S-1/A 1 d248386ds1a.htm S-1/A S-1/A
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As filed with the Securities and Exchange Commission on November 8, 2021

Registration No. 333-260337

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 1

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

KC Holdco, LLC*

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   8351   87-1653366

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

650 NE Holladay, Suite 1400

Portland, OR 97232

(503) 872-1300

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Tom Wyatt

Chief Executive Officer

650 NE Holladay, Suite 1400

Portland, OR 97232

503-872-1300

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

 

Ian D. Schuman, Esq.

Stelios G. Saffos, Esq.

R. Charles Cassidy III, Esq.

Latham & Watkins LLP

1271 Avenue of the Americas

New York, New York 10020

Telephone: (212) 906-1200

Fax: (212) 751-4864

 

Joshua N. Korff, Esq.

Michael Kim, Esq.

Kirkland & Ellis LLP

601 Lexington Avenue

New York, New York 10022

Telephone: (212) 446-4800

Fax: (212) 446-4900

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

   

Title of each class of

securities to be registered

 

Amount to be

registered(1)

 

Proposed

maximum

offering price

per share(2)

 

Proposed

maximum

aggregate

offering price(1)(2)

 

Amount of

registration fee(3)

Common stock, par value $0.01 per share

  29,641,749   $21.00   $622,476,729.00   $57,703.59

 

 

(1)

Includes 3,866,315 shares of common stock that may be sold if the underwriters fully exercise their option granted by the Registrant to purchase additional shares of common stock.

(2)

Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended.

(3)

The Registrant previously paid a total of $9,720 in connection with the prior filing of the registration statement.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

*

Shortly after the effectiveness of this registration statement in connection with a series of internal transactions, KC Holdco, LLC will convert into a Delaware corporation pursuant to a statutory conversion and change its name to KinderCare Learning Companies, Inc. as described in “Prospectus Summary—The Reorganization and Our Organizational Structure.” Except as disclosed in this registration statement, the consolidated financial statements and historical consolidated financial data and other financial information included in this registration statement are those of KC Holdco, LLC and its subsidiaries and do not give effect to the statutory conversion to a Delaware corporation and the other transactions described in “Prospectus Summary—The Reorganization and Our Organizational Structure.”

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated November 8, 2021.

PROSPECTUS

 

 

LOGO

25,775,434 Shares

KinderCare Learning Companies, Inc.

Common Stock

 

 

This is an initial public offering of shares of common stock of KinderCare Learning Companies, Inc. We are offering 25,775,434 shares of our common stock.

Prior to this offering, there has been no public market for our common stock. The initial public offering price is expected to be between $18.00 and $21.00 per share. We intend to apply to list our common stock on the New York Stock Exchange under the symbol “KLC.”

The underwriters have an option for a period of 30 days after the date of this prospectus, to purchase from us from time to time, in whole or in part, up to an aggregate of 3,866,315 shares of our common stock.

Following this offering, investment funds affiliated with or advised by affiliates of Partners Group Holding AG will continue to own a controlling interest in our common stock, owning 74.7% of our common stock. As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of the New York Stock Exchange.

We intend to use the net proceeds from this offering to (i) repay all $56.3 million of our outstanding First Lien Notes, repay all $210.0 million of the loans outstanding under our Second Lien Facility and then repay $151.9 million of the loans outstanding under our First Lien Term Loan Facility, (ii) redeem $42.6 million of the shares of common stock received by members of management from vested Class B units of KC Parent, LLC in connection with the Reorganization and (iii) pay fees and expenses in connection with this offering. We intend to use the remainder, if any, of the net proceeds to us from this offering for general corporate purposes. See “Use of Proceeds.”

Investing in our common stock involves risk. See “Risk Factors” beginning on page 22 to read about factors you should consider before buying shares of our common stock.

 

     Price to
Public
     Underwriting
Discounts(1)
     Proceeds, before
expenses
 

Per Share

   $                    $                    $                

Total

   $        $        $    

 

(1)

See “Underwriting (Conflicts of Interest)” for additional information regarding underwriting compensation.

Neither the Securities and Exchange Commission (the “SEC”) nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

Delivery of the shares of our common stock will be made on or about                 , 2021.

 

 

 

Barclays  

Morgan Stanley

 

Jefferies

                            (in alphabetical order)

 
BofA Securities   Goldman Sachs & Co. LLC   Baird
Citigroup   Credit Suisse   Macquarie Capital
Loop Capital Markets   Ramirez & Co., Inc.   R. Seelaus & Co., LLC

 

 

Prospectus dated                 , 2021.


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LOGO

 

 

KinderCare Education


Table of Contents

TABLE OF CONTENTS

 

ABOUT THIS PROSPECTUS

     ii  

MARKET AND INDUSTRY DATA

     ii  

BASIS OF PRESENTATION

     ii  

MANAGEMENT ESTIMATES

     iii  

CERTAIN TRADEMARKS

     iv  

NON-GAAP FINANCIAL MEASURES

     iv  

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     22  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     48  

USE OF PROCEEDS

     50  

DIVIDEND POLICY

     52  

CAPITALIZATION

     53  

DILUTION

     55  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     58  

BUSINESS

     86  

MANAGEMENT

     111  

COMPENSATION DISCUSSION AND ANALYSIS

     117  

PRINCIPAL STOCKHOLDERS

     144  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     147  

DESCRIPTION OF CAPITAL STOCK

     151  

DESCRIPTION OF CERTAIN INDEBTEDNESS

     157  

SHARES ELIGIBLE FOR FUTURE SALE

     161  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES FOR NON-U.S. HOLDERS OF OUR COMMON STOCK

     163  

CERTAIN ERISA CONSIDERATIONS

     168  

UNDERWRITING (CONFLICTS OF INTEREST)

     169  

LEGAL MATTERS

     178  

EXPERTS

     178  

WHERE YOU CAN FIND MORE INFORMATION

     178  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

 

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ABOUT THIS PROSPECTUS

You should rely only on the information included elsewhere in this prospectus and any free writing prospectus prepared by or on behalf of us that we have referred to you. Neither we nor the underwriters have authorized anyone to provide you with additional information or information different from that included elsewhere in this prospectus or in any free writing prospectus prepared by or on behalf of us that we have referred to you. If anyone provides you with additional, different or inconsistent information, you should not rely on it. Offers to sell, and solicitations of offers to buy, shares of our common stock are being made only in jurisdictions where offers and sales are permitted.

No action is being taken in any jurisdiction outside the United States to permit a public offering of common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restriction as to this offering and the distribution of this prospectus applicable to those jurisdictions.

MARKET AND INDUSTRY DATA

This prospectus includes estimates regarding market and industry data that we prepared based on our management’s knowledge and experience in the markets in which we operate, together with information obtained from various sources, including publicly available information, industry reports and publications, surveys, our clients, suppliers, trade and business organizations and other contacts in the markets in which we operate. Management estimates are derived from publicly available information released by independent industry analysts and third-party sources, as well as data from our internal research, and are based on assumptions made by us upon reviewing such data and our knowledge of such industry and markets which we believe to be reasonable.

In presenting this information, we have made certain assumptions that we believe to be reasonable based on such data and other similar sources and on our knowledge of, and our experience to date in, the markets for the products we distribute. Market share data is subject to change and may be limited by the availability of raw data, the voluntary nature of the data gathering process and other limitations inherent in any statistical survey of market share. In addition, client preferences are subject to change. Accordingly, you are cautioned not to place undue reliance on such market share data.

BASIS OF PRESENTATION

The Company reports on a 52- or 53-week fiscal year comprised of 13- or 14-week quarters, with the fiscal year ending on the Saturday closest to December 31. The fiscal year ending January 2, 2021 is a 53-week fiscal year with a 14-week fourth quarter. The fiscal years ended December 28, 2019 and December 29, 2018 are 52-week fiscal years with 13-week fourth quarters. References in this prospectus to “fiscal 2020” refer to the fiscal year ended January 2, 2021, “fiscal 2019” refer to the fiscal year ended December 28, 2019 and “fiscal 2018” refer to the fiscal year ended December 29, 2018.

As used in this prospectus, unless the context otherwise requires, references to:

 

   

the “Company,” “KinderCare,” “we,” “us” and “our” mean, prior to the Reorganization discussed elsewhere in this prospectus, KC Holdco, LLC and, unless the context otherwise requires, its consolidated subsidiaries, and after the Reorganization, KinderCare Learning Companies, Inc. and, unless the context otherwise requires, its consolidated subsidiaries;

 

   

“ARPA” means the American Rescue Plan Act;

 

   

“CAA” means the Consolidated Appropriations Act;

 

   

“CARES Act” means the Coronavirus Aid, Relief and Economic Security Act;

 

   

“Credit Agreements” means, collectively, the First Lien Credit Agreement and the Second Lien Credit Agreement;

 

   

“Credit Facilities” means, collectively, the First Lien Facilities and the Second Lien Facility;

 

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“DGCL” means the Delaware General Corporation Law;

 

   

“Exchange Act” means the Securities Exchange Act of 1934, as amended;

 

   

“First Lien Credit Agreement” means that certain credit agreement, dated as of August 13, 2015 (as most recently amended by the Incremental Facility Amendment, dated as of November 3, 2021), governing the First Lien Facilities, by and among KC Holdco, LLC, as Holdco, KC Sub, Inc. and KUEHG Corp. (as successor to KC Mergersub, Inc.), as the Borrower, Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent and the other parties from time to time party thereto;

 

   

“First Lien Facilities” means collectively, the First Lien Revolving Facility and the First Lien Term Loan;

 

   

“First Lien Multicurrency Revolving Facility” means the $10.0 million first lien multicurrency revolving credit facility;

 

   

“First Lien Notes” means $50.0 million aggregate principal amount of first lien notes issued by KUEHG Corp. pursuant to the Notes Purchase Agreement;

 

   

“First Lien Revolving Facility” means the First Lien Multicurrency Revolving Facility and the First Lien US Revolving Facility;

 

   

“First Lien Term Loan Facility” means the $1,200.0 million first lien term loan facility;

 

   

“First Lien US Revolving Facility” means the $105.0 million first lien revolving credit facility;

 

   

“GAAP” means U.S. generally accepted accounting principles;

 

   

“Governmental Stimulus” means incremental funding arising from governmental acts relating to the COVID-19 pandemic to support the ECE industry, including without limitation, the CARES Act, CAA and ARPA, which funding we expect to continue for the foreseeable future;

 

   

“Notes Purchase Agreement” means that certain First Lien Note Purchase Agreement, dated as of July, 6, 2020, by and among KUEHG Corp., certain members of KC Parent, LLC and Wilmington Trust, National Association, as administrative agent and collateral agent;

 

   

“Parent” means, prior to the Reorganization, KC Parent, LLC;

 

   

“PG” means investment funds affiliated with or advised by affiliates of Partners Group Holding AG, which own a controlling interest in us;

 

   

“Second Lien Credit Agreement” means that certain credit agreement, dated as of August 22, 2017 (as amended by that certain Amendment No. 1 dated as of September 19, 2018), governing the Second Lien Facility, by and among KC Holdco, LLC, as Holdco, KC Sub, Inc. and KUEHG Corp. as the Borrower, Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent and the other parties from time to time party thereto;

 

   

“Second Lien Facility” means the $210.0 million second lien term loan facility;

 

   

“Securities Act” means the Securities Act of 1933, as amended;

 

   

“Services Agreement” means the services agreement, dated August 13, 2015, by and between KinderCare Education LLC and an advisory affiliate of PG, as amended; and

 

   

“Stockholders Agreement” means the stockholders agreement to be effective following the Reorganization and upon the consummation of this offering, by and among PG, certain other existing stockholders and KinderCare.

MANAGEMENT ESTIMATES

Unless otherwise indicated, information in this prospectus concerning economic conditions, our industry, our markets and our competitive position is based on a variety of sources, including information from independent

 

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industry analysts and publications, as well as our own estimates and research. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates.

CERTAIN TRADEMARKS

This prospectus includes trademarks and service marks owned by us, including Champions, Early Foundations, KinderCare, KinderCare Education and Rainbow. This prospectus also contains trademarks, trade names and service marks of other companies, which are the property of their respective owners. Solely for convenience, trademarks, trade names and service marks referred to in this prospectus may appear without the ®, or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, trade names and service marks. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

NON-GAAP FINANCIAL MEASURES

Certain financial measures presented in this prospectus are not recognized under GAAP. EBIT, EBITDA, Adjusted EBITDA, and Adjusted net (loss) income (collectively referred to as the “non-GAAP financial measures”) are not presentations made in accordance with GAAP, and should not be considered as an alternative to net income or loss, income or loss from operations, or any other performance measure in accordance with GAAP, or as an alternative to cash provided by operating activities as a measure of our liquidity. EBIT is defined as net income (loss) adjusted for net interest expense and income tax expense (benefit). EBITDA is defined as EBIT adjusted for depreciation and amortization. Adjusted EBITDA is defined as EBITDA adjusted for COVID-19 related costs, equity-based compensation, management and advisory fee expenses, acquisition-related costs and other costs because these charges do not relate to the core operations of our business. Adjusted net (loss) income is defined as net income (loss) before income tax adjusted for amortization of intangible assets, COVID-19 related costs, equity-based compensations, management and advisory fee expenses, acquisitions-related costs and other costs.

We present EBIT, EBITDA, Adjusted EBITDA and Adjusted net (loss) income because we consider them to be important supplemental measures of our performance and believe they are useful to securities analysts, investors and other interested parties. Specifically, Adjusted EBITDA and Adjusted net (loss) income allow for an assessment of our operating performance without the effect of charges that do not relate to the core operations of our business. We believe Adjusted EBITDA is helpful to investors in highlighting trends in our core operating performance compared to other measures, which can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments.

We believe the use of Adjusted net (loss) income provides investors with consistency in the evaluation of the Company as it provides a meaningful comparison of past, present and future operating results, as well as a more useful financial comparison to our peers. We believe this supplemental measure can be used to assess the financial performance of our business without regard to certain costs that are not representative of our continuing operations.

EBIT, EBITDA, Adjusted EBITDA and Adjusted net (loss) income have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

they do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on indebtedness;

 

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they do not reflect income tax expense or the cash requirements for income tax liabilities;

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will have to be replaced in the future, and EBIT, EBITDA, Adjusted EBITDA and Adjusted net (loss) income do not reflect cash requirements for such replacements;

 

   

they do not reflect our cash used for capital expenditures or contractual commitments;

 

   

they do not reflect changes in or cash requirements for working capital; and

 

   

other companies, including other companies in our industry, may calculate these measures differently than we do, limiting their usefulness as a comparative measure.

 

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A Letter from Tom Wyatt, our Chief Executive Officer

As a father of two daughters and grandfather to four grandchildren, I know firsthand the joy that comes with raising a family. I also know well the daily juggle that parents with young children face balancing work and personal lives. Childcare was a lifeline then, much like it is today for millions of working parents across the country. When I first joined KinderCare in 2012, I immediately began to spend time in our centers and at our onsite programs. When I saw the incredible interactions that teachers had with children in their care and the smiles on children’s faces, I was reminded of my early days as a parent. I knew right away that working at KinderCare was more than a professional opportunity, it was a personal mission. Today, our shared mission makes every role at our Company a movement we are all proud to be a part of.

Since we opened our first center in 1969, our commitment to delivering the highest quality care possible for families, regardless of who they are or where they live has never changed. Today, with over 2,000 locations nationwide, we are a collection of thousands of big and little stories written every day; a community of approximately 35,000 passionate employees striving to make each child’s potential shine; a human-powered network in 40 states and the District of Columbia working individually and collectively. Through it all, what we do for children and families remains constant. We are caregivers. We are educators. We impart a lifetime love of learning. We are also so much more. We are builders; of confidence in children; of unshakable self-worth; of conviction that our children can carry with them as they take their first steps and every step toward taking on the world.

As access to high-quality early childhood education has become increasingly recognized as an essential building block of our country’s economic future, KinderCare’s leadership matters now more than ever. Over 17.5 million workers, or about 20% of the American workforce, rely on childcare every day. It is also estimated that nearly 3 million women have left the workforce as a result of the COVID-19 pandemic—a key factor is lack of access to childcare.

Success at work and at home builds stronger communities one child at a time. Studies show that quality early education increases the likelihood of children obtaining higher education credentials and increases self-sufficiency and productivity later in life. This benefit to communities is reinforced by childcare’s contribution to broader economic outcomes including workforce attraction, retention and productivity and economic growth overall.

From their earliest weeks, children build critical social, emotional and academic skills that lay the groundwork for the rest of their educational journey. At KinderCare, as children take their first steps and every step into their future, they do so with confidence.

Our Company purpose is grounded in four pillars that promote a great experience for our children, families and staff and drive profitable growth in the business:

Educational Excellence

Every family wants the best care and education for their child. We deliver that through (i) our proprietary curriculum, (ii) our commitment to accreditation – the third-party validation of the high standards in our centers and sites and (iii) through assessments that consistently prove KinderCare children are better prepared for kindergarten than their peers outside our programs.

People & Engagement

Our industry-first, data-driven talent assessment tools help us hire the best teachers and center staff who will thrive in our classrooms. Our annual employee and family engagement surveys build culture

 

LOGO

 

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and connections, and help identify how to best serve children and families and drive business performance. Our approach has helped us win the Gallup Exceptional Workplace Award for each of the last five years – one of only four employers globally to do so.

Health & Safety

We hold sacred our responsibility to protect and nurture the children in our care. Our rigorous safety standards across all classrooms are reinforced by ongoing training and measurement tools. We help children build healthy bodies and minds by providing them with nutritious meals, physical activity programs and dedicated mental and emotional wellness resources.

Operations & Growth

We bring our high-quality standards to more families and communities each year. We do this by building new centers and inviting smaller high-quality providers to join the KinderCare family. We work with school administrators and public and private employers to expand access to our programs. As we grow our reach, we reinvest in all our pillars to elevate our impact.

These pillars guide each of our employees every day in classrooms across the country. While our footprint is large, it is the footsteps of each child in our care that inspires us. Our unwavering devotion to their children gives families confidence and peace of mind to pursue their dreams and to integrate work and life. Because strong and vibrant communities depend on access to high-quality childcare for all, we serve the full socioeconomic spectrum of families, including those of modest means. This is not a requirement from regulators, it is a matter of principle to which we have held true for the last 50 years and remains core to our mission today.

I am honored to lead KinderCare into this next phase of our journey and invite you to join me in championing the working families of this country and their children.

 

 

LOGO

Tom Wyatt

Chief Executive Officer

 

LOGO

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. Because this is only a summary, it does not contain all the information that may be important to you. You should read the entire prospectus carefully, especially “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus, before deciding to invest in our common stock.

Our Company

We are the largest private provider of high-quality early childhood education and care services (“ECE”) in the United States by center capacity. We are a mission driven organization, rooted in a commitment to providing all children with the very best start in life. We serve children ranging from 6 weeks to 12 years of age across our market leading footprint of 1,490 early childhood education centers with capacity of more than 195,000 children and contracts for more than 650 before- and after-school sites located in 40 states and the District of Columbia as of October 2, 2021. We believe families choose us because of our differentiated, inclusive approach and our commitment to delivering every child a high-quality educational experience in a nurturing and engaging environment. We operate all of our centers under the KinderCare brand and utilize a consistent curriculum and operational approach across our network.

We offer a differentiated value proposition to the children, families, schools and employers we serve, driven by our market-leading scale and commitment to quality, access and inclusion. We leverage our extensive network of community-based centers, employer-sponsored programs, and before- and after-school sites, to meet parents where they are; an important factor in the context of evolving work styles as a result of the novel coronavirus (“COVID-19”) pandemic. We utilize our proprietary curriculum with the goal of generating superior outcomes for children of all abilities and backgrounds. We use third-party assessment tools that consistently show children in our centers outperform their peers in other programs in readiness for kindergarten. We voluntarily seek accreditation at all of our centers and onsite programs, demonstrating our commitment to best practices for our sector. Our commitment to transparent, third-party validation of the quality and impact of our offerings is a critical factor for parents when selecting a center for their children. Our culture promotes high levels of employee engagement, which leads to better financial performance of our centers. Our expertise helping families access public subsidies for childcare is a core competency and drives greater levels of diversity and access in our centers.

We have built a reputation as a leader in early childhood education and care across our three go-to-market channels: KinderCare Learning Centers, KinderCare Education at Work and Champions.

 

   

KinderCare Learning Centers (“KCLC”) is the largest private provider of community-based early childhood education centers in the United States by center capacity. As of October 2, 2021, KCLC operates approximately 1,400 KCLC centers. Most KCLC centers are accredited by accrediting bodies such as the National Association for the Education of Young Children (“NAEYC”). The accreditation process evaluates curriculum, evidence of learning, operating practices and health and safety protocols. The majority of the unaccredited centers are newer to our fleet of centers – either as newly built centers or as acquisitions and are currently in various stages of the two-year accreditation process. Families typically become aware of KCLC through our strong brand recognition, public relations campaigns, digital and direct marketing efforts and word of mouth references before enrolling directly in a center. KCLC serves families with children between six weeks and 12 years of age. KCLC represented 79.2% and 77.2% of our 2020 and 2019 revenue, respectively.

 

   

KinderCare Education at Work (“KCE at Work”) is a leading provider of employer-sponsored childcare programs. As of October 2, 2021, KCLC operates 72 onsite employer-sponsored centers. The KCLC

 

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centers and onsite employer-sponsored centers together comprise our early childhood education centers. We work closely with employers to design programs that effectively address the childcare needs of their employees. Our ability to offer both onsite centers, as well as access to our own leading KinderCare center network, provides flexibility and accessibility to a broad range of employees. We currently serve more than 600 employers through onsite programs and tuition discount benefit programs for employees. KCE at Work represented 17.8% and 18.1% of our 2020 and 2019 revenue, respectively.

 

   

Champions is a leading private provider of before- and after-school programs in the United States. Our outsourced model provides an attractive value proposition to schools and districts. We provide staff, teachers and curriculum to deliver high-quality supplemental education and care to families and children onsite at schools we serve, and have contracts for more than 650 sites as of October 2, 2021. Champions represented 3.0% and 4.7% of our 2020 and 2019 revenue, respectively.

Our operating strategy is designed to deliver a high-quality experience for every child and family we serve across all of our centers and sites. This self-reinforcing strategy is anchored in four pillars:

 

   

Educational Excellence. We leverage our proprietary curriculum combined with third-party assessment tools and voluntary accreditation to deliver a high-quality educational experience and provide objective validation of the quality and impact of our programs.

 

   

People & Engagement. We utilize a proprietary, data-driven approach to attract, hire and develop exceptional talent. We instill a culture that builds emotional connections between our employees and our mission and values, driving high engagement across our organization. Our internal surveys consistently demonstrate that a more engaged workforce leads to better financial performance of our centers.

 

   

Health & Safety. We consistently adhere to strict procedures across all of our centers to provide a healthy, safe environment for our children and our workforce and to deliver confidence and peace of mind to families. Our procedures address both the physical and mental health of children and are informed by input from the Center for Disease Control and Prevention (the “CDC”) and other third-party experts.

