total shares of common stock beneficially
owned by KKR-KLC L.L.C., 203,684 were owned by KKR Partners II, L.P., its
affiliate.
(b) Oaktree Capital Management, LLC, referred to as Oaktree, provides
investment sub-advisory services to the general partner of TCW Special
Credits Fund V - The Principal Fund pursuant to a sub-advisory agreement.
To the extent that Mr. Goldstein, as a Senior Vice President of Oaktree,
participates in the process to vote or to dispose of any such shares, he
may be deemed under such circumstances for the purpose of Section 13 of the
Exchange Act to be the beneficial owner of such shares of common stock. Mr.
Goldstein disclaims beneficial ownership of such shares of common stock.
62
(c) The shares beneficially owned by the Named Executive Officers include
shares subject to options that are currently exercisable or become
exercisable prior to October 22, 2002 as follows:
Number
of
Options
-------
David J. Johnson................................. 842,106
Robert Abeles.................................... 41,814
Dan R. Jackson................................... 56,974
Eva M. Kripalani................................. 43,874
Bruce A. Walters................................. 68,190
(d) The shares beneficially owned by all directors and executive officers as a
group include 1,146,214 shares that are subject to options that are
currently exercisable or become exercisable prior to October 22, 2002.
Shares owned by our executive officers are subject to restrictions on
transfer.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes our equity compensation plans at May 31,
2002, all of which have been approved by shareholders:
Number of
securities to Number of
be issued upon Weighted-average securities remaining
exercise of exercise price available for future
outstanding of outstanding issuance under equity
Plan Category options(a) options compensation plans(b)
- ------------------------- -------------- ---------------- ---------------------
Equity compensation plans
approved by security
holders................ 1,862,378 $10.32 2,599,322
(a) Represents the shares of common stock issuable upon exercise of outstanding
options under the 1997 Plan, which was approved by stockholders during
fiscal year 1998.
(b) Represents the shares remaining available for future issuance under the
1997 Plan (excluding shares reflected in first column). Future 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Relationship with KKR
At August 23, 2002, affiliates of KKR beneficially owned in the aggregate
approximately 79.5% of our outstanding shares of common stock. See "Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters, Security Ownership of Certain Beneficial Owners and
Management, Note (a)."
KKR receives fees and expense reimbursement for management, consulting and
financial services provided to us and may receive customary investment banking
fees for services, plus reimbursement of its related expenses. During fiscal
year 2002, we paid $591,171 in fees and reimbursements to KKR.
63
Registration Rights
Each of KLC Associates, L.P. and its affiliate, KKR Partners II, L.P., has
the right to require us to register under the Securities Act of 1933 shares of
common stock held by it pursuant to a registration rights agreement. Such
registration rights will generally be available to KLC Associates and KKR
Partners II until registration under the Securities Act is no longer required to
enable it to resell the common stock owned by it. The registration rights
agreement provides that we will pay all expenses in connection with the first
six registrations requested by KLC Associates and/or KKR Partners II and in
connection with any registration commenced by us as a primary offering. In
addition, pursuant to stockholders' agreements, Oaktree and members of our
management may be allowed to participate in specified registration processes. In
addition, Oaktree and our management stockholders have the right, under certain
circumstances and subject to certain conditions, to participate in any
registration process, subject to certain exceptions.
Management Indebtedness
The following table sets forth the amount of indebtedness in excess of
$60,000 due under term notes executed by the executive officers at August 23,
2002:
Robert Abeles.......................... $ 156,245
Edward L. Brewington................... 96,804
S. Wray Hutchinson..................... 122,198
Dan R. Jackson......................... 74,145
Eva M. Kripalani....................... 75,005
The amount of indebtedness remained constant during the past year for all
executive officers except Mr. Abeles. The largest amount of indebtedness during
fiscal year 2002 for Mr. Abeles was $231,245.
The term notes mature from calendar 2008 to 2009 and bear interest at a
rate of 4.44% per year, payable semi-annually on June 30 and December 31. The
term notes are secured by shares of restricted stock purchased by the executive
officers under the terms of the 1997 Plan.
64
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 31, 2002 and June 1, 2001.... 34
Consolidated statements of operations for the fiscal years
ended May 31, 2002, June 1, 2001 and June 2, 2000............. 35
Consolidated statements of stockholders' equity and
comprehensive income for the fiscal years ended May 31,
2002, June 1, 2001 and June 2, 2000........................... 36
Consolidated statements of cash flows for the fiscal year ended
May 31, 2002, June 1, 2001 and June 2, 2000................... 37
Notes to consolidated financial statements...................... 38-53
Independent auditors' report.................................... 54
(a)(2) Schedules to Financial Statements: None.