 

   

Operations & Growth. Our operational excellence enables us to deliver profitable growth and to fund consistent reinvestment into our service offerings. We utilize a robust technology platform and proprietary operating procedures to deliver a high-quality, consistent experience across our centers and sites. Our technology platform closely monitors activity across all centers and sites and allows us to stay connected with families on a daily basis through digital channels. We utilize this proprietary data to continuously refine our operations and adapt to changing market conditions and consumer preferences.

Our History

We have provided children and families with high-quality ECE for over 50 years. Throughout our history, we have empowered parents seeking to enter the workforce with options for excellent early childhood education and care. We have remained committed to providing broad access to our services throughout our history and, over the past decade, have become a leading advocate in our industry, working with legislators to promote greater access to early education for all families.

In 2012, John T. (“Tom”) Wyatt became our CEO to lead our business transformation. Our primary stockholder, PG, acquired control of KinderCare in 2015 to further support this transformation. From 2012 to 2017, Tom and our leadership team implemented and refined our current operating strategy, based on our four pillars described above, to enhance our value to children and families and to drive improved operating performance. During this period, we optimized our center footprint by closing more than 380 centers, drove compound same center


 

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revenue growth of 4.5% and increased same center occupancy from 56% to 69%. We also made significant investments in our curriculum, human capital and technology infrastructure to accelerate growth and strengthen our commitment to quality.

Since 2017, we have executed on our multi-faceted growth strategy to extend our center footprint and reinforce our position as the largest private ECE provider in the United States by center capacity. We acquired 163 centers between fiscal 2018 and fiscal 2020 and opened 47 new greenfield centers. During the nine months ended October 2, 2021, we also acquired 10 additional centers and opened 26 new greenfield centers. We established our Growth Delivery, New Center Enrollment and New Center Operations teams, and developed and refined our new center management processes to enable us to quickly and consistently implement our operating procedures and curriculum, while driving growth in inquiries and enrollment. In 2019, prior to the onset of the COVID-19 pandemic, we grew to $1.9 billion in revenue, had $29 million in net loss and had $180 million in Adjusted EBITDA. From 2017 to 2019, we achieved 4.5% compound same center revenue growth. We increased same center occupancy to 72% in early 2020 from 69% in 2017. During this time we also maintained our cost of services excluding depreciation and impairment at approximately 79.2% to 79.4% of revenue.

In 2020, we had $1.4 billion in revenue, $129 million in net loss and $45 million in Adjusted EBITDA. Our same center revenue decreased by 25% primarily due to a decrease in same center occupancy to 47%. Our cost of services excluding depreciation and impairment increased to 84.3% of revenue in 2020 due to the impact of fixed operating costs on lower revenues and incurring higher costs from implementing enhanced health and safety protocols in response to COVID-19. During the first nine months of 2021, we had $1.3 billion in revenue, $41 million in net income and $198 million in Adjusted EBITDA. Our same center revenue increased by 36% compared to the first nine months of 2020, primarily due to an increase in same center occupancy to 62% from 45%. Our cost of services excluding depreciation and impairment improved to 75% of revenue during the first nine months of 2021 as compared to 86% for the first nine months of 2020 due to the impact of leveraging fixed costs over higher enrollments and reimbursements from Governmental Stimulus.

COVID-19 Impact Update

In March 2020, government-mandated closures of childcare centers, intended to curb the spread of COVID-19, significantly reduced enrollment across our industry. During the final two weeks of the first quarter of 2020, we temporarily closed 1,074 centers and 547 before- and after-school sites. A temporarily closed center or site, sometimes referred to as a “temporary closure,” is a center or site that has ceased operations as of the end of the reporting period, but management intends on recommencing operations at some point in the future. We kept more than 420 centers open to provide childcare to first responders, critical healthcare providers and families working in essential services. We undertook several actions to manage costs and improve liquidity, including curtailing all non-critical business spend, furloughing employees, temporarily reducing the salaries of the executive team and negotiating rent and benefit holidays or deferrals where possible.

During the second half of 2020, we reopened 1,021 centers and approximately 320 before- and after-school sites. As centers reopened, we brought many employees off furlough and reinstated salaries. We implemented enhanced health and safety protocols at all of our centers and sites to safely welcome children back. We proactively communicated with families to articulate our approach to safely reopening our centers and our commitment to supporting them and their children throughout the COVID-19 pandemic.

Since reopening our centers, enrollment has increased significantly. For the three months ended October 2, 2021, our same center occupancy increased to 64%, which represents 90% of our occupancy prior to the COVID-19 pandemic, well above the industry average of 79% of pre-COVID-19 occupancy levels. While many of the children who returned to our centers were previously enrolled in a KinderCare center, we believe other children

 

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transferred from centers that had closed during the COVID-19 pandemic. Approximately 13,000 centers, representing an estimated 20% to 25% of industry capacity, closed between September 2019 and September 2021 and have not reopened.

The CARES Act, signed into law on March 27, 2020, provided $3.5 billion in stimulus funding for childcare assistance. During fiscal 2020, we recognized $119.2 million in incremental revenue and $60.9 million for reimbursement of center operating expenses from Governmental Stimulus. We estimate that $111 million of the incremental revenue related to Governmental Stimulus with the remaining $8 million related to tuition adjustments. We believe that we will continue to receive these types of incremental revenue and reimbursement of center operating expenses for the foreseeable future. Bills passed by U.S. Congress subsequent to the CARES Act have approved $49 billion in incremental stimulus funding for ECE providers.

During the nine months ended October 2, 2021, we recognized $45.1 million in incremental revenue and $76.5 million for reimbursement of center operating expenses from Governmental Stimulus as compared to $101.1 million in incremental revenue and $33.7 million for reimbursement of center operating expenses from Governmental Stimulus during the nine months ended September 26, 2020. Of the incremental revenue recognized, we estimate that $34 million for the nine months ended October 2, 2021 and $96 million for the nine months ended September 26, 2020 related to Governmental Stimulus with the remainder related to tuition adjustments. The federal government passed additional legislation during fiscal 2020, such as the employer payroll tax deferral and employee retention credit, both of which we implemented.

Our Industry

We compete in the U.S. ECE market. Over 17.5 million workers, or 20% of the American workforce, rely on childcare every day. According to the Bureau of Economic Research, the U.S. market for private expenditures on education-focused care for children zero to five years of age was $15.2 billion in 2019, and served annual enrollments of approximately 2.5 million children according to management estimates, while the total spending in the United States on childcare was approximately $42 billion, according to the Consumer Expenditure Survey in 2018. From 2012 to 2019, according to the Bureau of Economic Research, private expenditures on education-focused care grew from $10.5 billion to $15.2 billion, representing a compound annual growth rate over the period of 4.7%. We estimate that the market for private expenditures on education-focused care is expected to grow at a compound annual growth rate of 6.4% between 2021 and 2026, excluding any impact from Governmental Stimulus.

The ECE market is highly fragmented with more than 109,000 centers in the United States in 2017, according to the Office of Child Care. We estimate that the top three providers, including KinderCare, represented approximately 5% of total capacity as of January 1, 2020. The COVID-19 pandemic caused many providers to experience significant financial challenges and reduced enrollments due to government restrictions and consumer behavior. As a result, approximately 13,000 centers, representing an estimated 20% to 25% of industry capacity, closed between September 2019 and September 2021 and have not reopened, leaving families with fewer options for organized care.

According to management estimates, the employer-sponsored ECE market represented a small but meaningful portion of the overall ECE market with expenditures of approximately $3 billion in 2019. Increasingly, employers recognize the benefits of offering employees access to flexible, high-quality, affordable ECE options on either a full-time or back-up care basis. Evolving work styles are driving a preference for flexible ECE solutions with care options both onsite at corporate offices and in the communities in which employees live.

The market for before- and after-school programs serves children enrolled in pre-K-12 schools. According to the National Center for Education Statistics, there are more than 130,000 schools across the United States. Schools have

 

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long recognized the benefits of providing their families with access to before- and after-school care and education programs, though many schools have struggled to effectively manage and deliver such offerings. The lack of before- and after school care onsite creates challenges for children and families who need to travel to and from other providers, such as the YMCA, to access full-day care solutions. Third-party providers, such as Champions, are in the early stages of serving this market opportunity at scale.

We believe the market opportunity for scaled, quality ECE providers will continue to grow due to the following trends and market dynamics:

Broad recognition of the benefit of ECE drives growth in private spend and consistent public subsidy funding. Studies consistently show that organized early childhood education fosters the development of cognitive and social skills, better preparing children for success in school and life and achieving long-term benefits for society, including a 28% increase in likelihood of graduating high school if such child had received high-quality early education according to the Perry Preschool Project. The U.S. government has consistently passed bipartisan public funding to support ECE to catalyze these societal benefits. Federal subsidies for ECE, primarily provided through the Child Care and Development Fund (“CCDF”), authorized under the Child Care and Development Block Grant (“CCDBG”), increased from $4.9 billion in 2008 to $8.2 billion in 2019.

Trends in labor force participation continue to support robust demand for high-quality ECE. As of 2019, 68% of children under the age of six were in dual income households, an increase from 65% in 2015 according to National Kids Count. The labor force participation rate of women ages 20 to 44 in the United States increased from 74% in 2009 to 75% in 2019 according to the U.S. Bureau of Labor Statistics, representing an estimated 2.5 million additional women in the workforce. Among millennials, over 80% cite work-life integration, of which access to high-quality childcare is a key component, as the most important factor in job selection according to a Forbes article published in 2020. However, in 2018, more than 80% of parents with children under the age of five reported challenges in finding affordable, quality care according to the Affordable Child Care and Early Learning for All Families report published in 2018 by the Center for American Progress. These trends are expected to drive sustained growth in the ECE market.

Reduced capacity from COVID-19 pandemic-related center closings creates opportunity for high-quality ECE providers. Government restrictions and shifts in consumer behavior caused many operators to experience significant financial challenges and reduced enrollments during the COVID-19 pandemic. As a result, approximately 13,000 centers, representing an estimated 20% to 25% of industry capacity, closed between September 2019 and September 2021 and have not reopened. This reduced capacity has increased demand for scaled providers, such as KinderCare, and has created incremental opportunities for greenfield expansion or acquisitions.

Evolving work styles have increased the need for flexible ECE offerings. We believe providers that offer ECE via a variety of delivery channels are best positioned to meet the demands of parents regardless as to how future work styles evolve. Many employers are actively exploring blended models, balancing the amount of time employees spend working remotely versus in the office. In response to the evolving landscape, the mix of demand for ECE provided in communities, at corporate offices and onsite in schools is expected to evolve. In many cases, parents are expected to take advantage of the services offered through multiple channels to best meet their needs.

Over $50 billion in Governmental Stimulus provides meaningful support for ECE. The U.S. federal government has acknowledged the importance of the ECE market through recently passed federal governmental acts designed to support continued access to ECE for parents. The CARES Act, signed into law on March 27, 2020, provided $3.5 billion in stimulus funding for childcare assistance.

The Consolidated Appropriations Act (“CAA”), passed in December 2020, includes $10 billion in stimulus funding for the CCDBG to supplement state general revenue funds to support the childcare needs of working

 

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families and to stabilize childcare providers. The American Rescue Plan Act (“ARPA”), passed in March 2021, includes $15 billion in stimulus funding for the CCDBG and an additional $24 billion for a COVID-19 childcare relief and stabilization fund, which provides states with resources to offer immediate grants to childcare providers. All stimulus funding under the CAA and ARPA must be distributed by December 31, 2024. Additionally, the ARPA provides monthly child tax credit payments for qualifying families. Monthly payments of $300 for each child under the age of six and $250 for each child ages six through 17 began to be distributed on July 15, 2021 and will provide parents incremental funding to support family needs, such as ECE.

Scaled providers are uniquely qualified to navigate complex public subsidy and stimulus funding channels. Each state has unique and disparate processes to administer funds received from the CCDF, making it difficult for many families and providers to access public subsidy and stimulus funding. Scaled providers with the expertise, resources and infrastructure necessary to understand each state’s requirements and support families through the application process are best positioned to capture enrollments supported by public funds. We expect public subsidy funding for ECE to continue to grow, furthering the importance of this capability.

Our Competitive Strengths

We believe the following are our core strengths that differentiate us from our competition:

Market leader with significant scale advantages. We are the largest private provider of ECE in the United States by center capacity with nearly 50% greater center capacity based on our estimates than the next largest operator. Our scale enables us to (i) identify best practices within our network and apply them across all of our centers and onsite programs, (ii) consistently invest in our curriculum, teachers and rigorous health and safety protocols across all our centers and sites, (iii) invest in our technology infrastructure to better manage our operations, (iv) identify opportunities for expansion through greenfield centers and acquisitions, (v) help our families access public subsidy funding by engaging with approximately 800 government agencies and (vi) serve as a leading, visible advocate for our industry with legislators.

Diverse set of offerings that enable broad access to our services. We believe we are the only ECE provider with the ability to reach families in their communities, at their places of employment and onsite at their children’s schools. Our mix of community-based and onsite centers makes us well-suited to address families’ ECE needs, even as work styles evolve. The flexibility of our KCE at Work offering allows us to provide tailored programs to employers seeking flexible, employer-sponsored care solutions for their employees. Our before- and after-school programs extend our offerings to older children at their schools, expanding the population of families and children that we are able to effectively serve.

Commitment to educational excellence across our footprint. We have intentionally designed our curriculum for children of all abilities, and we continuously enhance and refine our curriculum to drive better outcomes. As educational quality for young children can be difficult for parents to assess, we utilize objective, third-party assessment tools and accreditation to demonstrate the impact of our programs. We voluntarily seek accreditation at all of our centers and onsite programs. Very few providers embrace accreditation across their entire center network. In addition, our internal studies with third-party assessment tools show that on average, children who begin attending KinderCare centers as infants are six weeks ahead of their peers at two years of age and nine months ahead at five years of age and KinderCare kindergartners test at least two months ahead of expectations for first grade.

Strong workforce engagement which inspires our best talent to do their best work. We utilize a holistic approach to attract, train and develop a talented workforce, at scale, and drive workforce engagement. Our approach fosters stronger connections with families and better center financial performance. Our workforce

 

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culture is a fundamental driver of employee engagement as we strive to maintain a culture that is mission driven, inclusive and values the input of each of our employees. Also, we are the only early education company to utilize a predictive, data-driven selection tool in our hiring practices. Our internal research shows that centers with higher employee and family engagement generated, on average, 1.5 and 2.5 times higher revenue growth in our network in 2018 and 2019, respectively. In 2020, 71% of our workforce considered themselves engaged, nearly double the U.S. population average. Through our continued focus on engagement, we have received the Gallup Exceptional Workplace Award every year from 2017 to 2021, making us one of only four companies worldwide to win this award in each of the last five years.

Technology infrastructure supporting efficient, data-driven decisions across our business. We invest significant resources into our technology infrastructure to support our centers and site operations and our interactions with current and prospective families. We leverage our proprietary OneCMS platform to provide real-time key performance indicator (“KPI”) tracking and reporting across all of our centers. Our OneCMS platform drives consistency, economies of scale and efficient integration of greenfield and acquired centers. We utilize a Salesforce-based client relationship management (“CRM”) system to manage inquiries from new families and effectively enroll and onboard new children and families into our centers and sites. We engage with our families through our robust mobile platform to connect them with their centers and provide daily updates on their child’s activity and developmental progress. All of these systems generate valuable data that we leverage to inform decision-making, improve learning outcomes and increase family engagement and retention.

Expertise helping families access public subsidy funding for childcare. We proactively work with prospective and current families to help them access public subsidy funding. The process for accessing public subsidy funding is complex and burdensome, causing many families to forego applying for available resources. Our dedicated Subsidy Team assists families with understanding the requirements of programs available to them and with completing the administrative steps necessary to access public subsidy funding. Our scale allows us to invest in the expertise, resources and infrastructure needed to effectively navigate these programs across our network of centers. Our frequent interactions and relationships with government institutions position us as a leading advocate for our industry to help build continued growing public funding support for our sector.

High-quality management team demonstrating deep industry experience across education and multi-site consumer industries and track record of profitable growth. Our experienced management team has executed on its strategic initiatives with respect to people, education and financial performance. The combined expertise and experience of our management team covers early childcare, multi-site platforms and education, representing more than 135 years of relevant professional experience. Our Company is managed by a seasoned team of professionals led by Chief Executive Officer Tom Wyatt who, with more than 40 years of experience leading successful childcare and multi-site platforms, has guided our Company to achieve the highest standards of excellence in ECE. Chief Academic Officer Dr. Elanna Yalow is responsible for the development of KinderCare’s educational programs as well as public policy and accreditation initiatives. Paul Thompson, President, and Anthony (“Tony”) Amandi, Chief Financial Officer, have 32 and 21 years of relevant experience, respectively, and provide strong continuity of operational expertise. Since installing Tom as Chief Executive Officer, our management team demonstrated consistent profitable growth, achieving a compound same center revenue growth of 4.5% from 2012 to 2019.

Our Growth Strategies

We intend to extend our position as the largest private ECE provider in the United States by center capacity through our key growth strategies, as follows:

Increase enrollments and occupancy at our existing centers. We employ a multi-pronged strategy to increase enrollments and occupancy. Our commitment to inclusive access and transparent, third-party validation across our

 

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offerings allows us to provide a differentiated value proposition to families seeking ECE. We leverage our strong brand recognition, public relations campaigns, digital and direct marketing campaigns and word-of-mouth references to attract families to our centers. As a scaled provider, we are well-positioned to benefit from the combined impacts of growing ECE demand and supply reductions driven by COVID-19 pandemic-related center closures. Given our scale and operational expertise and resources, we possess a unique ability to serve families supported by public subsidy funding and the agility to meet evolving family preferences toward flexible and accredited providers.

Leverage dedicated teams and data-driven research to open new greenfield centers. We consistently open new greenfield centers that generate attractive returns and complement our existing center network. We opened 47 new greenfield centers from fiscal 2018 to fiscal 2020. In 2021, we opened 26 new greenfield centers through October 2, 2021. We maintain a robust pipeline of new center opportunities and employ a disciplined and data driven approach in selecting locations for new greenfield centers. We utilize dedicated, specialized teams to oversee the development and opening of each new center. This approach creates a scalable, repeatable and highly efficient process while ensuring we are creating the best experience for families and center staff. When evaluating our new center occupancy after eight weeks of operation, we have seen improvements in occupancy each year from 2017 to 2019. Class of 2020 center performance was negatively impacted by the COVID-19 pandemic due to temporary closures of centers and delayed opening dates, and as such occupancy rates were approximately at par with class of 2017 centers. Class of 2021 centers are performing in line with pre-COVID expectations, approximately 20% improved from 2017 levels when we began our growth journey.

Continue to expand our flexible employer-sponsored program offerings. We provide employers with a diverse, flexible offering to best meet the needs of their workforce, positioning us to grow our employer client base as work styles evolve. We offer onsite employer-sponsored centers as well as access to our own network of approximately 1,400 KCLC centers providing employers with the ability to design flexible programs to meet the shifting needs of their employees. We also offer tuition benefits programs, which allow employers to provide discounted access to our centers. Since 2019, we have grown our number of employer relationships from approximately 400 to more than 600 as of October 2, 2021. These relationships include 72 onsite employer-sponsored centers.

Re-invest revenue from consistent price increases to enhance our value proposition for families. We consistently invest in all aspects of our service offering to deliver high-quality, accessible ECE. We also offer competitive compensation and benefits packages as well as periodic salary increases for our teachers and staff. We implement regular price increases across our centers to support these investments. Over the past three years, our annual tuition price increases ranged from 2-5% across all of our centers. Rate increases vary by age and center. We have found that parents appreciate our investment in delivering a high-quality ECE solution for their children and are supportive of reasonable annual price increases to facilitate such investments. Additionally, while our rates for children of a given age increase each year, these rates generally decrease as children get older. Our pricing methodology indexes rates against our entry level infant tuition rates; toddler rates are set at approximately 97%, two-year old rates are set at approximately 88% and preschool rates are set at approximately 81% of infant tuition rates. As a result, the out-of-pocket costs paid by parents typically decrease as children age, despite our annual rate increases.

Increase the number of sites served and grow enrollments in programs offered by Champions. We actively pursue opportunities to offer Champions before- and after-school programs to additional schools and to grow enrollment in programs offered at existing sites. Champions offers high-quality, education-focused accredited programs conveniently onsite at the schools we serve, while removing the administrative burden for the school to operate these programs. From 2015 to 2019, we grew our revenues from Champions at a compound annual

 

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growth rate of more than 13%. We currently have contracts with more than 650 sites, a small percentage of the over 130,000 schools in the United States, providing significant opportunity to continue to grow our footprint.

Opportunistically pursue strategic acquisitions and partnerships. We continue to grow our footprint by acquiring centers through our disciplined acquisition approach. We acquired 163 centers between fiscal 2018 and fiscal 2020. During the nine months ended October 2, 2021, we acquired 10 additional centers and opened 26 new greenfield centers. We maintain a robust pipeline of targets, ranging in size from single site to multi-site providers, to support our inorganic growth trajectory. We quickly transition newly acquired centers onto our technology platform, implement our proprietary curriculum and center management processes and rebrand such centers. Given the significant fragmentation in our industry, we expect to continue to pursue acquisitions that meet our criteria and complement our existing network. Additionally, we expect to pursue acquisitions to add new brands that will allow us to target and serve specific populations as well as to potentially grow our presence in attractive international markets.

Environmental, Social and Governance (“ESG”) Considerations

Our mission is to provide high-quality ECE to families of all backgrounds and means. Early childhood education gives children the tools needed to be successful in school and thrive as they enter adulthood. We have purposefully built a scaled ECE platform that enables us to reach more families and children than any other private childcare provider. We strive to make our services easily accessible to families of all socioeconomic backgrounds. We welcome children, families and employees of all abilities and backgrounds. We make investments in how we operate our centers to promote safety as well as the physical and emotional health of our employees and students. We conduct assessments and voluntarily seek third-party accreditation across all our centers to provide parents with objective, informed insight on the quality of our offerings. We remain committed to sustainable and impactful business practices through our ESG initiatives, policies, and goals.

Recent Developments

On November 3, 2021, our subsidiary, KUEHG Corp. (as successor to KC Mergersub, Inc.), entered into an incremental facility amendment (the “Incremental Facility Amendment”) to our first lien credit agreement, dated as of August 13, 2015, by and among KUEHG Corp., KC Sub, Inc., KC Holdco, LLC, the guarantors party thereto, Credit Suisse AG, Cayman Islands Branch, as administrative agent, and the lenders party thereto. Pursuant to the Incremental Facility Amendment, upon the consummation of this offering, (i) our First Lien Revolving Facility will increase to $200.0 million and the First Lien US Revolving Facility and the First Lien Multicurrency Revolving Facility will become a single revolving facility, (ii) Amendment No. 10 to the First Lien Credit Agreement will be terminated and (iii) the maturity date of the First Lien Revolving Facility will change to the earlier of five years from the effective date of the Incremental Facility Amendment and 91 days prior to the maturity date of the First Lien Term Loan Facility. See “Description of Certain Indebtedness” for more information.

Summary Risk Factors

We are subject to a number of risks, including risks that may prevent us from achieving our business objectives or that may adversely affect our business, financial condition and results of operations. You should carefully consider the risks discussed in the section titled “Risk Factors,” including the following risks, before investing in our common stock:

Risks Related to our Business

 

   

The COVID-19 pandemic has significantly disrupted our business, financial condition and results of operations and will continue to adversely impact our business.

 

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Changes in the demand for childcare and workplace solutions, influenced by a permanent shift in workforce demographics, economic conditions, office environments, unemployment rates, and the failure to anticipate and respond to changing preferences and expectations, may affect our operating results.

 

   

Our business depends largely on our ability to hire and retain qualified teachers, key management, key employees and maintain strong employee engagement.

 

   

Adverse publicity could impact demand for our services, as well as the value of our brands and reputation as a provider of choice.

 

   

Our continued profitability depends on our ability to offset our increased costs through tuition increases.

 

   

Governmental universal childcare benefit programs and changes in the spending policies or budget priorities for government funding of childcare and education could impact demand for our services.

 

   

We have identified a material weakness in our internal control over financial reporting.

Risks Related to our Capital Structure, Indebtedness and Capital Requirements

 

   

We may face risks related to our indebtedness.

 

   

The terms of our Credit Facilities impose operating and financial restrictions on us that may impair our ability to respond to changing barriers and economic conditions.

 

   

We may require additional capital to meet our financial obligations and support business growth, and this capital may not be available on acceptable terms or at all.

 

   

Acquisitions have played a part in our strong growth portfolio, and contribute to our competitive industry profile, but they also present many risks and may disrupt our operations. We also may not realize the financial and strategic goals that were contemplated at the time of the transaction.

 

   

We are a holding company with no operations of our own, and we depend on our subsidiaries for cash.

Risks Related to Intellectual Property, Information Technology and Data Privacy

 

   

We rely significantly on the use of our IT systems, as well as the technology of our third-party service providers and any significant failure, inadequacy, interruption or data security incident of our IT systems, or those of our third-party service providers, could disrupt our business operations.

 

   

If we are unable to adequately protect our intellectual property rights, our business, financial condition and results of operations may be materially and adversely affected.

 

   

Our collection, use, storage, disclosure, transfer and other processing of personal information could give rise to significant costs and liabilities, including as a result of governmental regulation, uncertain or inconsistent interpretation and enforcement of legal requirements or differing views of personal privacy rights, which may have a material adverse effect on our reputation, business, financial condition and results of operations.

 

   

We are subject to payment-related risks that may result in higher operating costs or the inability to process payments, either of which could harm our brand, reputation, business, financial condition and results of operations.

Risks Related to our Common Stock and this Offering

 

   

If our stock price fluctuates after this offering, you could lose a significant part of your investment.

 

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We are a “controlled company” within the meaning of the rules and, as a result, will qualify for, and may rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

 

   

Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace or remove our current management.

 

   

Changes in tax laws or to any of the several factors upon which our tax rate is dependent could impact our future tax rates and net income and affect our profitability.

General Risks

 

   

Our business, financial condition and results of operations may be materially and adversely affected by various litigation and regulatory proceedings.

 

   

Inadequacy of our insurance coverage could have a material and adverse effect on our business, financial condition and results of operations.

 

   

Becoming a public company will increase our compliance costs significantly and require the expansion and enhancement of a variety of financial and management control systems and infrastructure and the hiring of significant additional qualified personnel.

 

   

We will be exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act.

 

   

Natural disasters, geo-political events and other highly disruptive events could materially and adversely affect our business, financial condition and results of operations.

 

   

Discovery of any environmental contamination may affect our operating results.

Our business also faces a number of other challenges and risks discussed throughout this prospectus. You should read the entire prospectus carefully, especially “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus, before deciding to invest in our common stock.

The Reorganization and Our Organizational Structure

We previously operated as a Delaware limited liability company under the name KC Holdco, LLC. Shortly after the effectiveness of the registration statement of which this prospectus forms a part:

 

   

KC Holdco, LLC will convert into a Delaware corporation through a Delaware law statutory conversion and be renamed KinderCare Learning Companies, Inc.;

 

   

KC Sub, Inc., the direct subsidiary of KC Holdco, LLC, will convert into a Delaware limited liability company through a Delaware law statutory conversion and be renamed KC Sub, LLC; and

 

   

KC Parent, LLC, the direct parent of KC Holdco, LLC, will liquidate and distribute the stock of KinderCare Learning Companies, Inc. to unitholders of KC Parent, LLC in proportion to their interests in KC Parent, LLC.

 

   

The holders of the Class A units of KC Parent, LLC will receive shares of common stock in connection with the Reorganization in proportion to their interests in KC Parent, LLC. The Class B units of KC Parent, LLC will vest in connection with the Reorganization and the holders of the Class B units will

 

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receive shares of common stock of KinderCare Learning Companies, Inc. in proportion to their fully vested interests in KC Parent, LLC. The Class B-1 Units will automatically accelerate and vest based on the expected value to be received by the Partners Group Members (as defined in Parent’s limited liability company agreement). Our board of directors has determined that the Class B-2 Units and Class B-3 Units will be deemed to have vested as well. $42.6 million of the shares of common stock that the prior holders of the Class B units will receive will be redeemed with the proceeds of this offering. See “Use of Proceeds.” The holders of the Class C preferred units of KC Parent, LLC will receive shares of common stock in connection with the Reorganization in proportion to their interests in KC Parent, LLC.

We collectively refer to the foregoing organizational transactions as the “Reorganization.”

The diagram below depicts our organizational structure after giving effect to the Reorganization, including this offering.

LOGO

Our Corporate Information

We were originally formed as KC Holdco, LLC, a Delaware limited liability company. In connection with this offering and the Reorganization, we will convert into a Delaware corporation pursuant to a statutory conversion and will be renamed KinderCare Learning Companies, Inc. See “—The Reorganization and Our Organizational Structure” above. Upon consummation of this offering, assuming the sale of 25,775,434 shares in this offering and the redemption of $42.6 million of common stock, PG will own approximately 74.7% of our shares of common stock. See “Principal Stockholders” and “Use of Proceeds.”

Our principal executive office is located at 650 NE Holladay, Suite 1400, Portland, OR 97232 and our telephone number at that address is 503-872-1300. We maintain a website at www.kindercare.com. We have included our website address in this prospectus as an inactive textual reference only. The information contained on, or that can be accessed through, our website is not a part of, and should not be considered as being incorporated by reference into, this prospectus.

 

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THE OFFERING

 

Common stock offered by us    25,775,434 shares.
Common stock to be outstanding after this offering    140,880,006 shares (or 144,746,321 shares, if the underwriters exercise in full their option to purchase additional shares of common stock) including the impact of the redemption of $42.6 million of shares of common stock described in “—Use of Proceeds” below.
Option to purchase additional shares from us    3,866,315 shares.
Use of proceeds    We estimate that the net proceeds to us from our sale of shares in this offering, after deducting underwriting discounts and estimated offering expenses payable by us, will be approximately $460.0 million (or $530.8 million, if the underwriters exercise in full their option to purchase additional shares of common stock), assuming an initial public offering price of $19.50 per share (the midpoint of the price range set forth on the cover page of this prospectus). We intend to use the net proceeds from this offering to (i) repay all $56.3 million of our outstanding First Lien Notes, repay all $210.0 million of the loans outstanding under our Second Lien Facility and then repay $151.9 million of the loans outstanding under our First Lien Term Loan Facility, (ii) redeem $42.6 million of the shares of common stock received by members of management from vested Class B units of KC Parent, LLC in connection with the Reorganization and (iii) pay fees and expenses in connection with this offering. We intend to use the remainder, if any, of the net proceeds to us from this offering for general corporate purposes. See “Use of Proceeds.”
Symbol    “KLC.”
Controlled company    Following this offering, we will be a “controlled company” within the meaning of the corporate governance rules of the New York Stock Exchange. See “Management—Director Independence and Controlled Company Exception.”
Conflicts of Interest    Affiliates of Barclays Capital Inc., Morgan Stanley & Co. LLC and Credit Suisse Securities (USA) LLC are lenders under our First Lien Facilities and Credit Suisse Securities (USA) LLC will receive 5% or more of the net proceeds of this offering due to the repayment of borrowings thereunder. Therefore, Barclays Capital Inc., Morgan Stanley & Co. LLC and Credit Suisse Securities (USA) LLC are deemed to have a conflict of interest within the meaning of FINRA Rule 5121. Accordingly, this offering is being conducted in accordance with Rule 5121, which requires, among other things, that a “qualified independent underwriter” participate in the preparation of, and exercise the usual standards of “due diligence” with respect to, the registration statement and this prospectus. Jefferies LLC has agreed to act as a qualified independent underwriter for this offering and to undertake the legal responsibilities and liabilities of an underwriter under the Securities Act, including specifically those inherent in Section 11 thereof. Jefferies LLC will not receive any additional fees for

 

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   serving as a qualified independent underwriter in connection with this offering.
Risk factors    Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 22 of this prospectus for a discussion of factors you should carefully consider before investing in our common stock.

The number of shares of common stock to be outstanding after this offering excludes:

 

   

14,074,831 shares of common stock reserved for future issuance under our 2021 Incentive Award Plan (the “2021 Plan”), which will become effective once the registration statement of which this prospectus forms a part is declared effective, as well as any shares of common stock that become available pursuant to provisions in the 2021 Plan that automatically increase the share reserve under the 2021 Plan; and

 

   

2,345,805 shares of common stock reserved for future issuance under our 2021 Employee Stock Purchase Plan (the “ESPP”), which will become effective once the registration statement of which this prospectus forms a part is declared effective, as well as any shares of common stock that become available pursuant to provisions in the ESPP that automatically increase the share reserve under the ESPP.

Unless otherwise indicated, all information contained in this prospectus:

 

   

assumes an initial public offering price of $19.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus;

 

   

assumes the underwriters’ option to purchase additional shares will not be exercised; and

 

   

assumes the Reorganization has been consummated prior to the closing of this offering.


 

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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

We present below our summary consolidated statements of operations and of cash flow data for the nine months ended October 2, 2021 and September 26, 2020 and for the fiscal years ended January 2, 2021, December 28, 2019 and December 29, 2018, and our consolidated balance sheet data as of October 2, 2021, January 2, 2021 and December 28, 2019. We have derived this information from our audited annual consolidated financial statements and unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. In our opinion, the unaudited interim condensed consolidated financial statements have been prepared on a basis consistent with our audited annual consolidated financial statements and contain all adjustments, consisting only of normal and recurring adjustments, necessary for a fair statement of such financial statements. Per share data has been omitted from this filing as the membership interests for KC Holdco, LLC are uncertificated and there is no set number of units.

The historical results presented below are not necessarily indicative of the results to be expected for any future period. You should read the summary consolidated financial and operating data presented below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

Consolidated Statements of Operations Data

 

    Nine Months Ended     Fiscal Years Ended  
    October 3,
2021
    September 26,
2020
    January 2,
2021
    December 28,
2019
    December 29,
2018
 
    (dollars in thousands)  

Revenue

  $ 1,332,299     $ 985,115     $ 1,366,556     $ 1,875,664     $ 1,675,049  

Expenses

         

Cost of services (excluding depreciation and impairment)

    999,543       843,058       1,152,063       1,486,430       1,329,497  

Depreciation and amortization

    61,233       66,504       87,919       99,255       94,708  

Selling, general, and administrative expenses

    137,919       116,352       158,409       202,701       188,570  

Impairment losses

    5,387       18,904       38,645       22,908       16,354  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    1,204,082       1,044,818       1,437,036       1,811,294       1,629,129  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    128,217       (59,703     (70,480     64,370       45,920  

Interest expense, net

    72,236       73,222       99,353       102,626       94,097  

Other income, net

    (547     (1,263     (1,039     (1,027     (116
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    56,528       (131,662     (168,794     (37,229     (48,061

Income tax expense (benefit)

    15,046       (34,519     (39,298 )       (8,088     (11,640
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 41,482     $ (97,143   $ (129,496   $ (29,141   $ (36,421
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

         

Change in net gains (losses) on cash flow hedges

    4,946       (1,396     787       (11,537     3,818  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

  $ 46,428     $ (98,539   $ (128,709   $ (40,678   $ (32,603
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Pro Forma Presentation

 

     Nine Months Ended
October 2, 2021
     Fiscal Year Ended
January 2, 2021
 
    

(dollars in thousands, except

per share amounts)

 

Pro forma net income (loss) per share—basic(1)

   $ 0.45      $ (1.01

Pro forma net income (loss) per share—diluted(1)

     0.45        (1.01

Pro forma weighted average number of shares
outstanding—basic(1)

     140,001,594        139,183,170  

Pro forma weighted average number of shares
outstanding—diluted(1)

     140,001,594        139,183,170  

Consolidated Balance Sheet Data (end of period)(1)

 

     October 2,
2021
     January 2,
2021
    December 28,
2019
 
     (dollars in thousands)  

Cash and cash equivalents

   $ 152,472      $ 53,235     $ 40,343  

Working capital(2)

     12,983        (61,770     (79,794

Total assets

     3,394,421        3,266,542       3,300,318  

Long-term debt, less current portion of long-term debt

     1,377,118        1,378,442       1,344,367  

Total liabilities

     3,210,998        3,130,257       3,061,810  

Total member’s equity

     183,423        136,285       238,508  

Other Financial and Operating Data

 

    For the Nine Months
Ended
    For the Fiscal Years Ended  
    October 2,
2021
    September 26,
2020
    January 2,
2021
    December 28,
2019
    December 29,
2018
 

Early childhood education centers

    1,490       1,472       1,460       1,500       1,511  

Before- and after-school sites

    639       363       415       563       525  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total centers and sites(3)

    2,129       1,835       1,875       2,063       2,036
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average weekly ECE full-time enrollments (“FTEs”) (4)

    119,681       87,095       90,526       136,095       125,141

ECE same center occupancy(5)

    62.0%       44.9%       47.0%       70.3%       69.1%  

Adjusted EBITDA(6) (dollars in thousands)

    198,330       16,217       44,517       179,749       154,603  

Adjusted net income (loss)(6) (dollars in thousands)

    52,401       (83,901     (96,417     1,153       (4,480

 

(1)

Basic and diluted pro forma net income (loss) per share, and the basic and diluted weighted-average shares used in computing pro forma net income (loss) per share, give effect to (i) the Reorganization and (ii) the issuance and sale of 25,775,434 shares of our common stock in this offering at an assumed initial public offering price of $19.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

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The table below provides a summary of net income used in the calculation of basic and diluted pro forma net income (loss) per share attributable to common stockholders for the periods presented:

 

     Nine Months Ended
October 2, 2021
     Fiscal Year Ended
January 2, 2021
 

Net income

   $ 41,482      $ (129,496

Adjustment to eliminate interest expense for First Lien Notes and Second Lien Facility(a)

     24,096        31,282  

Adjustment for prepayment premium on debt (a)

     —          (512

Adjustment for amortization of deferred financing fees(a)

     (1,219      (7,190

Adjustment for stock-based compensation expense due to acceleration of vesting of all Class B Units(b)

     710        (20,424

Adjustment for stock-based compensation expense for the 2021 Plan issued in connection with this offering(c)

     (2,458      (13,576
  

 

 

    

 

 

 

Pro forma net income (loss)

     62,611        (139,916
  

 

 

    

 

 

 

 

  (a)

These adjustments reflect the elimination of the interest expense related to the First Lien Notes and Second Lien Facility, partial elimination of the interest expense related to the First Lien Term Loan Facility, prepayment premium on debt, and amortization of deferred financing fees.

 

  (b)

In connection with this offering, all unvested and outstanding Class B Units will vest and, as a result, we estimate that we will incur equity compensation expense at the time of this offering as a result of the acceleration of stock-based compensation due to the vesting of the unvested awards.

 

  (c)

Reflects compensation expenses for the stock options and restricted stock units (“RSUs”) to be issued to certain employees under the equity awards granted in connection with this offering. The compensation expense is measured at fair value at the grant date and expense is recognized over the requisite service period. The fair value of the stock options was estimated utilizing a Black Scholes model and the fair value of the RSU was estimated based on the assumed initial public offering price of $19.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus.

The table below provides a summary of the weighted-average shares used in computing pro forma net income (loss) per share attributable to common stockholders for the periods presented:

 

     Nine Months Ended
October 2, 2021
     Fiscal Year Ended
January 2, 2021
 

Weighted average shares outstanding - pro forma(i)

     113,465,071        112,646,647  

Common stock sold by us in this offering

     25,775,434        25,775,434  

Contingently Issuable shares(ii)

     761,089        761,089  

Weighted-average shares outstanding - pro forma(i) - Basic

     140,001,594        139,183,170  

Weighted-average shares outstanding - pro forma(iii) - Diluted

     140,001,594        139,183,170  

 

  (i)

Gives effect to the Reorganization as described in “—The Reorganization and Our Organizational Structure.”

 

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  (ii)

These shares represent the equity awards issued to the grantees eligible for retirement on the grant date. Because the grantees are not required to provide future employment to retain these services, these awards vest immediately.

 

  (iii)

Since the Company was in a net loss position for year ended January 2, 2021, weighted average shares outstanding was the same on a basic and diluted basis, as the inclusion of all potential common equivalent shares outstanding would have been anti-dilutive. For the nine months ended October 2, 2021, weighted average shares outstanding was the same on a basic and diluted basis, as the inclusion of all potential common equivalent shares outstanding would not have any dilutive impact.

 

     As of October 2, 2021  
     Actual      Pro Forma(A)      Pro Forma as
Adjusted(B)
 

Consolidated Balance Sheet Data

        

Cash and cash equivalents

   $ 152,472      $ 152,472      $ 152,472  

Working capital(C)

     12,983        12,983        11,021  

Total assets

     3,394,421        3,394,421        3,392,459  

Long-term debt, including current portion(D)

     1,388,890        1,388,890        976,105  

Total liabilities

     3,210,998        3,210,998        2,798,213  

Accumulated deficit

     (245,553      (265,267      (255,914

Total member’s/stockholders’ equity(E)

     183,423        183,423        594,246  

 

  (A)

The pro forma column gives effect to (i) the Reorganization, and (ii) the filing and effectiveness of our certificate of incorporation in connection with this offering.

  (B)

The pro forma as adjusted column gives effect to (i) the pro forma adjustments described in note (A), (ii) the issuance and sale by us of 25,775,434 shares of common stock in this offering at an assumed initial public offering price of $19.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us and (iii) the application of the net proceeds from this offering as described in “Use of Proceeds.” Each $1.00 increase (decrease) in the assumed initial public offering price of $19.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of total stockholders’ equity, as well as decrease (increase) the amount of long-term debt and total liabilities, in each case by $24.2 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares offered by us at an assumed initial public offering price of $19.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, would increase (decrease) the pro forma as adjusted amount of total stockholders’ equity, as well as decrease (increase) the amount of long-term debt and total liabilities, in each case by $18.3 million. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

  (C)

We define working capital as current assets less current liabilities, excluding current portions of long-term debt and operating lease liabilities.

  (D)

Net of deferred financing costs of $16.4 million as of October 2, 2021 and $10.4 million pro forma and pro forma as adjusted as of October 2, 2021.

  (E)

In connection with the Reorganization, the membership interests will be reduced to zero to reflect the elimination of all outstanding interests in KC Holdco, LLC and corresponding adjustments will be

 

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  reflected as common stock, additional paid-in capital and total stockholders’ equity which results in no change to Total member’s/stockholders’ equity. See “Capitalization.”

 

(2)

We define working capital as current assets less current liabilities, excluding current portions of long-term debt and operating lease liabilities.

(3)

We define total centers and sites as the number of centers and sites at the beginning of the period plus openings, acquisitions, and re-openings for the period minus any closures, permanent or temporary, for the period. A temporarily closed center or site, sometimes referred to as a “temporary closure,” is a center or site that has ceased operations as of the end of the reporting period, but management intends on recommencing operations at some point in the future. A permanently closed center is a center that has ceased operations as of the end of the reporting period and management does not intend on reopening the center.

(4)

We define Average weekly ECE FTEs as a measure of the number of full-time children enrolled and charged tuition weekly in our centers. We calculate Average weekly ECE FTEs based on weighted averages, for example, an enrolled full-time child equates to one Average weekly ECE FTE, while a child enrolled for three full days equates to 0.6 Average weekly ECE FTE.

(5)

We define ECE same center occupancy as a measure of the utilization of center license capacity for centers that have been operated by us for at least 12 months (“same centers”) and excludes any closed centers. We calculate ECE same center occupancy as the average weekly ECE same center full-time enrollment divided by the total of the ECE same centers’ licensed capacity during the period.

(6)

Adjusted EBITDA, and Adjusted net (loss) income are non-GAAP financial measures. EBIT is defined as net income (loss) adjusted for net interest expense and income tax expense (benefit). EBITDA is defined as EBIT adjusted for depreciation and amortization. Adjusted EBITDA is defined as EBITDA adjusted for COVID-19 related costs, equity-based compensation, management and advisory fee expenses, acquisition-related costs and other costs because these charges do not relate to the core operations of our business. For further information, refer to “Non-GAAP Financial Measures” within the “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We present EBIT, EBITDA and Adjusted EBITDA because we consider them to be important supplemental measures of our performance and believe they are useful to securities analysts, investors and other interested parties. Specifically, Adjusted EBITDA and Adjusted net (loss) income allows for an assessment of our operating performance without the effect of charges that do not relate to the core operations of our business. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in our presentation of Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

There can be no assurance that we will not modify the presentation of Adjusted EBITDA following this offering, and any such modification may be material. In addition, Adjusted EBITDA may not be comparable to similarly titled measures used by other companies in our industry or across different industries.

We believe Adjusted EBITDA is helpful in highlighting trends in our core operating performance compared to other measures, which can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We also use Adjusted EBITDA in connection with establishing discretionary annual incentive compensation; to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies; to make budgeting decisions; to compare our performance against that of other peer companies using similar measures; and because our Credit Facilities use measures similar to Adjusted EBITDA to measure our compliance with certain covenants. We believe Adjusted EBITDA is helpful to investors in highlighting trends in our core operating performance compared to other measures, which can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments.

 

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Adjusted EBITDA has its limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations include:

 

   

Adjusted EBITDA does not reflect our cash expenditure or future requirements for capital expenditures or contractual commitments;

 

   

Adjusted EBITDA does not reflect changes in our cash requirements for our working capital needs;

 

   

Adjusted EBITDA does not reflect the interest expense and the cash requirements necessary to service interest or principal payments on our debt;

 

   

Adjusted EBITDA does not reflect cash requirements for replacement of assets that are being depreciated and amortized;

 

   

Adjusted EBITDA does not reflect non-cash compensation, which is a key element of our overall long-term compensation;

 

   

Adjusted EBITDA does not reflect the impact of certain cash charges or cash receipts resulting from matters we do not find indicative of our ongoing operations; and

 

   

other companies in our industry may calculate Adjusted EBITDA differently than we do.