(a)(3) Exhibits: The following exhibits are filed with this report or
incorporated herein by reference:
Exhibit Description of
Number Exhibits
- ------- --------------
2(a) Stockholders' Agreement between KinderCare and the stockholders parties
thereto (incorporated by reference from Exhibit 2.3 of our Registration
Statement on Form S-4, filed March 11, 1997, File No. 333-23127).
3(a) Amended and Restated Certificate of Incorporation of KinderCare.
3(b) Restated Bylaws of KinderCare effective September 1, 2001 (incorporated
by reference from Exhibit 3(a) to our Quarterly Report on Form 10-Q for
the quarterly period ended September 21, 2001).
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
our Registration Statement on Form S-4, filed March 11, 1997, File No.
333-23127).
4(b) First Supplemental Indenture dated as of September 1, 1999 to the
Indenture dated as of February 13, 1997 between KinderCare and HSBC
Bank USA (formerly known as Marine Midland Bank), as Trustee
(incorporated by reference from Exhibit 4(a) to our Quarterly Report on
Form 10-Q for the quarterly period ended September 17, 1999).
4(c) Form of 9.5% Series B Senior Subordinated Note due 2009 (incorporated
by reference from Exhibit 4.3 of our Registration Statement on Form
S-4, filed March 11, 1997, File No. 333-23127).
65
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 our Registration Statement on Form S-4, filed March 11,
1997, File No. 333-23127).
10(b) Registration Rights Agreement, dated as of February 13, 1997, among
KCLC Acquisition, KLC Associates L.P. and KKR Partners II, L.P.
(incorporated by reference from Exhibit 10.2 of our Registration
Statement on Form S-4, filed March 11, 1997, File No. 333-23127).
10(c) Lease between 600 Holladay Limited Partnership and KinderCare dated
June 2, 1997 (incorporated by reference from Exhibit 10(f) of our
Annual Report on Form 10-K for the fiscal year ended May 30, 1997).
10(d) Addendum dated June 28, 2000 to Lease dated June 2, 1997 between 600
Holladay Limited Partnership and KinderCare (incorporated by reference
from Exhibit 10(a) to our Quarterly Report on Form 10-Q for the
quarterly period ended September 22, 2000).
10(e)* 1997 Stock Purchase and Option Plan for Key Employees of KinderCare
Learning Centers, Inc. and Subsidiaries (incorporated by reference from
Exhibit 10(c) to our Quarterly Report on Form 10-Q for the quarterly
period ended September 19, 1997).
10(f)* Form of Restated Management Stockholder's Agreement (incorporated by
reference from Exhibit 10(f) to our Annual Report on Form 10-K for the
fiscal year ended June 1, 2001).
10(g)* Form of Non-Qualified Stock Option Agreement (incorporated by reference
from Exhibit 10(g) to our Annual Report on Form 10-K for the fiscal
year ended June 1, 2001).
10(h)* Form of Restated Sale Participation Agreement (incorporated by
reference from Exhibit 10(h) to our Annual Report on Form 10-K for the
fiscal year ended June 1, 2001).
10(i)* Form of Term Note (incorporated by reference from Exhibit 10(g) to our
Quarterly Report on Form 10-Q for the quarterly period ended September
19, 1997).
10(j)* Form of Pledge Agreement (incorporated by reference from Exhibit 10(h)
to our Quarterly Report on Form 10-Q for the quarterly period ended
September 19, 1997).
10(k)* Stockholders' Agreement dated as of February 14, 1997 between
KinderCare and David J. Johnson (incorporated by reference from Exhibit
10(l) to our Quarterly Report on Form 10-Q for the quarterly period
ended September 19, 1997).
10(l)* Nonqualified Stock Option Agreement dated as of February 14, 1997
between KinderCare and David J. Johnson (incorporated by reference from
Exhibit 10(j) to our Quarterly Report on Form 10-Q for the quarterly
period ended September 19, 1997).
10(m)* 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 our Quarterly Report
on Form 10-Q for the quarterly period ended September 19, 1997).
10(n)* Directors' Deferred Compensation Plan (incorporated by reference from
Exhibit 10(q) to our Annual Report on Form 10-K for the fiscal year
ended May 29, 1998).
10(o)* Form of Indemnification Agreement for Directors and Officers of
KinderCare (incorporated by reference from Exhibit 10(r) to our Annual
Report on Form 10-K for the fiscal year ended May 29, 1998).