The following table shows EBIT, EBITDA and Adjusted EBITDA for the periods presented and the reconciliation to its most comparable GAAP measure, net income (loss), for the periods presented:

 

     Nine Months Ended     Fiscal Years Ended  
     October 2,
2021
     September 26,
2020
    January 2,
2021
    December 28,
2019
    December 29,
2018
 

Net income (loss)

   $ 41,482      $ (97,143   $ (129,496   $ (29,141   $ (36,421

Add back:

                                             

Interest expense, net

     72,236        73,222       99,353       102,626       94,097  

Income tax expense (benefit)

     15,046        (34,519     (39,298     (8,088     (11,640
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

EBIT

   $ 128,764      $ (58,440   $ (69,441   $ 65,397     $ 46,036  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Add back:

           

Depreciation and amortization

     61,233        66,504       87,919       99,255       94,708  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 189,997      $ 8,064     $ 18,478     $ 164,652     $ 140,744  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Add back:

           

COVID-19 related costs(a)

     —          2,322       18,809       —         —    

Equity-based compensation(b)

     710        1,316       1,486       3,616       2,234  

Management and advisory fee expenses(c)

     3,648        3,648       4,864       4,865       4,865  

Acquisition related costs(d)

     363        223       236       4,256       6,760  

Other costs(e)

     3,612        644       644       2,360       —    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 198,330      $ 16,217     $ 44,517     $ 179,749     $ 154,603  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net (loss) income

Adjusted net (loss) income is defined as net income (loss) before income tax adjusted for amortization of intangible assets, COVID-19 related costs, equity-based compensation, management and advisory fee expenses, acquisition-related costs and other costs because these charges do not relate to the core operations of our business. We present Adjusted net (loss) income because we consider it to be an important measure used to evaluate our operating performance internally. We believe the use of Adjusted net (loss) income provides

 

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investors with consistency in the evaluation of the Company as it provides a meaningful comparison of past, present and future operating results, as well as a more useful financial comparison to our peers. We believe this supplemental measure can be used to assess the financial performance of our business without regard to certain costs that are not representative of our continuing operations.

The following table shows Adjusted net (loss) income for the periods presented and the reconciliation to its most comparable GAAP measure, net income (loss), for the periods presented:

 

    Nine Months Ended     Fiscal Years Ended  
    October 2,
2021
    September 26,
2020
    January 2,
2021
    December 28,
2019
    December 29,
2018
 

Net income (loss)

  $ 41,482     $ (97,143   $ (129,496   $ (29,141   $ (36,421

Income tax expense (benefit)

    15,046       (34,519     (39,298     (8,088     (11,640
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before income tax:

  $ 56,528     $ (131,662   $ (168,794   $ (37,229   $ (48,061
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Add back:

         

Amortization of intangible assets

    6,530       9,668       11,932       23,056       29,082  

COVID-19 related costs(a)

    —         2,322       18,809       —         —    

Equity-based compensation(b)

    710       1,316       1,486       3,616       2,234  

Management and advisory fee expenses(c)

    3,648       3,648       4,864       4,865       4,865  

Acquisition related costs(d)

    363       223       236       4,256       6,760  

Other costs(e)

    3,612       644       644       2,360       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted income (loss) before income tax

    71,391       (113,841     (130,823     923       (5,120

Adjusted income tax expense (benefit)(f)

    18,990       (29,940     (34,406     (230     (640
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net income (loss):

  $ 52,401     $ (83,901   $ (96,417   $ 1,153     $ (4,480
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Explanation of add backs:

 

(a)

For the nine months ended September 26, 2020, COVID-19 related costs represent non-cash impairment costs for long-lived assets as result of disruption of cash flows caused by the COVID-19 pandemic. For the fiscal year ended January 2, 2021, COVID-19 related costs represent non-cash impairment costs for long-lived assets as result of disruption of cash flows caused by the COVID-19 pandemic and partial impairment of KCE at Work client list intangible assets due to extended remote work environments as a result of COVID-19 and client attrition.

(b)

Represents non-cash stock-based compensation expense in accordance with Accounting Standards Codification Topic 718, Compensation: Stock Compensation.

(c)

Represents amounts incurred for management and advisory fees with related parties in connection with the Services Agreement, which will be terminated in connection with this offering. See “Certain Relationships and Related Party Transactions—Services Agreement.”

(d)

Represents costs incurred in connection with completed acquisitions, including transaction, integration and severance related costs.

(e)

Other costs include professional fees incurred for both contemplated and completed debt and equity transactions as well as costs incurred in connection with this offering.

(f)

The non-GAAP tax rate used to calculate Adjusted net (loss) income was approximately 26.6% and 26.3% for the nine months ended October 2, 2021 and September 26, 2020, respectively. The non-GAAP tax rate used to calculate adjusted net (loss) income was approximately 26.3%, (24.9)% and 12.5% for the fiscal years ended January 2, 2021, December 28, 2019 and December 29, 2018, respectively. The non-GAAP tax rates represent the GAAP tax rate for the period as adjusted by the estimated tax impact of the items adjusted from the measure and excluding non-recurring impacts of tax rate changes and valuation allowances.

 

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RISK FACTORS

You should carefully consider the risks described below, together with all of the other information included in this prospectus, including our consolidated financial statements and related notes included elsewhere in this prospectus, before making an investment decision. Our business, financial condition and results of operations could be materially and adversely affected by any of these risks or uncertainties. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. Furthermore, the potential impact of the COVID-19 pandemic on our business operations and financial results and on the world economy as a whole may heighten the risks described below.

Risks Related to our Business

The COVID-19 pandemic has significantly disrupted our business, financial condition and results of operations and will continue to adversely impact our business.

The COVID-19 pandemic has significantly disrupted our operations. We expect to continue to be impacted as the situation remains dynamic and subject to rapid and potentially material changes. As of October 2, 2021, we operated 1,490 early childhood education centers with a licensed capacity of more than 195,000 children. We also provide before- and after-school educational services for preschool and school-age children in connection with elementary schools. As of October 2, 2021, we offered these services through 639 sites in 23 states and the District of Columbia. While we are focused on the re-enrollment and re-ramping of our centers and sites and continuing the phased re-opening of our centers and sites that remain temporarily closed, the continued or additional disruptions to our business and potential adverse impacts to our business, financial condition and results of operations resulting from the COVID-19 pandemic include, but are not limited to:

 

   

significant changes in the conditions of the markets we operate in, including required school and business closures, stay-at-home mandates or new lockdown orders, limiting our ability to provide our services, especially center-based and site-based childcare, and potentially resulting in continued center and site closures or permanent center or site closures;

 

   

reduced enrollment upon the re-opening of centers and sites and difficulty re-ramping enrollment as families may limit their participation in various public activities and gatherings, including group childcare, or as social distancing protocols and other licensing regulations may reduce group sizes or otherwise affect the overall capacity of children we can serve;

 

   

inability to hire and maintain an adequate level of staff requiring us to reduce enrollment in order to comply with mandated ratios, inability to retain teachers after long periods of furlough, and the impact to our operations if a significant percentage of our workforce is unable to return to work because of illness, quarantine, worker absenteeism, limitations on travel, or government or social distancing restrictions, or difficulty maintaining or retaining staff, which may have a disproportionate impact on our business compared to other companies that depend less on the in-person provision of services;

 

   

periodic classroom closures or temporary center or site closures due to potential exposure to COVID-19, which may impact our reputation or impact parent or client confidence resulting in reduced demand or the adoption of alternative childcare options;

 

   

the length of time before COVID-19 vaccines are available to children or the lack of widespread adoption and acceptance of the vaccines by the general public, including due to side effects from the vaccines or the lack of effectiveness of the vaccines against new variants, all of which may have a disproportionate impact on our business compared to other companies that depend less on the in-person provision of services;

 

   

reduced or shifting demand for our services due to adverse and uncertain economic and demographic conditions, including as a result of families or clients that have been adversely impacted, and/or increased unemployment, continued school and business closures, new lockdown orders, long-term shift to an at-home workforce, and general effects of a broad-based economic recession;

 

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incremental costs associated with mitigating the effects of the COVID-19 pandemic, additional procedures and protocols required to maintain health and safety at our centers and sites, and costs and reputational harm associated with a potential COVID-19 outbreak at our centers and sites, or the failure of compliance with our COVID-19 health and safety protocols;

 

   

a decrease in revenues due to families or clients requesting refunds or renegotiating contracts for reduced or changing services;

 

   

the potential deterioration in the collectability of our existing accounts receivable and a decrease in the generation of new revenue due to the potential diminished financial health of our clients;

 

   

inability to implement our growth strategies due to prolonged business contraction and reduced capital expenditures and cost-saving initiatives;

 

   

delayed re-opening or permanent closure of centers or sites outside of our control due in large part to the interdependence of our operations with our client partners’ operating decisions and requirements as well as decisions by governmental authorities regarding school and business closures and requirements for re-opening;

 

   

legal actions or proceedings related to COVID-19;

 

   

potential asset impairments or write-downs as we review assets impacted as a result of the ongoing COVID-19 pandemic;

 

   

reduction in our liquidity position limiting our ability to service our indebtedness and our future ability to incur additional indebtedness or financing; and

 

   

downgrades to our credit rating by ratings agencies which could reduce our ability to access capital markets.

These factors could place limitations on our ability to operate effectively and could have a material adverse effect on our business, financial condition and results of operations. As the situation continues to evolve and more information and guidance becomes available, we may adjust our current plans, policies and procedures to address the rapidly changing variables related to the COVID-19 pandemic. The COVID-19 pandemic could continue to have a negative impact on our results of operations, the size and duration of which we are currently unable to predict and the volatile conditions stemming from the COVID-19 pandemic, as well as reactions to any resurgences of COVID-19, could also precipitate or aggravate the other risk factors that we identify in this section. Additional impacts may arise of which we are currently not aware, the nature and extent of which will depend on future developments which are highly uncertain and cannot be predicted.

Changes in the demand for childcare and workplace solutions, which may be negatively affected by demographic trends and economic conditions, including unemployment rates, may affect our operating results.

Most of our families are dual-income families or working single parents who require ECE, and we are dependent on this demographic segment to maintain and grow center revenues. As a result, changes in demographic trends, including the number of dual-income or working single parent families in the workforce, inflation, personal disposable income and birth rates may impact the demand for our services. In addition, our strategy also depends on employers recognizing the value in providing employees with childcare, workforce education and other workplace solutions as an employee benefit. The number of employers that view such services as cost effective or beneficial to their workforces may not continue to grow at the levels we anticipate or may diminish. Further, a deterioration of general economic conditions, including rising unemployment, may adversely impact the demand for our services due to the tendency of out-of-work parents to diminish or discontinue utilization of our services. Such changes could materially and adversely affect our business and operating results.

Demand may be adversely affected by general economic conditions or changes in workforce demographics and work-place environments as a result of COVID-19. Uncertainty or a deterioration in economic conditions could

 

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also lead to reduced demand for our services. In addition, a reduction in the size of an employer’s workforce could negatively impact the demand for our services and result in reduced enrollment or failure of our employer clients to renew their contracts. A deterioration of general economic conditions or changes in workforce demographics may adversely impact the need for our services because out-of-work parents may decrease or discontinue the use of childcare services, or be unwilling to pay tuition for high-quality services. Additionally, we may not be able to increase the price for our services at a rate consistent with increases in our operating costs. If demand for our services were to decrease, it could disrupt our operations and have a material adverse effect on our business and operating results.

A permanent shift in workforce demographics and office environments may result in decreased demand for center-based or site-based childcare and have an adverse effect on our results of operations.

During the ongoing COVID-19 pandemic, a substantial portion of the workforce, including parents of children we serve at our centers and sites, transitioned from working in traditional office environments to working in “virtual” or “home” offices. While we expect that many employees will return to traditional office environments once the likelihood of exposure to COVID-19 is significantly reduced, some employers may continue to encourage their employees to maintain a remote or work from home presence or may permanently move all or a portion of their workforce to work remotely. While working parents continue to need childcare regardless of their work location, there are no assurances that parents who work from home will continue to use our centers or sites, or will not require other part-time childcare arrangements that accommodate different working arrangements. Additionally, we believe that as a result of COVID-19, more women have temporarily stepped back from the workforce and that traditional dual-career households may have temporarily decreased. A shift in workplace demographics where employees work from home on a part- or full-time basis, or a sustained decrease in the number of women or dual-career households in the workforce, may reduce demand for center-based or site-based childcare or specific center or site locations as well as other service offerings. We may be unable to successfully meet changed client and parent demands and needs, which may have a material adverse effect on our business or results of operations.

Our business depends largely on our ability to hire and retain qualified teachers and maintain strong employee engagement.

The provision of childcare services is personnel-intensive. Our business depends on our ability to attract, train, and retain the appropriate mix of qualified employees and on effectively implementing and maintaining strong employee engagement, cultivating an atmosphere of trust, and effectively communicating the value proposition of working for us. The childcare industry traditionally has experienced high turnover rates. In addition, state laws require our teachers and other staff members to meet certain educational and other minimum requirements, and we often require that teachers and staff at our centers and sites have additional qualifications. We are also required by state laws to maintain certain prescribed minimum adult-to-child ratios. If we are unable to hire and retain qualified teachers at a center or site, we could be required to reduce enrollment or be prevented from accepting additional enrollment in order to comply with such mandated ratios. In certain markets, we may experience difficulty in attracting, hiring and retaining qualified teachers due to tight labor pools, health concerns and changes in the work environment which may require us to offer increased salaries, enhanced benefits and institute initiatives to maintain strong employee engagement that could result in increased costs. Difficulties in attracting, hiring and retaining qualified personnel may also affect our ability to meet growth objectives in certain geographies and to take advantage of additional enrollment opportunities at our childcare and early education centers and our sites in these markets, which could negatively impact our business. From time to time we may be subject to employee organizing efforts. If some of our employees attempt to unionize, the terms of any collective bargaining agreement may be significantly different from our current compensation arrangements and working conditions. Additionally, responding to such organization attempts could distract our management from performing their various business and operation functions and result in legal or other professional fees. Labor union representation of a material number of our employees could impact our business, financial condition or results of operations as a result of additional labor costs, payroll and benefit expenses, new rules and practices, or work stoppages.

 

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We depend on key management and key employees to manage our business.

Our success depends on the efforts, abilities and continued services of our executive officers and other key employees. We believe future success will depend upon our ability to continue to attract, motivate and retain highly-skilled managerial, sales and marketing, regional and childcare and early education center and site director personnel. Failure to retain our leadership team and attract and retain other important personnel could lead to disruptions in management and operations, which could affect our business and operating results.

Because our success depends substantially on the value of our brands and reputation as a provider of choice, adverse publicity could impact the demand for our services.

Our reputation and brand are critical to our business. Adverse publicity concerning reported incidents or allegations of inappropriate, illegal or harmful acts to a child at any childcare center or site, or through a third-party provider, whether or not directly relating to or involving us, could result in decreased enrollment at our childcare centers or sites, termination of existing corporate relationships, inability to attract new corporate relationships, or increased insurance costs, all of which could adversely affect our operations. Brand value and our reputation can be severely damaged even by isolated incidents, particularly if the incidents receive considerable negative publicity or result in substantial litigation. These incidents may arise from events that are beyond our ability to control, such as instances of abuse or actions taken (or not taken) by one or more center or site managers or teachers relating to the health, safety or welfare of children in our care. In addition, from time to time, clients and others make claims and take legal action against us. Whether or not claims have merit, they may adversely affect our reputation and the demand for our services. Such demand could also diminish significantly if any such incidents or other matters erode general confidence in us or our services, which would likely result in lower revenues and could materially and adversely affect our business and operating results. Any reputational damage could have a material adverse effect on our brand value and our business, which, in turn, could have a material adverse effect on our business, financial condition and results of operations.

Our continued profitability depends on our ability to offset our increased costs, such as labor and related costs, through our families.

Hiring and retaining key employees and qualified personnel, including teachers, is critical to our business. Labor costs constitute our largest expense. Because we are primarily a service business, inflationary factors and regulatory changes that contribute to wage and benefits cost increases result in significant increases in the costs of running our business. We expect to pay employees at rates above the minimum wage, and increases in the statutory minimum wage rates could result in a corresponding increase in the wages and benefits we pay to our employees. From time to time, including following the 2020 U.S. presidential election, legislative proposals are made or discussed to increase the federal minimum wage in the United States as well as the minimum wage in a number of states and municipalities. Additionally, legislative proposals are also made or discussed to reform entitlement programs, such as health insurance and paid leave programs. If any of these proposals are successful resulting in an increase in the federal minimum wage, such an increase could result in an increase in the wages and benefits we pay. Additionally, competition for teachers in certain markets, and costs associated with rehiring and retaining previously furloughed employees, and costs of retraining teachers could result in significant increases in the cost of running our business. Our success depends on our ability to continue to pass along these costs to our families and to meet our changing labor needs while controlling costs. In the event that we cannot increase the price for our services to cover these higher wage and benefit costs without reducing family demand for our services, our margins could be adversely affected, which could have a material adverse effect on our business, financial condition and results of operations as well as our growth.

Our ability to find affordable real estate and renew existing leases on terms acceptable to us may affect our operating results.

Our ability to effectively obtain real estate leases to open new centers depends on the availability of and our ability to identify cost-effective property that meets our criteria for site convenience, demographics, square

 

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footage, lease economics, licensing regulations and other factors. We also must be able to cost effectively negotiate or renew our existing center leases at attractive rental rates. If we cannot renew leases for an appropriate term, it may affect enrollment should parents become concerned with the length of time a center will remain open in a particular location. In addition, in certain markets, we may seek to downsize, consolidate, reposition or close some of our locations, which in some cases requires a modification to an existing center lease. Failure to secure adequate new locations or successfully modify existing leases, or failure to effectively manage rent cost, could have an adverse effect on our business, financial condition and results of operations.

Changes in our relationships with employer sponsors or failure to anticipate and respond to changing client (parents or client employees) preferences and expectations may affect our operating results.

Our contracts with employers for full-service center-based and site-based childcare generally have terms of 10 to 15 years, though some have terms as long as 30 years, with varying terms and renewal and termination options. We have a history of consistent contract renewals, but we may not experience similar renewal rates in the future. Employer sponsors have historically reduced their expenditures for benefits related to family services during economic downturns. The termination or non-renewal of a significant number of contracts or the termination of a multiple-site or multiple-service client relationship could have a material adverse effect on our business, financial condition, results of operations or cash flows. Additionally, our continued success depends on our ability to convert and retain new and existing clients and our ability to develop new consumer-oriented strategies or services to accommodate changing client, learner, or parent expectations and preferences around service delivery. Our future success depends on our ability to continue to meet the evolving needs and expectations of our clients, including enhancing our existing services. Failure to meet these needs may result in client loss and reduced demand and could have a material impact on our financial results.

Our operating results are subject to seasonal fluctuations.

Our revenue and results of operations fluctuate with the seasonal demands for childcare and the other services we provide. Revenue in our childcare centers and sites typically declines during the third quarter due to decreased enrollments over the summer months. We may be unable to adjust our expenses on a short-term basis to minimize the effect of these fluctuations in revenue. Our quarterly results of operations may also fluctuate based upon the number and timing of childcare center and site openings and/or closings, the timing of new client service launches, acquisitions, the performance of new and existing childcare and early education centers and sites, the contractual arrangements under which childcare centers and sites are operated, the change in the mix of such contractual arrangements, competitive factors and general economic conditions. The inability of existing childcare centers or sites to maintain their current enrollment levels and profitability, the failure of newly opened childcare centers or sites to contribute to profitability could result in additional fluctuations in our future operating results on a quarterly or annual basis.

Governmental universal childcare benefit programs could reduce the demand for our services.

Federal, state or local childcare and early education benefit programs relying primarily on subsidies in the form of tuition assistance or tax credits could provide us with opportunities for expansion in new or existing markets. However, a federal, state or local universal benefit such as preschool, if offered primarily or exclusively through public schools or nonprofit entities, could reduce the demand for services at our existing centers or sites and negatively impact the financial and operational model for our remaining programs. Some states and smaller political subdivisions already offer preschool through programs in which we may or may not participate. If these programs were to significantly expand or our participation is reduced, it could have an adverse effect on our business, financial condition or results of operations. President Biden has proposed publicly funded universal preschool for all three- and four-year-olds in partnerships with the states. The initial legislative drafts of the President’s proposal for a new federally funded preschool program allow private, for-profit entities to be eligible for participation, but do not mandate such participation. It is unclear how the proposed legislation will progress in the current political and fiscal climate, or how the states would implement the programs. Public programs have

 

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the ability to either expand or shrink our ability to serve additional children. The amount of public funding, the rates paid for early education programs, our eligibility to be a provider and the terms and conditions of the programs can have either a positive or negative effect on our business, financial condition and results of operations.

Our revenue and profitability may be affected if there are changes in the spending policies or budget priorities for government funding of childcare and education.

A significant portion of our revenue and a portion of reimbursement of center operating expenses are derived from various federal, state and local government programs, including Governmental Stimulus. For example, some of the government programs from which our revenue is derived include programs that provide funding for full or partial subsidies of tuition at our centers, a food program that provides meals for low income families and universal pre-K programs that provide for free pre-kindergarten programs for children ages three and four. When the federal government funds such programs, it directs funds to state and local governments for specified purposes, which purposes may include the programs listed above. When the federal government directs funds to state and local governments, the appropriations processes are often slow and can be unpredictable. Some programs also require our centers to maintain eligibility in order to receive such funding, such as the food program. Programs such as the food program also provide that losing eligibility for the program in one state could also result in losing eligibility in states across the country. Factors such as budget cuts, curtailments, delays, changes in leadership, shifts in priorities, changes in eligibility or general reductions in funding could reduce or delay the funding for government programs.

Our business may be adversely affected by changes in government programs, resulting from changes in legislation, both at the federal and state levels, changes in the state procurement process, changes in government leadership, emergence of other priorities and changes in the condition of the local, state or U.S. economy. Moreover, future reductions in government funding and the state and local tax bases could create an unfavorable environment, leading to budget shortfalls resulting in a decrease in funding for the relevant government programs. Any decreased funding may harm our recurring and new business materially if our clients are not able to find and obtain alternative sources of funding.

We have identified a material weakness in our internal controls over financial reporting and if our remediation of the material weakness is not effective, or if we fail to develop and maintain an effective system of disclosure controls and internal controls over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable laws and regulations could be impaired.

In connection with the preparation of our audited consolidated financial statements included elsewhere in this prospectus, we identified a material weakness in our internal controls over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A “significant deficiency” is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of our financial reporting. We did not design or maintain an effective control environment as we lacked sufficient oversight of activities related to our internal control over financial reporting due to a lack of an appropriate level of experience and training commensurate with public company requirements.

This material weakness was driven by (i) our technology access related environment and lacking a control process over authentication, provisioning, modification, and segregation of duties in user access to prevent or detect unauthorized access to the affected IT systems, (ii) lacking change management controls to ensure that segregation of duties over changes to the affected IT systems was appropriately maintained to prevent the execution of inappropriate or direct changes, and (iii) lack of governance over IT general controls, including oversight of third-party service organizations. These IT deficiencies, when aggregated, could impact effective segregation of duties as well as the effectiveness of IT-dependent controls that could result in misstatements

 

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potentially impacting all financial statement accounts and disclosures that would not be prevented or detected. Accordingly, our management has determined these deficiencies in the aggregate constitute a material weakness.

None of the control deficiencies described above resulted in a material misstatement to our annual consolidated financial statements. However, the material weakness described above could result in a misstatement of one or more account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected, and, accordingly, we determined that these control deficiencies constitute a material weakness.

To address our material weakness, we have added personnel and engaged an external advisor to assist with evaluating and documenting the design and operating effectiveness of our internal controls over financial reporting and assisting with the remediation of deficiencies, including implementing new controls and processes. We intend to continue to take steps to remediate the material weakness described above through hiring additional personnel with public company experience, and further evolving our accounting and business processes related to internal controls over financial reporting. We will not be able to fully remediate this material weakness until these steps have been completed and have been operating effectively for a sufficient period of time.

Furthermore, we cannot assure you that the measures we have taken to date, and actions we may take in the future, will be sufficient to remediate the control deficiencies that led to our material weakness in our internal controls over financial reporting or that they will prevent or avoid potential future material weaknesses. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal controls over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our annual or interim financial statements.

Neither our management nor our independent registered public accounting firm has performed an evaluation of our internal controls over financial reporting in accordance with the SEC rules because no such evaluation has been required. Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal controls over financial reporting until the filing of our second Annual Report on Form 10-K following this offering. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal controls over financial reporting is documented, designed or operating. Any failure to implement and maintain effective internal controls over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal controls over financial reporting that we will eventually be required to include in our periodic reports that are filed with the SEC. Ineffective disclosure controls and procedures and internal controls over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the New York Stock Exchange.

Risks Related to our Capital Structure, Indebtedness and Capital Requirements

We may face risks related to our indebtedness.

Our indebtedness and lease obligations could adversely affect our ability to raise additional capital to fund our operations, limit our flexibility in operating our business, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under the debt instruments. We had $1.4 billion in debt outstanding as of October 2, 2021. We also had $52.7 million available for borrowing under our Credit Facilities, after giving effect to outstanding letters of credit of $62.3 million. As a result, an increase in interest rates could result in a substantial increase in interest expense. In fiscal 2020, our total interest expense was $99.4 million and for the nine months ended October 2, 2021, our total interest expense was $72.2 million.

 

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Our indebtedness and lease obligations could have important consequences to us, including:

 

   

limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions, investments and general corporate or other purposes;

 

   

limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors that are less leveraged;

 

   

increasing our vulnerability to general economic and industry conditions;

 

   

exposing us to the risk of increased interest rates as the borrowings under our Credit Facilities are at variable rates of interest;

 

   

requiring a portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities; and

 

   

making it more difficult for us to satisfy our obligations with respect to our debt, and any failure to comply with the obligations under our debt instruments, including restrictive covenants, could result in an event of default under the agreements governing our indebtedness.

The occurrence of any one of these events could have an adverse effect on our business, financial condition, results of operations and ability to satisfy our obligations under our indebtedness. In addition, we may incur additional indebtedness in the future, subject to the terms of our Credit Facilities, which could magnify the risks that we currently face.

The terms of our Credit Facilities impose operating and financial restrictions on us that may impair our ability to respond to changing barriers and economic conditions.

The agreements governing our Credit Facilities contain a number of restrictive covenants imposing significant operating and financial restrictions on us, including restrictions that may limit our ability to:

 

   

pay dividends on, repurchase, or make distributions in respect of our capital stock or make other restricted payments;

 

   

incur additional indebtedness or issue certain disqualified stock and preferred stock;

 

   

create liens;

 

   

make investments, loans and advances;

 

   

consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;

 

   

enter into certain transactions with our affiliates;

 

   

prepay certain junior indebtedness;

 

   

make certain changes to our lines of business; and

 

   

designate our subsidiaries as unrestricted subsidiaries.

A breach of any of these covenants could result in an event of default under our Credit Facilities and/or other agreements containing cross-default provisions, which could result in our lenders accelerating our debt by declaring amounts outstanding under our debt instruments, including accrued interest, to be immediately due and payable. If we are unable to pay those amounts, the lenders under our Credit Facilities could proceed against the collateral granted to them to the extent such collateral secures such indebtedness. We may not be able to generate sufficient cash to service our indebtedness or satisfy our obligations upon an event of default, and may not be able to refinance any of our indebtedness on commercially reasonable terms or at all.

 

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In addition, our variable rate indebtedness may use LIBOR as a benchmark for establishing the interest rate applicable to the indebtedness. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. On July 27, 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021. The Alternative Reference Rates Committee has proposed the Secured Overnight Financing Rate, or SOFR, as its recommended alternative to LIBOR, and the Federal Reserve Bank of New York began publishing SOFR rates in April 2018. SOFR is intended to be a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities. It is unknown whether SOFR or any potential alternative reference rate will attain market acceptance as replacements for LIBOR and, as such, the potential effect on our results from operations is unknown.

We may require additional capital to meet our financial obligations and support business growth, and this capital may not be available on acceptable terms or at all.

Based on our current plans and market conditions, we believe that cash flows generated from our operations and borrowing capacity under our Credit Facilities will be sufficient to satisfy our anticipated cash requirements in the ordinary course of business for the foreseeable future. However, we intend to continue to make significant investments to support our business growth and may require additional funds to respond to business challenges. Accordingly, we may need to engage in equity or debt financings in addition to our Credit Facilities to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing we secure in the future could include restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business may be harmed.

The growth of our business may be adversely affected if we do not implement our growth strategies and initiatives successfully or if we are unable to manage our growth or operations effectively.

We have expanded and are continuing to expand our operations, suite of services and client relationships, which has placed, and will continue to place, significant demands on our management and our operational, IT and financial infrastructure. Additionally, our ability to grow in the future will depend upon a number of factors, including the ability to develop and expand new and existing client relationships, to continue to provide and expand the high-quality services we offer, to hire and train qualified personnel, to expand and grow in existing and future markets, to develop and operationalize new service offerings, and to sustain our operations, growth and efficiencies. Achieving and sustaining growth requires the successful execution of our growth strategies, which may require the implementation of enhancements to client-facing, operational and financial systems, expanded sales and marketing capacity, continuous updates to technology and improvements to processes and systems, and additional or new organizational resources. Given these challenges, we may be unable to manage our expanding operations effectively, or to maintain our growth, which could have a material adverse effect on our business or results of operations.

Acquisitions present many risks and may disrupt our operations. We also may not realize the financial and strategic goals that were contemplated at the time of the transaction.

Acquisitions are an integral part of our growth strategy and we have made, and intend to continue to make, acquisitions to add centers or sites, clients or expand into new markets, which may potentially include markets outside of the United States. We may also consider new service offerings and complementary companies,

 

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products, or technologies, and from time to time may enter into other strategic transactions, such as investments and joint ventures. Acquisitions involve numerous risks, including potential difficulties in the integration of acquired operations, such as bringing new centers or sites through the re-licensing or accreditation processes, successfully implementing our curriculum programs, integration of systems and technology, diversion of management’s attention and resources in connection with an acquisition and its integration, loss of key employees or key service contract arrangements of the acquired operations, and failure of acquired operations to effectively and timely adopt our internal control processes and other policies. Additionally, the acquisition of new service offerings or emerging services may present operational and integration challenges, particularly with respect to companies that have significant or complex operations or that provide services where we do not have significant prior experience. With any acquisition, the financial and strategic goals that were contemplated at the time of the transaction may not be realized due to increased costs, undisclosed liabilities not covered by insurance or by the terms of the acquisition, write-offs or impairment charges relating to goodwill and other intangible assets, and other unexpected integration costs. We also may not have success in identifying, executing and integrating acquisitions in the future. The occurrence of any of these risks could have an impact on our business, results of operations, financial condition or cash flows, particularly in the event of a larger acquisition or concurrent acquisitions.

Significant competition in our industry could adversely affect our results of operations.

We compete for enrollment in our early education centers and sites in a highly-fragmented market, including residential-based childcare operated out of the caregiver’s home and other center-based childcare that may include work-site childcare centers, full- and part-time childcare centers and preschools, private and public elementary schools and church-affiliated, government-subsidized and other not-for-profit providers and schools. In addition, alternatives to organized childcare, such as relatives and nannies caring for children, can represent lower cost options to our services. We are often at a price disadvantage with alternative providers, who operate with little or no rental expense, little or no curriculum expense and who may not be compelled to comply with the same health, safety, insurance and operational regulations. We believe that our ability to compete successfully depends on a number of factors, including qualifications of teachers, quality of care, quality of curriculum, center accreditation, site convenience and tuition pricing. Our inability to remain competitive could cause decreased enrollment, reduced tuition revenues and/or increased expenses relative to net revenue, which may have an adverse effect on our business, financial condition and results of operations.

We are a holding company with no operations of our own, and we depend on our subsidiaries for cash.

We are a holding company and do not have any material assets or operations other than ownership of equity interests of our subsidiaries. Our operations are conducted almost entirely through our subsidiaries, and our ability to generate cash to meet our obligations or to pay dividends, if any, is highly dependent on the earnings of, and receipt of funds from, our subsidiaries through dividends or intercompany loans. The ability of our subsidiaries to generate sufficient cash flow from operations to allow us and them to make scheduled payments on our debt obligations will depend on their future financial performance, which will be affected by a range of economic, competitive and business factors, many of which are outside of our control.

Risks Related to Intellectual Property, Information Technology and Data Privacy

If we are unable to adequately protect our intellectual property rights, our business, financial condition and results of operations may be materially and adversely affected.

Our success depends in large part on our ability to protect our intellectual property rights, including those rights in our brands and our ability to build and maintain brand loyalty. Our company’s brands (including name, logo, domain name, and trademark rights thereto), and our curriculum (including copyrights therein) are valuable assets that serve to differentiate us from our competitors. We currently rely on a combination of trademark, patent, copyright, trade secrets and unfair competition laws, as well as confidentiality and license agreements and

 

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other contractual provisions, to establish and protect our intellectual property rights. These laws are subject to change at any time and certain agreements may not be fully enforceable, which could restrict our ability to protect our intellectual property rights, including our brands and curriculum. Such means also may afford only limited protection of our intellectual property rights and we cannot assure you that the steps taken by us to protect our intellectual property rights will be adequate to: (i) prevent or deter infringement, misappropriation or other violation of our trademarks, copyrights or other intellectual property rights by others; (ii) prevent others from independently developing services similar to, or duplicative of, ours; or (iii) permit us to gain or maintain a competitive advantage.

We generally seek or apply for similar statutory protections as and if we deem appropriate, based on then-current facts and circumstances. We cannot guarantee that we will be able to secure additional intellectual property rights as we expand our services and geographic scope and there can be no assurance that any of our existing intellectual property rights will not be challenged, invalidated, circumvented or rendered unenforceable. If we fail to obtain additional intellectual property rights or our existing intellectual property rights are rendered invalid or unenforceable, or narrowed in scope, the coverage of such intellectual property rights afforded our brands and services could be impaired. Such impairment could impede our ability to market our services, negatively affect our competitive position and harm our business and operating results.

The unauthorized use, infringement, misappropriation or other violation of our intellectual property could damage our brand identity and the goodwill we have created for our company, which could cause our sales to decline. We cannot guarantee that the operation of our business does not, and will not in the future, infringe, misappropriate or violate the rights of third parties, and from time to time we may be subject to claims of infringement, misappropriation or other violation of intellectual property rights and related litigation. Litigation may also be necessary to protect or enforce our intellectual property rights, or to defend against third-party claims. Any such litigation, regardless of merit, is inherently uncertain and can be time-consuming and result in substantial costs and diversion of our resources, causing a material and adverse effect on our business, financial condition and results of operations. If we cannot protect our intellectual property rights, our brand identity and the goodwill we created for our company may diminish, causing our sales to decline. If we are found to infringe, misappropriate or violate the rights of a third-party, we may be forced to stop offering, or to rebrand or redesign, certain products or services, to pay damages or royalties, and to enter into licensing agreements, which may not be available on commercially reasonable terms, or at all.

Intellectual property protection in jurisdictions outside of the United States may not be available to the same extent as in the United States and filing, prosecuting and defending our intellectual property in all countries throughout the world may be prohibitively expensive. The lack of adequate legal protections of intellectual property or failure of legal remedies for related actions in jurisdictions outside of the United States could have an adverse effect on our business, financial condition and results of operations, including materially and adversely affecting our identity in the United States and cause our sales to decline.

We rely significantly on the use of information technology, as well as those of our third-party service providers. Any significant failure, inadequacy, interruption or data security incident of our information technology systems, or those of our third-party service providers, could disrupt our business operations, which could have a material adverse effect on our business, prospects, results of operations, financial condition and/or cash flows.

We rely extensively on various information technology systems, including data centers, hardware and software and applications to manage many aspects of our business and the success of our operations depends upon the secure transmission of confidential and personal information over public networks, including the use of cashless payments. In particular, we are heavily dependent upon our mobile application and website platform as a means of growing user engagement and perception of our brand. Our mobile application is hosted by a third-party and supported by another outside development firm. In addition, kindercare.com, our website platform, is hosted on an Infrastructure-as-a-Service solution provided to us by a third-party’s cloud platform. Any compromises,

 

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shutdowns, failures or interruption of our mobile application, website hosting platform, payment processing application, or any of our computer and information technology systems, incidents or failures experienced by our third-party service providers including any of our computer and information technology systems managed thereby, could intentionally or inadvertently lead to delays in our business operations or harm our ability to serve our clients and families through these channels, which could adversely affect our business, prospects, results of operations, financial condition and/or cash flows.

Our information technology systems may be subject to damage or interruption from telecommunications problems, data corruption, software errors, fire, flood, global pandemics and natural disasters, power outages, systems disruptions, system conversions, and/or human error. Our existing safety systems, data backup, access protection, user management and information technology emergency planning may not be sufficient to prevent data loss or long-term network outages. In addition, we may have to upgrade our existing information technology systems or choose to incorporate new technology systems from time to time in order for such systems to support the increasing needs of our expanding business. Costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology or with maintenance or adequate support of existing systems could disrupt or reduce the efficiency of our operations.

In addition, as part of our normal business activities, we collect and store certain confidential information, including personal information with respect to clients and employees, as well as information related to intellectual property, and the success of our business depends on the secure transmission of confidential and personal data over public networks, including the use of cashless payments. We may share some of this information with third-party service providers who assist us with certain aspects of our business. Any failure on the part of us or our third-party service providers to maintain the security of this confidential data and personal information, including via the penetration of our network security (or those of our third-party service providers) and the misappropriation of confidential and personal information, could result in business disruption, damage to our reputation, financial obligations to third parties, fines, penalties, regulatory proceedings and private litigation, any or all of which could result in the Company incurring potentially substantial costs. Such events could also result in the deterioration of confidence in the Company by employees and clients and cause other competitive disadvantages.

Security incidents compromising the confidentiality, integrity, and availability of our confidential or personal information and our and our third-party service providers’ information technology systems could result from cyber-attacks, computer malware, viruses, social engineering (including spear phishing and ransomware attacks), credential stuffing, supply chain attacks, efforts by individuals or groups of hackers and sophisticated organizations, including state-sponsored organizations, errors or malfeasance of our personnel, and security vulnerabilities in the software or systems on which we and our third-party service providers rely. The techniques used by criminals to obtain unauthorized access to systems or sensitive data change frequently, are constantly evolving and often are not recognized until after being launched against a target, and accordingly, we may be unable to anticipate these techniques or implement adequate preventative measures and there may be a significant delay between the initiation of an attack on our information technology systems and our recognition of the attack. Thus, a disruption, cyberattack or other security breach of our information technology systems or infrastructure, or those of our third-party service providers, may go undetected for an extended period and could result in the theft, transfer, unauthorized access to, disclosure, modification, misuse, loss or destruction of our employee, representative, client, vendor, consumer and/or other third-party data, including sensitive or confidential data, personal information and/or intellectual property. While we have taken measures designed to protect the security of the confidential and personal information under our control, we cannot assure you that any security measures that we or our third-party service providers have implemented will be effective against current or future security threats.

Additionally, new or changing risk profiles related to data security could require that we expend significant additional resources to enhance our information security systems. Several recent, highly publicized data security breaches at other companies have heightened consumer awareness of this issue and may embolden individuals or

 

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groups to target our systems or those of third parties with which we do business. In addition, our information systems are a target of cyberattacks, although the incidents that we have experienced to date have not had a material effect. If we suffer a material loss or disclosure of personal or confidential information as a result of a breach of our information technology systems, including those of our third-party service providers, we may suffer reputational, competitive and/or business harm, incur significant costs and be subject to government investigations, litigation, fines and/or damages, which could have a material adverse effect on our business, prospects, results of operations, financial condition and/or cash flows. Moreover, while we maintain cyber insurance that may help provide coverage for these types of incidents, we cannot assure you that our insurance will be adequate to cover costs and liabilities related to these incidents.

Any failure on the part of us or third parties with which we do business to maintain the security of our personal, sensitive, or confidential data, including via the penetration of our network and the misappropriation of confidential and personal information, as well as a failure to promptly remedy any security incidents events should they occur, could compromise our systems, and the information stored in our systems could be accessed, publicly disclosed, lost, stolen, or damaged. Any such circumstance could adversely affect our ability to attract and maintain clients, cause us to suffer negative publicity, and subject us to legal claims and liabilities or regulatory penalties or cause us to suffer competitive disadvantages, and thus have a material and adverse impact on us. Investigations into a data breach, including how it occurred, its consequences and our responses, by state and federal agencies could, among other adverse outcomes, lead to fines, other monetary relief and/or injunctive relief that could materially increase our data security costs, adversely impact how we operate our information systems and collect and use client information, and put us at a competitive disadvantage with other retailers. For example, as discussed below, the CCPA creates a private right of action for certain data breaches. Further, defending a suit, regardless of its merit, could be costly, divert management attention and harm our reputation. The successful assertion of one or more large claims against us could adversely affect our reputation, business, financial condition, revenues, results of operations or cash flows. Furthermore, payment card networks with payment cards impacted by a data breach may pursue claims against us, either directly or through our acquiring banks. Finally, any material disruption or slowdown of our systems or those of our third-party service providers and business partners, could have a material adverse effect on our business, financial condition, and results of operations.

Our collection, use, storage, disclosure, transfer and other processing of personal information could give rise to significant costs and liabilities, including as a result of governmental regulation, uncertain or inconsistent interpretation and enforcement of legal requirements or differing views of personal privacy rights, which may have a material adverse effect on our reputation, business, financial condition and results of operations.

As part of our normal business activities, we collect, use, store, process, and transmit personal information with respect to our clients and their families and our team members. We share some of this personal information with vendors who assist us with certain aspects of our business. A variety of federal and state laws, regulations industry self-regulatory principles, industry standards or codes of conduct, and regulatory guidance, relating to privacy, data protection, marketing and advertising, and consumer protection apply to the collection, use, retention, protection, disclosure, transfer and other processing of certain types of data. These requirements of such laws, regulations, industry self-regulatory principles, industry standards or codes of conduct, and regulatory guidance may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another or may conflict with other rules or our practices. As a result, our practices may not have complied in the past, or may not comply in the future, with all such laws, regulations, standards, requirements and obligations. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any federal or state privacy or consumer protection-related laws, regulations, industry self-regulatory principles, industry standards or codes of conduct, regulatory guidance, or orders to which we may be subject or other legal obligations relating to privacy or consumer protection could adversely affect our reputation, brand and business, and may result in claims, fines, penalties, proceedings or actions against us by governmental entities, clients, suppliers or others or other liabilities or may require us to change our operations and/or cease using certain data.

 

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In addition, various federal and state legislative and regulatory bodies, or self-regulatory organizations, may expand current laws or regulations, enact new laws or regulations or issue revised rules or guidance regarding privacy, data protection, consumer protection, and advertising, and as the regulatory environment related to information security, data collection and use, and privacy becomes increasingly rigorous, with new and changing requirements applicable to our business. For example, the California Consumer Privacy Act (“CCPA”), which came into effect in 2020, increases privacy rights for California consumers and imposes obligations on companies that process their personal information. Among other things, the CCPA gives California consumers expanded rights related to their personal information, including the right to access and delete their personal information and receive detailed information about how their personal information is used and shared. The CCPA also provides California consumers the right to opt-out of certain sales of personal information and may restrict the use of cookies and similar technologies for advertising purposes. The CCPA prohibits discrimination against individuals who exercise their privacy rights, and provides for civil penalties for violations enforceable by the California Attorney General as well as a private right of action for certain data breaches that result in the loss of personal information. This private right of action is expected to increase the likelihood of, and risks associated with, data breach litigation. Many of the CCPA’s requirements as applied to personal information of a business’s personnel and related individuals are subject to a moratorium set to expire on January 1, 2023. The expiration of the moratorium may increase our compliance costs and our exposure to public and regulatory scrutiny, costly litigation, fines and penalties. Additionally, in November 2020, California passed the California Privacy Rights Act (the “CPRA”), which expands the CCPA significantly, including by expanding California consumers’ rights with respect to certain personal information and creating a new state agency to oversee implementation and enforcement efforts, potentially resulting in further uncertainty and requiring us to incur additional costs and expenses in an effort to comply. Many of the CPRA’s provisions will become effective on January 1, 2023. The costs of compliance with, and the other burdens imposed by, these and other laws or regulatory actions may increase our operational costs, and/or result in interruptions or delays in the availability of systems. Most recently, Virginia passed the Virginia Consumer Data Protection Act, applicable to companies collecting personal information of more than 100,000 Virginia residents, which could further impact our compliance burden. We expect that there will continue to be new proposed laws and regulations concerning data privacy and security in the United States. We cannot yet determine the impact such future laws, regulations and standards may have on our business or operations and the enactment of such laws could have potentially conflicting requirements that would make compliance challenging.

Our communications with our clients are subject to certain laws and regulations, including the Controlling the Assault of Non-Solicited Pornography and Marketing (“CAN-SPAM”) Act of 2003, the Telephone Consumer Protection Act of 1991 (the “TCPA”), and the Telemarketing Sales Rule and analogous state laws, that could expose us to significant damages awards, fines and other penalties that could materially impact our business. For example, the TCPA imposes various consumer consent requirements and other restrictions in connection with certain telemarketing activity and other communication with consumers by phone, fax or text message. The CAN-SPAM Act and the Telemarketing Sales Rule and analogous state laws also impose various restrictions on marketing conducted use of email, telephone, fax or text message. As laws and regulations, including FTC enforcement, rapidly evolve to govern the use of these communications and marketing platforms, the failure by us, our employees or third parties acting at our direction to abide by applicable laws and regulations could adversely impact our business, financial condition and results of operations or subject us to fines or other penalties.