66
10(p)* Restated Nonqualified Deferred Compensation Plan effective January 1,
1999 (incorporated by reference from Exhibit 10(a) to our Quarterly
Report on Form 10-Q for the quarterly period ended March 5, 1999).
10(q)* Form of Executive Split Dollar Life Insurance Agreement (incorporated
by reference from Exhibit 10(b) to our Quarterly Report on Form 10-Q
for the quarterly period ended March 5, 1999).
10(r) Credit Agreement among The KinderCare Realty Trust 1999, as Borrower,
The Chase Manhattan Bank, as Agent, and the Lenders, dated as of
September 2, 1999 (incorporated by reference from Exhibit 10(a) to our
Quarterly Report on Form 10-Q for the quarterly period ended September
17, 1999).
10(s) Participation Agreement among KinderCare, as Lessee, The KinderCare
Realty Trust 1999, as Lessor, Scotiabanc Inc., as an Investor, The
Chase Manhattan Bank, as Agent, and the Lenders, dated as of September
2, 1999 (incorporated by reference from Exhibit 10(b) to our Quarterly
Report on Form 10-Q for the quarterly period ended September 17, 1999).
10(t) First Amendment to Participation Agreement among KinderCare, as Lessee,
The KinderCare Realty Trust 1999, as Lessor, Scotiabanc Inc., as an
Investor, The Chase Manhattan Bank, as Agent, and the Lenders, dated as
of August 7, 2000 (incorporated by reference from Exhibit 10(u) to our
Annual Report on Form 10-K for the fiscal year ended June 1, 2001).
10(u) Second Amendment to Participation Agreement among KinderCare, as
Lessee, The KinderCare Realty Trust 1999, as Lessor, Scotiabanc Inc.,
as an Investor, The Chase Manhattan Bank, as Agent, and the Lenders,
dated as of February 12, 2001 (incorporated by reference from Exhibit
10(v) to our Annual Report on Form 10-K for the fiscal year ended June
1, 2001).
10(v) Rules of Usage and Definitions under the Participation Agreement
(incorporated by reference from Exhibit 10(c) to our Quarterly Report
on Form 10-Q for the quarterly period ended September 17, 1999).
10(w) Agency Agreement between The KinderCare Realty Trust 1999, as Lessor,
and KinderCare, as Lessee, dated as of September 2, 1999 (incorporated
by reference from Exhibit 10(d) to our Quarterly Report on Form 10-Q
for the quarterly period ended September 17, 1999).
10(x) Guarantee made by KinderCare, as Lessee, and others, dated as of
September 2, 1999 (incorporated by reference from Exhibit 10(e) to our
Quarterly Report on Form 10-Q for the quarterly period ended September
17, 1999).
10(y) Lease, Security Agreement and Financing Statement between The
KinderCare Realty Trust 1999, as Lessor, and KinderCare, as Lessee,
dated as of September 2, 1999 (incorporated by reference from Exhibit
10(f) to our Quarterly Report on Form 10-Q for the quarterly period
ended September 17, 1999).
21 Subsidiaries of KinderCare.
23 Independent Auditors' Consent - Deloitte & Touche LLP.
* Management contract or compensatory plan or arrangement.
67
(a)(3) Supplemental Information to be Furnished with Reports Filed by
Registrants that do not have Securities Registered Pursuant to Section
12 of the Act: We do not intend to send an annual report and proxy
materials to stockholders during fiscal year 2003.
(b) Reports on Form 8-K: The registrant filed no reports on Form 8-K during
the fourth quarter of fiscal 2002.
(c) Exhibits Required by Item 601 of Regulation S-K: The exhibits to this
report are listed under item 14(a)(3) above.
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on August 28, 2002.
KINDERCARE LEARNING CENTERS, INC.
By: /s/ DAVID J. JOHNSON
-------------------------------------
David J. Johnson
Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated, on August 28, 2002:
By: /s/ DAVID J. JOHNSON
-------------------------------------
David J. Johnson
Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
By: /s/ ROBERT ABELES
-------------------------------------
Robert Abeles
Executive Vice President,
Chief Financial Officer
(Principal Financial and Accounting
Officer)
By: /s/ HENRY R. KRAVIS
-------------------------------------
Henry R. Kravis
Director
By: /s/ GEORGE R. ROBERTS
-------------------------------------
George R. Roberts
Director
By: /s/ MICHAEL W. MICHELSON
-------------------------------------
Michael W. Michelson
Director
By: /s/ SCOTT C. NUTTALL
-------------------------------------
Scott C. Nuttall
Director
By: /s/ RICHARD J. GOLDSTEIN
-------------------------------------
Richard J. Goldstein
Director
69