We are also subject to the Children’s Online Privacy Protection Act, or COPPA, which applies to operators of commercial websites and online services directed to U.S. children under the age of 13 that collect personal information from children, and to operators of general audience websites with actual knowledge that they are collecting information from U.S. children under the age of 13. We collect certain personal information about children from their parents or guardians. COPPA is subject to interpretation by courts and other governmental authorities, including the FTC, and the FTC is authorized to promulgate, and has promulgated, revisions to regulations implementing provisions of COPPA, and provides non-binding interpretive guidance regarding COPPA that changes periodically with little or no public notice. Although we strive to ensure that our business

 

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and mobile application are compliant with applicable COPPA provisions, these provisions may be modified, interpreted, or applied in new manners that we may be unable to anticipate or prepare for appropriately, and we may incur substantial costs or expenses in attempting to modify our systems, platform, applications, or other technology to address changes in COPPA or interpretations thereof. If we fail to accurately anticipate the application, interpretation or legislative expansion of COPPA we could be subject to governmental enforcement actions, litigation, fines and penalties or adverse publicity and we could be in breach of our clients contracts and our clients could lose trust in us, which could harm our reputation and business.

Further, some laws may require us to notify governmental authorities and/or affected individuals of data breaches involving certain personal information or other unauthorized or inadvertent access to or disclosure of such information. We may need to notify governmental authorities and affected individuals with respect to such incidents. For example, laws in all 50 U.S. states may require businesses to provide notice to consumers whose personal information has been disclosed as a result of a data breach. These laws are not consistent, and compliance in the event of a widespread data breach may be difficult and costly. We also may be contractually required to notify consumers or other counterparties of a security breach. Regardless of our contractual protections, any actual or perceived security breach or breach of our contractual obligations could harm our reputation and brand, expose us to potential liability or require us to expend significant resources on data security and in responding to any such actual or perceived breach.

In addition to government regulation, privacy advocates and industry groups have proposed, and may propose in the future, self-regulatory standards. These and other industry standards may legally or contractually apply to us, or we may elect to comply with such standards. If we fail to comply with these contractual obligations or standards, we may face substantial liability or fines.

We make public statements about our use and disclosure of personal information through our privacy policies that are posted on our websites. The publication of our privacy policies and other statements that provide promises and assurances about data privacy and security can subject us to potential government or legal action if they are found to be deceptive, unfair or misrepresentative of our actual practices.

In addition, the FTC expects a company’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities. Our failure to take any steps perceived by the FTC as appropriate to protect clients’ personal information may result in claims by the FTC that we have engaged in unfair or deceptive acts or practices in violation of Section 5(a) of the FTC Act. State consumer protection laws provide similar causes of action for unfair or deceptive practices for alleged privacy, data protection and data security violations.

Further, we are subject to the Payment Card Industry Data Security Standard (“PCI-DSS”), a security standard applicable to companies that collect, store or transmit certain data regarding credit and debit cards, holders and transactions. We rely on vendors to handle PCI-DSS matters and to ensure PCI-DSS compliance. Despite our compliance efforts, we may become subject to claims that we have violated the PCI-DSS based on past, present, and future business practices. Our actual or perceived failure to comply with the PCI-DSS can subject us to fines, termination of banking relationships, and increased transaction fees. In addition, there is no guarantee that PCI-DSS compliance will prevent illegal or improper use of our payment systems or the theft, loss or misuse of payment card data or transaction information.

Each privacy, security, and data protection law and regulation, and any changes or new laws or regulations, could impose significant limitations, require changes to our business, or restrict our use or storage of personal information, which may increase our compliance expenses and make our business more costly or less efficient to conduct and failure to comply with such laws and regulations could result in significant penalties and damages, each of which could materially and adversely affect our reputation, business, financial condition and results of operations.

 

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Use and storage of paper records increases risk of loss, destruction and could increase human error with respect to documentation.

We continue to rely on the use paper records, which are initially stored onsite at our centers. Paper records are more susceptible to human error both in terms of accurately capturing client information, as well as with respect to misplacing or losing the same. There is no duplicate or backup copy of the paper records and in the event of a flood, fire, theft, or other adverse event, the records, and all relevant client information or information about our clients’ families could be lost or destroyed. Paper records do not allow for a number of the benefits of electronic records systems, including features designed to improve privacy, security, accuracy and accessibility of such records. This may create more risk for us to the extent it could lead to breaches of client privacy.

We are subject to payment-related risks that may result in higher operating costs or the inability to process payments, either of which could harm our brand, reputation, business, financial condition and results of operations.

We accept payments using a variety of methods, including check, credit card, debit card and direct debit from a client’s bank account. For existing and future payment options that we offer to our clients, we may become subject to additional regulations and compliance requirements (including obligations to implement enhanced authentication processes that could result in significant costs and reduce the ease of use of our payment options), as well as fraud. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We rely on independent service providers to provide certain payment processing services, including the processing of credit cards, debit cards and electronic checks. If these independent service providers become unwilling or unable to provide these services to us or if the cost of using these providers increases, our business could be harmed. We also are subject to payment card association operating rules, including data security rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. In particular, we must comply with the PCI-DSS, a set of requirements designed to ensure that all companies that process, store or transmit payment card information maintain a secure environment to protect cardholder data. If we fail to comply with any of these rules or requirements, or if our data security systems are breached or compromised, we may be liable for card-issuing banks’ costs, subject to fines and higher transaction fees, and lose our ability to accept credit and debit card payments from our clients, process electronic funds transfers or facilitate other types of online payments and our brand, reputation, business, financial condition and results of operations could be materially and adversely affected.

Certain estimates of market opportunity and forecasts of market growth included in this prospectus may prove to be inaccurate.

This prospectus includes our internal estimates of the addressable market for our solutions. Market opportunity estimates and growth forecasts, whether obtained from third-party sources or developed internally, are subject to significant uncertainty and are based on assumptions and estimates that may prove to be inaccurate. This is especially so at the present time due to the uncertain and rapidly changing projections of the severity, magnitude and duration of the COVID-19 pandemic. The estimates and forecasts in this prospectus relating to the size and expected growth of our target market, market demand and adoption, capacity to address this demand and pricing may also prove to be inaccurate. In particular, our estimates regarding our current and projected market opportunity are difficult to predict. The addressable market we estimate may not materialize for many years, if ever, even if the markets in which we compete meet the size estimates and growth forecasted in this prospectus, our business could fail to grow at similar rates, if at all.

 

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Risks Related to our Common Stock and this Offering

There is no existing market for our common stock and we do not know if one will develop to provide you with adequate liquidity. If our stock price fluctuates after this offering, you could lose a significant part of your investment.

Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which investor interest in us will lead to the development of a trading market on the New York Stock Exchange, or otherwise or how active and liquid that market may come to be. If an active trading market does not develop, you may have difficulty selling any of the common stock that you buy.

Negotiations between us and the underwriters will determine the initial public offering price for our common stock, which may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell our common stock at prices equal to or greater than the price you paid in this offering. The market price of our common stock may be influenced by many factors including:

 

   

variations in our operating results compared to market expectations or any guidance given by us, or changes in our guidance or guidance practices;

 

   

changes in the preferences of our clients or families;

 

   

low total comparable sales growth and gross margins compared to market expectations;

 

   

the failure of securities analysts to cover us after this offering or changes in financial estimates by the analysts who cover us, our competitors or our industry;

 

   

economic, legal and regulatory factors unrelated to our performance;

 

   

changes in consumer spending or the economy;

 

   

increased competition or stock price performance of our competitors;

 

   

strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments, or changes in business strategy;

 

   

actual or anticipated variations in our or our competitors’ operating results, and our competitors’ growth rates;

 

   

future sales of our common stock or the perception that such sales may occur;

 

   

changes in senior management or key personnel;

 

   

changes in laws or regulations, or new interpretations or applications of laws and regulations that are applicable to our business; lawsuits, enforcement actions and other claims by third parties or governmental authorities;

 

   

action by institutional stockholders or other large stockholders;

 

   

events beyond our control, such as war, terrorist attacks, natural disasters, severe weather and widespread illness or pandemics, including developments relating to the COVID-19 pandemic; and

 

   

the other factors listed in this “Risk Factors” section.

As a result of these factors, investors in our common stock may not be able to resell their shares at or above the initial offering price. In addition, our stock price may be volatile. The stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies like us. Accordingly, these broad market fluctuations, as well as general economic, political and market conditions, such as recessions or interest rate changes, may significantly reduce the market price of the common stock, regardless of our operating performance. In the past, following periods of market volatility, stockholders have instituted securities class action litigation. If we were to become involved in securities litigation, it could result in substantial costs and divert resources and our management’s attention from other business concerns, regardless of the outcome of such litigation.

 

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Because PG owns a significant percentage of our common stock, it may control all major corporate decisions and its interests may conflict with your interests as an owner of our common stock and our interests.

We are controlled by PG, which, pro forma for the Reorganization, owns 89.7% of our common stock and will own approximately 74.7% after the consummation of this offering and the redemption of $42.6 million of common stock as described in “Use of Proceeds.” Accordingly, PG currently controls the election of our directors and could exercise a controlling interest over our business, affairs and policies, including the appointment of our management and the entering into of business combinations or dispositions and other corporate transactions. The directors PG elects have the authority to incur additional debt, issue or repurchase stock, declare dividends and make other decisions that could be detrimental to stockholders. In addition, following the Reorganization and in connection with this offering, we will enter into the Stockholders Agreement with PG and certain of our other existing stockholders. Accordingly, following this offering, PG will have specified board representation rights, governance rights and other rights, including PG having the right to nominate designees to our board of directors on a sliding scale based on PG’s ownership of our common stock. See “Management—Composition of the Board of Directors after this Offering.” Even if PG were to own or control less than a majority of our total outstanding shares of common stock, it will be able to influence the outcome of corporate actions so long as it owns a significant portion of our total outstanding shares of common stock.

PG may have interests that are different from yours and may vote in a way with which you disagree and that may be adverse to your interests. In addition, PG’s concentration of ownership could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which could cause the market price of our common stock to decline or prevent our stockholders from realizing a premium over the market price for their common stock.

Additionally, PG is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us or supply us with goods and services. PG may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. Stockholders should consider that the interests of PG may differ from their interests in material respects.

We are a “controlled company” within the meaning of the rules and, as a result, will qualify for, and may rely on, exemptions from certain corporate governance requirements.

Following the consummation of this offering, PG will continue to control a majority of our outstanding common stock. As a result, we expect to be a “controlled company” within the meaning of the New York Stock Exchange corporate governance standards. A company of which more than 50% of the voting power is held by an individual, a group or another company is a “controlled company” within the meaning of the New York Stock Exchange rules and may elect not to comply with certain corporate governance requirements of the New York Stock Exchange, including:

 

   

the requirement that a majority of our board of directors consist of independent directors;

 

   

the requirement that we have a nominating/corporate governance committee that is comprised entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

the requirement that we have a compensation committee that is comprised entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.

Following this offering, while we do not intend to utilize the exemptions listed above, we may from time to time utilize one or more of these exemptions. If we do utilize the exemptions, our board of directors and those committees may have more directors who do not meet the New York Stock Exchange’s independence standards than they would if those standards were to apply. The independence standards are intended to ensure that

 

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directors who meet those standards are free of any conflicting interest that could influence their actions as directors. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the New York Stock Exchange.

Sales of a substantial number of shares of our common stock in the public market by our existing stockholders could cause our stock price to fall.

Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. Substantially all of our existing stockholders are subject to lock-up agreements with the underwriters of this offering that restrict the stockholders’ ability to transfer shares of our common stock for 180 days from the date of this prospectus, subject to certain exceptions. The lock-up agreements limit the number of shares of common stock that may be sold immediately following the public offering. After this offering and the redemption of $42.6 million of common stock as described in “Use of Proceeds,” we will have 140,880,006 outstanding shares of common stock based on the number of shares outstanding. Subject to limitations, 115,104,572 shares will become eligible for sale upon expiration of the lock-up period, as calculated and described in more detail in the section entitled “Shares Eligible for Future Sale.” In addition, none of the shares issued or issuable upon exercise of options vested as of the expiration of the lock-up period will be eligible for sale at that time. Further, the representatives of the underwriters may, in their sole discretion, release all or some portion of the shares subject to the lock-up agreements at any time and for any reason. See “Shares Eligible for Future Sale” for more information. Sales of a substantial number of such shares upon expiration of the lock-up agreements, the perception that such sales may occur, or early release of these agreements, could have a material and adverse effect on the trading price of our common stock.

Moreover, after this offering, holders of 80.1% of our outstanding common stock will have rights pursuant to the Stockholders Agreement, subject to certain conditions such as the 180-day lock-up arrangement described above, to require us to file registration statements for the public sale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. Registration of these shares under the Securities Act, except for shares held by our affiliates as defined in Rule 144 under the Securities Act. Any sales of securities by these stockholders could have a material and adverse effect on the trading price of our common stock.

You will incur immediate dilution as a result of this offering.

If you purchase common stock in this offering, you will pay more for your shares than the amounts paid by existing stockholders for their shares. As a result, you will incur immediate dilution of $25.40 per share, representing the difference between the assumed initial public offering price of $19.50 per share (the midpoint of the estimated initial public offering price range set forth on the cover of this prospectus) and our as adjusted net tangible book value (deficit) per share after giving effect to this offering. Additionally, pursuant to our bylaws, our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon the exercise of options, or shares of our authorized but unissued preferred stock. Issuances of common stock or voting preferred stock would reduce your influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, would likely result in your interest in us being subject to the prior rights of holders of that preferred stock. See “Dilution.”

We may allocate the net proceeds from this offering in ways that you and other stockholders may not approve.

We intend to use the net proceeds from this offering, including any net proceeds from the underwriters’ exercise of the option to purchase additional shares from us, to (i) repay all $56.3 million of our outstanding First Lien Notes, repay all $210.0 million of the loans outstanding under our Second Lien Facility and then repay $151.9 million of the loans outstanding under the First Lien Term Loan Facility, (ii) redeem $42.6 million of the shares of common stock received by members of management from vested Class B units of

 

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KC Parent, LLC in connection with the Reorganization and (iii) pay fees and expenses in connection with this offering. We intend to use the remainder, if any, of the net proceeds to us from this offering for general corporate purposes.

To the extent the net proceeds from this offering are used for general corporate purposes, our management will have broad discretion in the application of the net proceeds from this offering. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. Our management might not apply our net proceeds in ways that ultimately increase the value of your investment, and the failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government. These investments may not yield a favorable return to our stockholders. If we do not invest or apply the net proceeds from this offering in ways that enhance shareholder value, we may fail to achieve expected results, which could cause our stock price to decline.

We may change our dividend policy at any time.

Following this offering we intend to retain any future earnings and do not anticipate declaring or paying any cash dividends in the foreseeable future. Our dividend policy may change at any time without notice. The declaration and amount of any future dividends is subject to the discretion of our board of directors in determining whether dividends are in the best interest of our stockholders based on our financial performance and other factors and are in compliance with all laws and agreements applicable to the declaration and payment of cash dividends by us. In addition, our ability to pay dividends on our common stock is currently limited by the covenants of our Credit Facilities and may be further restricted by the terms of any future debt or preferred securities. See “Dividend Policy.” Future dividends may also be affected by factors that our board of directors deems relevant, including our potential future capital requirements for investments, legal risks, changes in tax laws or corporate laws and contractual restrictions such as financial or operating covenants in our debt arrangements. As a result, we may not pay dividends at any rate or at all.

Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our certificate of incorporation and our bylaws, provisions of the DGCL and the Stockholders Agreement could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions include:

 

   

establishing a classified board of directors such that not all members of the board are elected at one time;

 

   

allowing the total number of directors to be determined exclusively (subject to the rights of holders of any series of preferred stock to elect additional directors) by resolution of our board of directors and granting to our board the sole power (subject to the rights of holders of any series of preferred stock or rights granted pursuant to the Stockholders Agreement) to fill any vacancy on the board;

 

   

providing that directors may only be removed for cause and only by the affirmative vote of at least two-thirds of the confirmed voting power of our stock entitled to vote in the election of directors;

 

   

authorizing the issuance of “blank check” preferred stock by our board of directors, without further shareholder approval, to thwart a takeover attempt;

 

   

prohibiting stockholder action by written consent (and, thus, requiring that all stockholder actions be taken at a meeting of our stockholders), if PG ceases to own, in the aggregate, more than 50% of the voting power of our stock entitled to vote generally in the election of directors;

 

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eliminating the ability of stockholders to call a special meeting of stockholders, except for PG, so long as PG owns, or in the aggregate, at least 25% of the voting power of our stock entitled to vote generally in the election of directors;

 

   

establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at annual stockholder meetings; and

 

   

requiring the approval of the holders of at least two-thirds of the voting power of all outstanding stock entitled to vote thereon, voting together as a single class, to amend or repeal our certificate of incorporation or bylaws during the seven-year period following the consummation of this offering if PG ceases to own, in the aggregate, more than 50% of the voting power of our stock entitled to vote generally in the election of directors.

In addition, while we have opted out of Section 203 of the DGCL, our certificate of incorporation contains similar provisions providing that we may not engage in certain “business combinations” with any “interested stockholder” for a three-year period following the time that the shareholder became an interested stockholder, unless:

 

   

prior to such time, our board of directors approved either the business combination or the transaction that resulted in the shareholder becoming an interested stockholder;

 

   

upon consummation of the transaction that resulted in the shareholder becoming an interested stockholder, the interested stockholder owned at least 85% of our voting stock outstanding at the time the transaction commenced, excluding certain shares; or

 

   

at or subsequent to that time, the business combination is approved by our board of directors and by the affirmative vote of holders of at least two-thirds of our outstanding voting stock that is not owned by the interested stockholder.

Generally, a “business combination” includes a merger, asset or stock sale or other transaction provided for or through us resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an “interested stockholder” is a person who owns 15% or more of our outstanding voting stock and the affiliates and associates of such person. For purposes of this provision, “voting stock” means any class or series of stock entitled to vote generally in the election of directors. Our certificate of incorporation will provide that PG, its affiliates and any of its direct or indirect designated transferees (other than in certain market transfers) and any group of which such persons are a party do not constitute “interested stockholders” for purposes of this provision.

Under certain circumstances, this provision will make it more difficult for a person who qualifies as an “interested stockholder” to effect certain business combinations with us for a three-year period. This provision may encourage companies interested in acquiring us to negotiate in advance with our board of directors in order to avoid the shareholder approval requirement if our board of directors approves either the business combination or the transaction that results in the shareholder becoming an interested stockholder. These provisions also may have the effect of preventing changes in our board of directors and may make it more difficult to accomplish transactions that our stockholders may otherwise deem to be in their best interests. See “Description of Capital Stock” and “Certain Relationships and Related Party Transactions—Stockholders Agreement.”

These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take corporate actions other than those you desire.

 

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Our certificate of incorporation will provide that the Court of Chancery of the State of Delaware or federal district courts of the United States will be the sole and exclusive forum for certain types of lawsuits, which could limit our stockholders’ abilities to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our certificate of incorporation and bylaws will become effective upon the consummation of this offering. Once effective, our certificate of incorporation and bylaws will require, to the fullest extent permitted by law, that (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or other employees to us or our stockholders, (iii) any action asserting a claim against us arising pursuant to any provision of the DGCL or the certificate of incorporation or the proposed bylaws, or (iv) any action asserting a claim against us governed by the internal affairs doctrine will have to be brought only in the Court of Chancery in the State of Delaware (or the federal district court for the District of Delaware or other state courts of the State of Delaware if the Court of Chancery in the State of Delaware does not have jurisdiction). The certificate of incorporation and bylaws will also require that the federal district courts of the United States of America will be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. However, there is uncertainty as to whether a court would enforce such provision in our certificate of incorporation and bylaws. Section 22 of the Securities Act provides that federal and state courts have concurrent jurisdiction over all lawsuits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Therefore, to the extent the exclusive federal forum provision for causes of action arising under the Securities Act restricts the courts in which claims arising under the Securities Act may be brought, there is uncertainty as to whether a court would enforce such a provision, and investors cannot waive compliance with federal securities laws and the rules and regulations thereunder.

The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation and bylaws has been challenged in legal proceedings, and it is possible that, in connection with any action, a court could find the choice of forum provisions contained in our certificate of incorporation and bylaws to be inapplicable or unenforceable in such action. If a court were to find the choice of forum provision contained in our certificate of incorporation and bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, financial condition and operating results. Although we believe these provisions benefit us by providing increased consistency in the application of applicable law in the types of lawsuits to which they apply, the provisions may have the effect of discouraging lawsuits against our directors and officers. These provisions would not apply to any suits brought to enforce any liability or duty created by the Exchange Act or any other claim for which the federal courts of the United States have exclusive jurisdiction.

Changes in laws and regulations could impact the way we conduct business.

Laws, regulations and licensing, and other requirements impacting education, childcare, and before- and after-school programs at the national, state and local levels frequently change, and the ultimate cost of compliance cannot be precisely estimated. Although these regulations and requirements vary greatly from jurisdiction to jurisdiction, government agencies and accreditation organizations generally review, among other things, the adequacy of buildings and equipment, minimum square footage, ratio of staff to children, educational qualifications and training of staff, record keeping, nutrition requirements, curriculum, employee screening, compliance with health and safety standards, including COVID-19 protocols, data privacy requirements, and program quality. Failure of a center, site or program to comply with applicable regulations and requirements could subject it to sanctions, which can include fines, corrective orders, being placed on probation, loss of accreditation or, in more serious cases, suspension or revocation of the license to operate, or ability to participate in federal, state and local subsidy programs, and could require significant expenditures to bring our centers, sites or programs into compliance or result in the closing of the center, site or program. Certain government agencies may publish or publicly report major and/or minor regulatory violations and we may suffer adverse publicity, which could result in loss of enrollment in a center, site, program or market. In addition, there may be unforeseen

 

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changes in regulations and licensing requirements, such as changes in the required ratio of child center staff personnel to enrolled children that could have an adverse impact on our operations.

Changes in tax laws or to any of the several factors upon which our tax rate is dependent could impact our future tax rates and net income and affect our profitability.

We are subject to income and other taxes and our future tax rates and operations may be adversely affected by a number of factors, including: changes in tax laws or the interpretation of such tax laws (including changes with retroactive effect) in the various jurisdictions in which we operate; changes in the estimated realization of our deferred tax assets and settlement of our deferred tax liabilities; changes in the jurisdictions in which profits are determined to be earned and taxed; adjustments to estimated taxes upon finalization of various tax returns;

increases in expenses that are not deductible for tax purposes, including impairment of goodwill in connection with acquisitions; changes in available tax credits; and the resolution of issues arising from tax audits with various tax authorities. For example, the Biden administration has proposed changes to federal income tax laws that would, among other things, increase the corporate tax rate, impose a 15% minimum tax on corporate book income for certain taxpayers and strengthen the global intangible low-taxed income regime imposed by the Tax Cuts and Jobs Act while eliminating related tax exemptions. Any such tax changes could materially increase the amount of taxes we would be required to pay, which could adversely affect our business, financial condition and results of operations. Losses for which no tax benefits can be recorded could materially impact our tax rate and its volatility from one quarter to another. Any significant change in our jurisdictional earnings mix or in the tax laws in those jurisdictions could impact our future tax rates and net income in those periods and any increases in income tax rates or changes in income tax laws could have a material adverse impact on our financial results.

Our ability to use net operating losses, tax credits and other tax attributes to offset future taxable income or otherwise reduce future tax liabilities may be or become subject to limitations.

We have significant net operating losses (“NOLs”) and certain other tax attributes for U.S. federal and other income tax purposes. In general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (“the Code”), a corporation or corporate group that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income and its ability to use certain tax credits to offset future tax liabilities. This offering, as well as future offerings or other changes in our stock ownership, could result in such an “ownership change.” In addition, under the Tax Cuts and Jobs Act, NOLs generated in taxable years beginning after December 31, 2017, may not be utilized to offset more than 80% of net taxable income for any particular tax period. Our NOLs and tax credits may also be impaired or otherwise limited under state or other tax laws. As a result, we may be required to pay federal, state and other income taxes in future years even if we have unused NOLs, tax credits or other tax attribute carryforwards. There is also a risk that due to regulatory changes or other unforeseen reasons our existing NOLs, tax credits and other tax attributes could expire or otherwise be unavailable to offset future tax liabilities. Furthermore, any NOLs, tax credits and other tax attributes would have value only to the extent we have net taxable income or other tax liabilities in the future against which such NOLs, tax credits or other tax attributes may be applied. For these reasons, we may not be able to realize a benefit from some or all of our existing or future NOLs, tax credits and other tax attributes.

General Risks

Our business, financial condition and results of operations may be materially and adversely affected by various litigation and regulatory proceedings.

We are subject to litigation and regulatory proceedings in the normal course of business and could become subject to additional claims in the future. These proceedings have included, and in the future may include, matters involving personnel and employment issues, workers’ compensation, personal and property injury, disputes relating to acquisitions, governmental investigations and other proceedings and allegations of inappropriate, illegal or harmful acts to children at our childcare centers or sites or through a third-party provider. We are, have also from time to time been, and in the future may be, subject to claims and matters alleging

 

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negligence, inadequate supervision, illegal, inappropriate, abusive or neglectful behavior, health and safety, or other grounds for liability arising from injuries or other harm to the people we serve, primarily children. From time to time, federal, state and local legislations also lengthen statutes of limitation, potentially exposing us to potential proceedings for longer periods of time. Some historical and current legal proceedings and future legal proceedings may purport to be brought as class actions on behalf of similarly situated parties including with respect to employment-related matters. We cannot be certain of the ultimate outcomes of any such claims, and resolution of these types of matters against us may result in significant fines, judgments or settlements, which, if uninsured, or if the fines, judgments and settlements exceed insured levels, could materially and adversely affect our business, financial condition and results of operations.

Inadequacy of our insurance coverage could have a material and adverse effect on our business, financial condition and results of operations.

We currently maintain insurance policies for workers’ compensation, general liability, automobile liability and other insurance coverage. These policies provide for a variety of coverage and are subject to various limitations, exclusions and deductibles. There can be no assurance that insurance, particularly coverage for abuse as well as other coverages, will continue to be readily available in the form or amounts we have been able to obtain in the past or that our insurance premiums will not materially increase in the future as a consequence of conditions in the insurance business or in the childcare industry. Although we believe we have adequate insurance coverage at this time, claims in excess of, or not included within, our coverage may be asserted. There can be no assurance of the long-term liquidity of our insurance carriers with regard to potential claims that may have significantly long statutes of limitations. We are also self-insured for medical, dental and vision benefits provided to our employees. We also provide our insurance carriers letters of credit under our Credit Facilities to support our self-insurance programs. While we believe we can adequately fund our self-insurance obligations, a significant increase in claims and/or costs could require us to arrange for financing for payment of those claims, which could have an adverse effect on our results of operations and financial condition.

If securities or industry analysts do not publish or cease publishing research or reports about us, or if they issue unfavorable commentary about us or our industry or downgrade our common stock, the price of our common stock could decline.

The trading market for our common stock will depend in part on the research and reports that third-party securities analysts publish about us and our industry. One or more analysts could downgrade our common stock or issue other negative commentary about us or our industry. In addition, we may be unable or slow to attract research coverage. Alternatively, if one or more of these analysts cease coverage of us, we could lose visibility in the market. As a result of one or more of these factors, the trading price of our common stock could decline.

Becoming a public company will increase our compliance costs significantly and require the expansion and enhancement of a variety of financial and management control systems and infrastructure and the hiring of significant additional qualified personnel.

Prior to this offering, we have not been subject to the reporting requirements of the Exchange Act, or the other rules and regulations of the SEC, or any securities exchange relating to public companies. We are working with our legal, independent accounting and financial advisors to identify those areas in which changes should be made to our financial and management control systems to manage our growth and our obligations as a public company. These areas include financial planning and analysis, tax, corporate governance, accounting policies and procedures, internal controls, internal audit, disclosure controls and procedures and financial reporting and accounting systems. We have made, and will continue to make, significant changes in these and other areas. However, the expenses that will be required in order to adequately prepare for being a public company could be material. Compliance with the various reporting and other requirements applicable to public companies will also require considerable time and attention of management and will also require us to successfully hire and integrate a significant number of additional qualified personnel into our existing finance, legal, human resources and operations departments.

 

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We will be exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act.

We are in the process of evaluating our internal controls systems to allow management to report on, and our independent registered public accounting firm to audit, our internal controls over financial reporting. We will be performing the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and, if required, the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. We will be required to comply with Section 404 in full (including an auditor attestation on management’s internal controls report) in our annual report on Form 10-K for the year following our first annual report required to be filed with the SEC (subject to any change in applicable SEC rules). Furthermore, upon completion of this process, we may identify control deficiencies of varying degrees of severity under applicable SEC and PCAOB rules and regulations that remain unremediated. As a public company, we will be required to report, among other things, control deficiencies that constitute a material weakness or changes in internal controls that, or that are reasonably likely to, materially affect internal controls over financial reporting.

In connection with the preparation of our audited consolidated financial statements included elsewhere in this prospectus, we identified a material weakness with our internal controls over financial reporting that resulted from lack of a control processes in user access, lack of change management controls, and lack of governance over general IT controls, including oversight of third-party service organizations. This deficiency did not result in any error or restatement of our financial statements. We have since enhanced the documentation of our risk assessment process and controls to identify and analyze risks of misstatement due to error or fraud, and implemented process and controls over our enhanced compliance communication and investigation policies.

To comply with the requirements of being a public company, we have undertaken various actions, and may need to take additional actions, such as implementing and enhancing our internal controls and procedures and hiring additional accounting or internal audit staff. Testing and maintaining internal controls can divert our management’s attention from other matters that are important to the operation of our business. Additionally, when evaluating our internal control over financial reporting, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404. If we identify any material weaknesses in our internal control over financial reporting or are unable to comply with the requirements of Section 404 in a timely manner or assert that our

internal control over financial reporting is effective, if we are required to make restatements of our financial statements, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy, completeness or reliability of our financial reports and the trading price of our common stock may be adversely affected, and we could become subject to sanctions or investigations by the New York Stock Exchange, the SEC or other regulatory authorities, which could require additional financial and management resources. In addition, if we fail to remedy any material weakness, our financial statements could be inaccurate and we could face restricted access to the capital markets.

If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our results of operations could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenues and expenses that are not readily apparent from other sources. If our assumptions change or if actual circumstances differ from our assumptions, our results of operations may be adversely affected and could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock.

 

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Natural disasters, geo-political events and other highly disruptive events could materially and adversely affect our business, financial condition and results of operations.

The occurrence of one or more natural disasters, such as fires, hurricanes, tornados, tsunamis, floods and earthquakes, geo-political events, such as protests, civil unrest or terrorist or military activities disrupting transportation, communication or utility systems or other highly disruptive events, such as nuclear accidents, public health epidemics or pandemics (such as the ongoing COVID-19 outbreak), unusual weather conditions or cyberattacks, could adversely affect our operations and financial performance. Such events could result in physical damage to or destruction or disruption of one or more of our properties (including our corporate offices and locations) or properties used by third parties in connection with the supply of products or services to us, the lack of an adequate workforce in parts or all of our operations, supply chain disruptions, data, utility and communications disruptions, fewer clients visiting our locations, including due to quarantines or public health crises, the inability of our clients to reach or have transportation to our locations directly affected by such events and the inability to operate our business. In addition, these events could cause a temporary reduction in sales or the ability to run our business or could indirectly result in increases in the costs of our insurance if they result in significant loss of property or other insurable damage. These factors could also cause consumer confidence and spending to decrease or result in increased volatility in the United States and global financial markets and economies. Any of these developments could have a material and adverse effect on our business, financial condition and results of operations.

Discovery of any environmental contamination may affect our operating results.

Although we have periodically conducted limited environmental investigations and remediation activities at some of our centers or sites, we have not undertaken an in-depth environmental review of each center or site and, accordingly, there may be environmental liabilities of which we are unaware. In addition, no assurances can be given that future laws or regulations will not impose any environmental liability, which could affect our business and operating results.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. You can generally identify forward-looking statements by our use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “seek,” “vision,” or “should,” or the negative thereof or other variations thereon or comparable terminology. Forward-looking statements include those we make regarding the following matters:

 

   

the impact of the COVID-19 pandemic on our business, financial condition and results of operations;

 

   

our ability to address changes in the demand for childcare and workplace solutions;

 

   

our ability to adjust to shifts in workforce demographics, economic conditions, office environments and unemployment rates;

 

   

our ability to hire and retain qualified teachers, management, employees, and maintain strong employee engagement;

 

   

our ability to address adverse publicity;

 

   

changes in federal childcare and education spending policies and budget priorities;

 

   

our ability to acquire additional capital;

 

   

our ability to successfully identify acquisition targets, acquire businesses and integrate acquired operations into our business;

 

   

our reliance on our subsidiaries;

 

   

our ability to protect our intellectual property rights;

 

   

our ability to protect our information technology and that of our third-party service providers;

 

   

our ability to manage the costs and liabilities of collecting, using, storing, disclosing, transferring and processing personal information;

 

   

our ability to manage payment-related risks;

 

   

our expectations regarding the effects of existing and developing laws and regulations, litigation and regulatory proceedings;

 

   

the fluctuation in our stock price after the offering;

 

   

our ability to successfully remediate the material weakness in our internal control over financial reporting described elsewhere in this prospectus;

 

   

the increased expenses associated with being a public company;

 

   

our ability to maintain adequate insurance coverage; and

 

   

the occurrence of natural disasters, environmental contamination, or other highly disruptive events.

The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed in this prospectus under the headings “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Furthermore, the potential impact of the COVID-19 pandemic on our business

 

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operations and financial results and on the world economy as a whole may heighten the risks and uncertainties that affect our forward-looking statements described above. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included elsewhere in this prospectus are not guarantees of future performance and our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate, may differ materially from the forward-looking statements included elsewhere in this prospectus. In addition, even if our results of operations, financial condition and liquidity, and events in the industry in which we operate, are consistent with the forward-looking statements included elsewhere in this prospectus, they may not be predictive of results or developments in future periods.

Any forward-looking statement that we make in this prospectus speaks only as of the date of such statement. Except as required by law, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this prospectus.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from our sale of shares in this offering will be approximately $460.0 million, based on the assumed initial public offering price of $19.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and estimated offering expenses. We intend to use the net proceeds from this offering, including any net proceeds from the underwriters’ exercise of the option to purchase additional shares, to (i) repay all $56.3 million of our outstanding First Lien Notes, repay all $210.0 million of the loans outstanding under our Second Lien Facility and then repay $151.9 million of the loans outstanding under the First Lien Term Loan Facility, (ii) redeem $42.6 million of the shares of common stock received by members of management from vested Class B units of KC Parent, LLC in connection with the Reorganization and (iii) pay fees and expenses in connection with this offering. We intend to use the remainder, if any, of the net proceeds to us from this offering for general corporate purposes. If the underwriters exercise their option to purchase additional shares in full, we estimate that the net proceeds will be approximately $530.8 million, after deducting underwriting discounts and estimated offering expenses.

As of October 2, 2021 we had (i) $55.0 million aggregate principal amount of First Lien Notes outstanding, (ii) $210.0 million of borrowings outstanding under our Second Lien Facility and (iii) $1,139.0 million of borrowings outstanding under our First Lien Term Loan Facility. The First Lien Notes mature in February 2025, the Second Lien Facility matures in August 2025 and the First Lien Term Loan Facility matures in February 2025. We will repay our outstanding First Lien Notes at a price of 101%, plus accrued and unpaid interest. For additional information about our First Lien Notes, our Second Lien Facility and our First Lien Term Loan Facility, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt Facilities” and “Description of Certain Indebtedness.”

We will redeem $42.6 million of common stock received by members of management from vested Class B units of KC Parent, LLC at the initial public offering price of the shares of common stock offered hereby. We will redeem such shares of common stock pursuant to our certificate of incorporation.

Affiliates of Barclays Capital Inc., Morgan Stanley & Co. LLC and Credit Suisse Securities (USA) LLC are lenders under our First Lien Facilities and Credit Suisse Securities (USA) LLC will receive 5% or more of the net proceeds of this offering due to the repayment of borrowings thereunder. Therefore, Barclays Capital Inc., Morgan Stanley & Co. LLC and Credit Suisse Securities (USA) LLC are deemed to have a conflict of interest within the meaning of FINRA Rule 5121. Accordingly, this offering is being conducted in accordance with Rule 5121, which requires, among other things, that a “qualified independent underwriter” participate in the preparation of, and exercise the usual standards of “due diligence” with respect to, the registration statement and this prospectus. Jefferies LLC has agreed to act as a qualified independent underwriter for this offering and to undertake the legal responsibilities and liabilities of an underwriter under the Securities Act, including specifically those inherent in Section 11 thereof. Jefferies LLC will not receive any additional fees for serving as a qualified independent underwriter in connection with this offering. See “Underwriting (Conflicts of Interest).”

The expected use of net proceeds to us from this offering represents our intentions based upon our current plans and business conditions, and we may find it necessary or advisable to use the net proceeds to us for other purposes. Accordingly, we will have broad discretion in the application and specific allocations of the net proceeds to us from this offering. Pending their use, we intend to invest the net proceeds to us from this offering in a variety of capital preservation investments, including short- and intermediate-term investments, interest-bearing obligations, investment-grade instruments or securities, government securities, certificates of deposit and money market funds.

Each $1.00 increase (decrease) in the assumed initial public offering price of $19.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds by approximately $24.2 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and estimated offering expenses. Each

 

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increase (decrease) of 1.0 million shares in the number of shares sold in this offering, as set forth on the cover page of this prospectus, would increase (decrease) the net proceeds by approximately $18.3 million, assuming an initial public offering price of $19.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and estimated offering expenses. The information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

 

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DIVIDEND POLICY

As a public company we intend to retain any future earnings and do not anticipate declaring or paying any cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon our results of operations, cash requirements, financial condition, contractual restrictions, restrictions imposed by applicable laws and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends on our common stock is currently limited by the covenants of our Credit Facilities and may be further restricted by the terms of any future debt or preferred securities. Our business is conducted through our subsidiaries. Dividends, distributions and other payments from, and cash generated by, our subsidiaries will be our principal sources of cash to repay indebtedness, fund operations and pay dividends. Accordingly, our ability to pay dividends to our stockholders is dependent on the earnings and distributions of funds from our subsidiaries. In addition, the covenants in the agreements governing our existing indebtedness, including the Credit Facilities, significantly restrict the ability of our subsidiaries to pay dividends or otherwise transfer assets to us. See “Description of Certain Indebtedness,” “Risk Factors—Risks Related to our Capital Structure, Indebtedness and Capital Requirements—We are a holding company with no operations of our own, and we depend on our subsidiaries for cash” and “Risk Factors—Risks Related to our Common Stock and this Offering—We may change our dividend policy at any time.”

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our consolidated capitalization as of October 2, 2021:

 

   

on an actual basis;

 

   

on a pro forma after giving effect to the Reorganization; and

 

   

on a pro forma as adjusted basis, to give effect to: (i) the Reorganization; and (ii) the issuance and sale of 25,775,434 shares of our common stock in this offering at an assumed initial public offering price of $19.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and estimated offering expenses and reflects the use of proceeds from this offering, including the redemption of $42.6 million of the shares of common stock that the prior holders of the Class B units of KC Parent, LLC in connection with the Reorganization.

The information discussed below is illustrative only, and our cash and cash equivalents and capitalization following the consummation of this offering will adjust based on the actual initial public offering price and other terms of this offering determined at pricing. You should read the data set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock,” “Description of Certain Indebtedness” and the consolidated financial statements and related notes included elsewhere in this prospectus.

 

(In thousands, except per share data)    Actual     Pro Forma for the
Reorganization(1)(2)
    Pro Forma As
Adjusted for the
Reorganization
and the Offering(1)(2)
 

Cash and cash equivalents(3)

   $ 152,472     $ 152,472     $ 152,472  
  

 

 

   

 

 

   

 

 

 

Long-term debt, including current maturities:

      

First Lien Term Loan Facility

     1,138,978       1,138,978       987,120  

Second Lien Facility

     210,000       210,000        

First Lien Notes(4)

     56,284       56,284        
  

 

 

   

 

 

   

 

 

 

Total debt

     1,405,262       1,405,262       987,120  

Member’s equity:

      

Member’s interests

     430,772              

Stockholders’ equity:

      

Preferred stock; $0.01 par value per share; no shares authorized, issued and outstanding, actual; 25,000,000 shares authorized and no shares issued and outstanding pro forma and pro forma as adjusted

                  

Common stock; $0.01 par value per share; no shares authorized, issued and outstanding, actual; 750,000,000 shares authorized, 117,290,262 shares issued and outstanding, pro forma, and 750,000,000 shares authorized, 140,880,006 shares issued and 140,880,006 shares outstanding as adjusted

           1,151       1,409  

Additional paid-in capital

           449,335       874,643  

Accumulated deficit

     (245,553     (265,267     (255,914

Accumulated other comprehensive loss

     (1,796)       (1,796     (1,796

Total equity

     183,423       183,423       618,342  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 1,588,685     $ 1,588,685     $ 1,605,462  
  

 

 

   

 

 

   

 

 

 

 

(1)

Each $1.00 increase (decrease) in the assumed initial public offering price of $19.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the as adjusted

 

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  amount of each of cash and cash equivalents, additional paid-in-capital, total stockholders’ equity and total capitalization by $24.2 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares sold in this offering, as set forth on the cover page of this prospectus, would increase (decrease) the as adjusted amount of each of cash and cash equivalents, additional paid-in-capital, total stockholders’ equity and total capitalization by $18.3 million, assuming the assumed initial public offering price of $19.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and estimated offering expenses payable by us.
(2)

As adjusted to reflect the conversion of our outstanding members’ units into shares of our common stock in conjunction with the Reorganization. See “Prospectus Summary—The Reorganization and Our Organizational Structure.”

(3)

Our cash and cash equivalents exclude $23.3 million that was previously held with Parent and, on October 26, 2021, contributed to one of our subsidiaries. In July 2020, we raised capital by issuing $50.0 million in senior secured notes and received $25.0 million in cash contribution from an issuance of $50.0 million Class C Preferred Units at Parent. Refer to Note 12, Long-Term Debt, and Note 20, Related Party Transactions, in our audited annual consolidated financial statements included elsewhere in this prospectus for further information.

(4)

Includes $1.3 million of accrued interest that was capitalized on October 6, 2021.

The number of shares of common stock to be outstanding after this offering excludes:

 

   

14,074,831 shares of common stock reserved for future issuance under the 2021 Plan, which will become effective once the registration statement of which this prospectus forms a part is declared effective, as well as any shares of common stock that become available pursuant to provisions in the 2021 Plan that automatically increase the share reserve under the 2021 Plan; and

 

   

2,345,805 shares of common stock reserved for future issuance under the ESPP, which will become effective once the registration statement of which this prospectus forms a part is declared effective, as well as any shares of common stock that become available pursuant to provisions in the ESPP that automatically increase the share reserve under the ESPP.

 

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DILUTION

If you purchase any of the shares of common stock offered by this prospectus, you will experience dilution to the extent of the difference between the offering price per share that you pay in this offering and our as adjusted net tangible book value (deficit) per share of our common stock immediately after this offering.

Net tangible book value (deficit) is total tangible assets less total liabilities, which is not included within stockholders’ equity. Tangible assets represent total assets excluding goodwill and other intangible assets. Net tangible book value (deficit) per share is determined by dividing our net tangible book value (deficit) by the aggregate number of shares of common stock outstanding.

Our net tangible book value (deficit) as of October 2, 2021, on a pro forma basis for the Reorganization, was $1.2 billion or $(10.79) per share of common stock. Our pro forma as adjusted net tangible book value (deficit) as of October 2, 2021 was $831.7 million, or $(5.90) per share of common stock.

After giving further effect to our sale of shares of common stock in this offering at an assumed initial public offering price of $19.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, our pro forma as adjusted net tangible book value as of October 2, 2021 would have been $831.7 million, or $(5.90) per share. This represents an immediate increase in as adjusted net tangible book value of $4.89 per share to our existing stockholders and an immediate dilution of $25.40 per share to new investors purchasing shares of common stock in this offering. Dilution in pro forma as adjusted net tangible book value (deficit) represents the difference between the price per share paid by investors in this offering and our net tangible book value per share of immediately after the offering.

The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

      $ 19.50  

Net tangible book value (deficit) per share as of October 2, 2021 on a pro forma basis for the Reorganization before this offering

   $ (10.79   

Increase in pro forma as adjusted net tangible book value per share attributable to new investors purchasing common stock in this offering

     4.89     

Pro forma as adjusted net tangible book value per share after this offering

        (5.90
  

 

 

    

 

 

 

Dilution per share to new investors purchasing common stock in this offering

      $ 25.40  
     

 

 

 

Each $1.00 increase (decrease) in the assumed initial offering price of $19.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value by $24.2 million, or $0.17 per share, and the dilution per common share to new investors in this offering by $0.17 per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and estimated offering expenses payable by us. An increase of 1.0 million shares in the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, would increase the pro forma as adjusted net tangible book value per share by $0.17 and decrease the dilution per share to new investors by $0.17, assuming no change in the assumed initial public offering price and after deducting estimated underwriting discounts and estimated offering expenses payable by us. A decrease of 1.0 million shares in the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, would decrease the pro forma as adjusted net tangible book value per share by $0.18 and increase the dilution per share to new investors by $0.18, assuming no change in the assumed initial public offering price and after deducting underwriting discounts and estimated offering expenses payable by us.

 

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If the underwriters exercise their option to purchase additional shares in full, the pro forma as adjusted net tangible book deficit per share of our common stock after giving effect to this offering would be $5.26 per share, and the dilution in net tangible book value per share to investors in this offering would be $24.76 per share.

The following table summarizes, as of October 2, 2021, on a pro forma as adjusted basis, the number of shares of common stock purchased or to be purchased from us, the total consideration paid or to be paid to us and the average price per share paid by existing stockholders or to be paid by new investors purchasing shares of common stock in this offering at an assumed initial public offering price of $19.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting the underwriting discounts and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average
Price
Per Share
 
     Number      Percent     Amount      Percent  

Existing stockholders

     115,104,572        82%     $ 748,499,000        60%     $ 6.50  
  

 

 

    

 

 

   

 

 

    

 

 

   

New investors

     25,775,434        18%       502,620,948        40%       19.50  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     140,880,006        100     $1,251,119,948        100  
  

 

 

    

 

 

   

 

 

    

 

 

   

Each $1.00 increase (decrease) in the assumed initial public offering price of $19.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) total consideration paid by new investors by $24.2 million and total consideration paid by all stockholders and average price per share paid by all stockholders by $24.2 million and $9.05 per share, respectively, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and estimated offering expenses payable by us. An increase (decrease) of 1.0 million shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) total consideration paid by new investors by $18.3 million and total consideration paid by all stockholders and average price per share paid by all stockholders by $18.3 million and $8.95 per share, respectively, assuming the assumed initial public offering price remains the same, and after deducting underwriting discounts and estimated offering expenses.

Except as otherwise indicated, the above discussion and tables assume the underwriters do not exercise their option to purchase additional shares in this offering. If the underwriters fully exercise their option to purchase 3,866,315 additional shares of our common stock in this offering, the as adjusted net tangible book value per share would be $5.26 per share and the dilution to new investors in this offering would be $24.76 per share.

The number of shares of common stock to be outstanding after this offering excludes:

 

   

14,074,831 shares of common stock reserved for future issuance under the 2021 Plan, which will become effective once the registration statement of which this prospectus forms a part is declared effective, as well as any shares of common stock that become available pursuant to provisions in the 2021 Plan that automatically increase the share reserve under the 2021 Plan; and

 

   

2,345,805 shares of common stock reserved for future issuance under the ESPP, which will become effective once the registration statement of which this prospectus forms a part is declared effective, as well as any shares of common stock that become available pursuant to provisions in the ESPP that automatically increase the share reserve under the ESPP.

To the extent any options are granted and exercised in the future, there may be additional economic dilution to new investors.

 

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In addition, we may choose to raise additional capital due to market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements and notes thereto for the fiscal years ended January 2, 2021, December 28, 2019 and December 29, 2018 and unaudited condensed consolidated financial statements and notes thereto for the nine months ended October 2, 2021 and September 26, 2020. Some of the information included in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” sections of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Our Company

We are the largest private provider of high-quality ECE in the United States by center capacity. We are a mission driven organization, rooted in a commitment to providing all children with the very best start in life. We serve children ranging from 6 weeks to 12 years of age across our market leading footprint of 1,490 early childhood education centers with capacity of more than 195,000 children and contracts for more than 650 before- and after-school sites located in 40 states and the District of Columbia as of October 2, 2021. We believe families choose us because of our differentiated, inclusive approach and our commitment to delivering every child a high-quality educational experience in a nurturing and engaging environment. We operate all of our centers under the KinderCare brand and utilize a consistent curriculum and operational approach across our network.

We offer a differentiated value proposition to the children, families, schools and employers we serve, driven by our market-leading scale and commitment to quality, access and inclusion. We leverage our extensive network of community-based centers, employer-sponsored programs, and before- and after-school sites, to meet parents where they are; an important factor in the context of evolving work styles as a result of the COVID-19 pandemic. We utilize our proprietary curriculum with the goal of generating superior outcomes for children of all abilities and backgrounds. We use third-party assessment tools that consistently show children in our centers outperform their peers in other programs in readiness for kindergarten. We voluntarily seek accreditation at all of our centers and onsite programs, demonstrating our commitment to best practices for our sector. Our commitment to transparent, third-party validation of the quality and impact of our offerings is a critical factor for parents when selecting a center for their children. Our culture promotes high levels of employee engagement, which leads to better financial performance of our centers. Our expertise helping families access public subsidies for childcare is a core competency and drives greater levels of diversity and access in our centers.

Our operating strategy is designed to deliver a high-quality experience for every child and family we serve across all of our centers and sites. This self-reinforcing strategy is anchored in four pillars:

 

   

Educational Excellence. We leverage our proprietary curriculum combined with third-party assessment tools and voluntary accreditation to deliver a high-quality educational experience and provide objective validation of the quality and impact of our programs.

 

   

People & Engagement. We utilize a proprietary, data-driven approach to attract, hire and develop exceptional talent. We instill a culture that builds emotional connections between our employees and our mission and values, driving high engagement across our organization. Our internal surveys consistently demonstrate that a more engaged workforce leads to better financial performance of our centers.

 

   

Health & Safety. We consistently adhere to strict procedures across all of our centers to provide a healthy, safe environment for our children and our workforce and to deliver confidence and peace of mind to families. Our procedures address both the physical and mental health of children and are informed by input from the CDC and other third-party experts.

 

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Operations & Growth. Our operational excellence enables us to deliver profitable growth and to fund consistent reinvestment into our service offerings. We utilize a robust technology platform and proprietary operating procedures to deliver a high-quality, consistent experience across our centers and sites. Our technology platform closely monitors activity across all centers and sites and allows us to stay connected with families on a daily basis through digital channels. We utilize this proprietary data to continuously refine our operations and adapt to changing market conditions and consumer preferences.

COVID-19 Impact Update

In March 2020, government-mandated closures of childcare centers, intended to curb the spread of COVID-19, significantly reduced enrollment across our industry. During the final two weeks of the first quarter of 2020, we temporarily closed 1,074 centers and 547 before- and after-school sites. A temporarily closed center or site, is a center or site that has ceased operations as of the end of the reporting period, but management intends on recommencing operations at some point in the future. We kept more than 420 centers open to provide childcare to first responders, critical healthcare providers and families working in essential services. We undertook several actions to manage costs and improve liquidity, including curtailing all non-critical business spend, furloughing employees, temporarily reducing the salaries of the executive team and negotiating rent and benefit holidays or deferrals where possible.

During the second half of 2020, we reopened 1,021 centers and approximately 320 before- and after-school sites. As centers reopened, we brought many employees off furlough and reinstated salaries. We implemented enhanced health and safety protocols at all of our centers and sites to safely welcome children back. We proactively communicated with families to articulate our approach to safely reopening our centers and our commitment to supporting them and their children throughout the COVID-19 pandemic.

Since reopening our centers, enrollment has increased significantly. For the three months ended October 2, 2021, our same center occupancy increased to 64%, which represents 90% of our occupancy prior to the COVID-19 pandemic, well above the industry average of 79% of pre-COVID-19 occupancy levels. While many of the children who returned to our centers were previously enrolled in a KinderCare center, we believe other children transferred from centers that had closed during the COVID-19 pandemic. Approximately 13,000 centers, representing an estimated 20% to 25% of industry capacity, closed between September 2019 and September 2021 and have not reopened.

The CARES Act, signed into law on March 27, 2020, provided $3.5 billion in stimulus funding for childcare assistance. During fiscal 2020, we recognized $119.2 million in incremental revenue and $60.9 million for reimbursement of center operating expenses from Governmental Stimulus. We estimate that $111 million of the incremental revenue related to Governmental Stimulus with the remaining $8 million related to tuition adjustments. We believe that we will continue to receive these types of incremental revenue and reimbursement of center operating expenses for the foreseeable future. Bills passed by U.S. Congress subsequent to the CARES Act have approved $49 billion in incremental stimulus funding for ECE providers.

During the nine months ended October 2, 2021, we recognized $45.1 million in incremental revenue and $76.5 million for reimbursement of center operating expenses from Governmental Stimulus as compared to $101.1 million in incremental revenue and $33.7 million for reimbursement of center operating expenses from Governmental Stimulus during the nine months ended September 26, 2020. Of the incremental revenue recognized, we estimate that $34 million for the nine months ended October 2, 2021 and $96 million for the nine months ended September 26, 2020 related to Governmental Stimulus with the remainder related to tuition adjustments. The federal government passed additional legislation during fiscal 2020, such as the employer payroll tax deferral and employee retention credit, both of which we implemented.

 

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Factors Affecting Results of Operations

The following factors, among others described herein, have been important to our business and we expect them to impact our results of operations and financial condition in future periods:

 

   

Grow enrollment at our existing centers. Our future revenue growth is in part dependent on us continuing to expand enrollments at our centers. We invest in developing our brand, which has become widely recognized in the ECE market. We focus on employee engagement by developing a motivated, talented workforce to build a nurturing environment for children and strong relationships with families. Our marketing approach leverages public relations campaigns to build awareness and digital and direct marketing to create and capture demand. Also, we have optimized our website so families can educate themselves about our centers. We help families access public subsidies, where appropriate, to make attendance at our centers more affordable. The differentiation of our offerings, combined with the reduced capacity across our sector as a result of the COVID-19 pandemic, provides us an opportunity to attract new families and drive enrollment growth at our existing centers. Although we expect these activities will increase our cost of services, we expect it to positively impact our results of operations in the future. As our occupancy grows, we have an opportunity to gain further leverage and improve profitability as we allocate both fixed and variable costs over more enrollments. In the event our occupancy decreases, our ability to leverage fixed costs over lower enrollments is limited and may result in reduced profitability. General economic conditions, shifts in workforce demographics and local market competition are our largest challenges in terms of future enrollment growth.

 

   

Sustain high-quality offerings through reinvestment of revenue from consistent price increases. We expect to implement yearly price increases to support center re-investment and enhance our operational performance. Tuition increases are standard across the industry, and we view them as a reliable component of our business model. Additionally, while we expect rates to increase each year, the out-of-pocket cost paid by parents with children who continue to enroll in our programs decline on an annual basis as tuition costs decrease as children age-up (e.g. three-year olds have lower tuition costs than two-year olds). Tuition increases have an immediate positive impact to revenue. Our ability to achieve these tuition increases could be negatively impacted by general economic conditions, increased competition in local markets, as well as regional economics where strategically we may choose to focus on maintaining or growing enrollment levels.

 

   

Expand footprint through greenfield development and strategic acquisitions. Our long-term revenue growth depends on the expansion of our footprint, either through opening new greenfield centers or acquiring centers. We acquired 163 centers between fiscal 2018 and fiscal 2020 and opened 47 new greenfield centers. During the nine months ended October 2, 2021, we also acquired 10 additional centers and opened 26 new greenfield centers. Our expansion strategy is driven by disciplined real estate evaluation capabilities that actively monitor the market as well as maintenance of a robust pipeline of potential new center opportunities. We have a rigorous integration approach to transition acquired centers on to our fleet. These approaches allow us to deliver a consistent level of quality, as expected by our clients and accreditors, at all of our centers in a short timeframe after acquisition or development. Given the significant fragmentation in our industry, we expect to continue to pursue acquisitions complementary to our existing portfolio. Expansion will require cash investment but we anticipate a long-term increase in both revenue and profit.

 

   

Develop and nurture nascent revenue streams and expand service offerings. Supporting services adjacent to our KCLC business provide diversification and drive incremental revenue. Our KCE at Work offerings, which includes 72 onsite employer-sponsored centers and more than 600 employer relationships, are poised for growth as employers are increasingly recognizing the importance of supporting their employees with access to quality ECE programs. Through KCE at Work, we also provide dedicated center space for some employers. In the before- and after-school programs market we are actively pursuing partnerships with schools and districts for Champions. From 2015 to 2019, we grew our revenues from Champions at a compound annual growth rate of more than 13%. We currently

 

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serve over 400 schools, a small percentage of the over 130,000 schools in the United States according to the National Center for Education Statistics, providing significant opportunity to continue to grow our footprint. Additionally, we expect to pursue acquisitions to either grow our presence internationally or to add additional brands and services that will allow us to target and serve a larger addressable population and in-turn grow our revenue.

Key Performance Metrics

Total centers and sites

We measure and track the number of centers and sites because as our number of centers and sites grow, it highlights our geographic expansion and potential growth in revenue. We believe this information is useful to investors as an indicator of revenue growth and operational expansion and can be used to measure and track our performance over time. We define number of centers and sites as the number of centers and sites at the beginning of the period plus openings, acquisitions, and reopenings for the period minus any closures, permanent or temporary, for the period. We evaluate local economic indicators, client demographics and competition to assess the potential for new center and site additions. We also look for opportunities to negotiate favorable terms on new and existing lease agreements whenever possible. In evaluating strategic closures, we closely monitor several factors including enrollment levels, local economic indicators, client demographics, leases with near-term end dates, multiple-year negative performance, as well as competition, and the opportunity to transition families to our nearby centers and sites.

 

     Nine Months Ended      Fiscal Years Ended  
     October 2,
2021
     September 26,
2020
     January 2,
2021
     December 28,
2019
     December 29,
2018
 

Early childhood education centers

     1,490        1,472        1,460        1,500        1,511  

Before- and after-school sites

     639        363        415        563        525  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total centers and sites

     2,129        1,835        1,875        2,063        2,036
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of October 2, 2021, we had 1,490 early childhood education centers open with a licensed capacity of 195,782 children as compared to 1,472 early childhood education centers as of September 26, 2020, with a licensed capacity of 193,361 children. Total centers increased by 18 primarily due to opening 29 centers, and acquiring 10 centers, partially offset by temporary and permanent closures of two and 19 centers, respectively. A temporarily closed center, sometimes referred to as a “temporary closure,” is a center that has ceased operations as of the end of the reporting period, but management intends on recommencing operations at some point in the future. A permanently closed center is a center that has ceased operations as of the end of the reporting period and management does not intend on reopening the center. Total before- and after-school sites increased by 276 during the nine months ended October 2, 2021 as compared to the number of before- and after-school sites as of the nine months ended September 26, 2020 primarily due to the opening of 137 new sites and reopening of 175 temporarily closed sites, partially offset by 36 closed sites.

As of January 2, 2021, we had 1,460 early childhood education centers open with a licensed capacity of 192,044 children as compared to 1,500 early childhood education centers as of December 28, 2019, with a licensed capacity of 196,993 children. Total centers decreased by 40 primarily due to temporary closures of 20 centers as a result of the COVID-19 pandemic and permanent closures of 33 centers, partially offset by opening 11 new centers and acquiring 2 centers. Total before- and after-school sites decreased by 148 during fiscal 2020 as compared to the number of before- and after-school sites as of December 28, 2019 due to temporary closures of approximately 200 sites due to the COVID-19 pandemic partially offset by new sites opened and operating during fiscal 2020.

As of December 28, 2019, we had 1,500 early childhood education centers open with a licensed capacity of 196,993 children as compared to 1,511 early childhood education centers as of December 29, 2018 with a licensed capacity

 

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of 197,436 children. Total centers decreased by 11 during fiscal 2019 primarily due to 36 center closures partially offset by opening 22 new centers and acquiring three centers. Total before- and after-school sites increased by 38 during fiscal 2019 as compared to the number of before- and after-school sites as of December 29, 2018 primarily due to 87 new sites opened and operating during fiscal 2019, partially offset by 49 closed sites.

Average weekly early childhood education center full-time enrollments (“Average weekly ECE FTEs”)

Average weekly ECE FTEs is a measure of the number of full-time children enrolled and charged tuition weekly in our centers. We calculate Average weekly ECE FTEs based on weighted averages; for example, an enrolled full-time child equates to one Average weekly ECE FTE, while a child enrolled for three full days equates to 0.6 Average weekly ECE FTE. This metric is used by management and we believe is useful to investors as it is the key driver of how much revenue is generated and variable costs incurred in our operations.

 

     Nine Months Ended      Fiscal Years Ended  
     October 2,
2021
     September 26,
2020
     January 2,
2021
     December 28,
2019
     December 29,
2018
 

Average weekly ECE FTEs

     119,681        87,095        90,526        136,095        125,141  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average weekly ECE FTEs increased by 32,586, or 37.4%, for the nine months ended October 2, 2021 as compared to the nine months ended September 26, 2020 primarily due to increased enrollment at centers that had been impacted by temporary closures and reduced enrollment in the prior year due to the COVID-19 pandemic.

Average weekly ECE FTEs decreased by 45,569, or 33.5%, for fiscal 2020 as compared to fiscal 2019 primarily due to the temporary closures of centers and the reduction of enrollment at reopened centers due to the COVID-19 pandemic and permanently closed centers.

Average weekly ECE FTEs increased by 10,954, or 8.48%, for fiscal 2019 as compared to fiscal 2018 primarily due to the acquisition of Rainbow in September 2018 and enrollment growth of 2.2% at same centers, partially offset by center closures.

Early childhood education same center occupancy (“ECE same center occupancy”)

ECE same center occupancy is a measure of the utilization of center license capacity. We define same center to be centers that have been operated by us for at least 12 months (“same centers”), or in other words, centers that are starting their second year of operation. Excluded from same centers are any temporarily or permanently closed centers at the end of the reporting period and any new centers that have not yet met the same center criteria. We determine which centers are included in the same center calculation at the beginning of each reporting period. For fiscal 2019 results, Rainbow centers are excluded from the same center definition. We calculate ECE same center occupancy as the average weekly ECE same center full-time enrollment divided by the total of the ECE same centers’ licensed capacity during the period. Licensed capacity is determined by regulatory and operational parameters. This metric is used by management and we believe is useful to investors as it measures the utilization of our centers’ capacity in generating revenue.

 

     Nine Months Ended     Fiscal Years Ended  
     October 2,
2021
    September 26,
2020
    January 2,
2021
    December 28,
2019
    December 29,
2018
 

ECE same center occupancy

     62.0     44.9 %     47.0     70.3     69.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ECE same center occupancy increased by 17.1% for the nine months ended October 2, 2021 as compared to September 26, 2020 primarily due to increased enrollment at centers that had been impacted by temporary closures and reduced enrollment in the prior year due to the COVID-19 pandemic.

 

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ECE same center occupancy decreased by 23.3% for fiscal 2020 as compared to fiscal 2019 primarily due to the temporary closures of centers and the reduction of enrollment at essential centers (those which stayed open during the COVID-19 pandemic) as well as a result of reduced capacity due to the COVID-19 pandemic at essential and reopened centers.

ECE same center occupancy increased by 1.2% for fiscal 2019 as compared to fiscal 2018 primarily due to enrollment growth of 2.2% at same centers.

Description of Certain Components of Financial Data

Revenue

Our revenue results primarily from tuition charged for providing early childhood education and care services at our centers and sites. Tuition rates are reviewed for potential adjustment once per year and increases often coincide with the fall back-to-school period. We routinely collect tuition payments in advance on either a weekly or monthly basis. The majority of tuition is paid by individual families and may be partially subsidized by amounts received from government subsidy programs or employer sponsors. In addition, we have received revenue from Governmental Stimulus. This subsidy and stimulus revenue was $506.9 million and $440.8 million for the nine months ended October 2, 2021 and September 26, 2020, respectively, and was $602.0 million, $599.8 million, and $509.7 million during the fiscal years ended January 2, 2021, December 28, 2019, and December 29, 2018, respectively.

In addition to tuition rates, our Learning Adventures supplemental enrichment programs, annual registration fees and summer programs are additional sources of revenue. We charge an annual registration fee commencing at the time of enrollment and annually thereafter. Management fees for management services are received from some employer-sponsored centers and are included in revenue. We provide discounts for employees, families with multiple enrollments, referral sources, promotional marketing, and organizations with which we partner, such as our employer-sponsored centers and programs. Revenue is comprised of gross revenue less discounts.

Cost of services (excluding depreciation and impairment)

Our cost of services includes the direct costs related to the operation of our centers and excludes depreciation and impairment. Cost of services consists primarily of personnel costs, rent, food, costs of operating and maintaining facilities, taxes and licenses, marketing, transportation, classroom and office supplies, and insurance. Offsetting certain center operating expenses are reimbursements from federal, state, and local agencies. Personnel costs are the largest component of cost of services. Our time management and scheduling methods enable us to adjust staffing levels for peak and reduced attendance periods, allowing us to manage labor efficiency without adversely impacting the quality of services within our centers. Regulations for state, local, and accreditation agencies require specific teacher-to-student ratios; therefore, our staffing requirements depend on the number of children in attendance, the ages of the children, and the programs in which they are enrolled. Personnel costs include our self-insurance obligation for employee medical coverage that fluctuates based on the cost of medical care, the demographics of our employees, and the extent of participation in the plans. Our large, nationwide base affords us the opportunity to leverage the costs of our system-wide programs and services.

Depreciation and amortization

Our depreciation and amortization includes depreciation relating to centers and sites, field management, and corporate facilities as well as amortization related to definite-lived intangibles, such as client relationships, accreditations, proprietary curricula, trade names and trademarks, covenants not-to-compete, and software.

Selling, general, and administrative expenses (“SG&A”)

SG&A includes costs, primarily personnel related, associated with field management, corporate oversight, and support of our centers. Other significant components of selling, general, and administrative expenses include loss on closure of centers and management services provided by related parties.

 

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Impairment losses

Our impairment losses relate to property and equipment and definite-lived intangible assets.

Interest expense, net

Interest expense, net includes long-term debt interest, gain or loss on interest rate derivatives, amortization of debt issuance costs and financing lease interest.

Other income, net

Other income, net includes sub-lease income, miscellaneous insurance proceeds and contract settlement amounts.

Income tax expense (benefit)

We account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the expected future consequences of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. If we determine that, on a more likely than not basis, sufficient future taxable income would not be achieved in order to realize the deferred tax assets, we would be required to establish a full valuation allowance or increase any partial valuation allowance, which would require a charge to income tax expense for the period in which the determination was made. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryforward periods provided for in the tax law for each applicable tax jurisdiction. In assessing the need for a valuation allowance, we consider all available evidence, both positive and negative, and tax planning strategies which could be employed, if necessary, to utilize deferred tax assets. It can be difficult to conclude a valuation allowance is not required when there is significant objective and verifiable negative evidence, such as cumulative losses in recent years. We utilize a trailing twelve quarters of actual results as the primary measure of cumulative losses in recent years.

We record uncertain tax positions on the basis of a two-step process in which we first determine whether it is more likely than not that the tax position will be sustained on the basis of the technical merits of the position, and second, for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the relevant taxing authority. Uncertain tax positions and the related interest and penalties are recognized in other long-term liabilities and income tax expense.

 

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Results of Operations

We operate as a single reportable segment to reflect the way our chief operating decision maker (“CODM”) reviews and assesses the performance of the business. Our accounting policies are described in Note 1 to our audited consolidated financial statements included elsewhere in this prospectus. The period-to-period comparisons below of financial results are not necessarily indicative of future results. The following table sets forth our results of operations including as a percentage of revenue for the periods presented (in thousands, except where otherwise noted):

 

    Nine Months Ended     Fiscal Years Ended  
    October 2, 2021     September 26, 2020     January 2, 2021     December 28, 2019     December 29, 2018  

Revenue

  $ 1,332,299       $ 985,115       $ 1,366,556       $ 1,875,664       $ 1,675,049    

Operating Expenses:

                   

Cost of services (excluding depreciation and impairment)

    999,543       75.0     843,058       85.6     1,152,063       84.3     1,486,430       79.2     1,329,497       79.4

Depreciation and amortization

    61,233       4.6     66,504       6.8     87,919       6.4     99,255       5.3     94,708       5.7

Selling, general and administrative expenses

    137,919       10.4     116,352       11.8     158,409       11.6     202,701       10.8     188,570       11.3

Impairment losses

    5,387       0.4     18,904       1.9     38,645       2.8     22,908       1.2     16,354       1.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    1,204,082       90.4     1,044,818       106.1     1,437,036       105.2     1,811,294       96.6     1,629,129       97.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    128,217       9.6     (59,703)       (6.1 %)      (70,480)       (5.2 %)      64,370       3.4     45,920       2.7

Interest expense, net

    72,236       5.4     73,222       7.4     99,353       7.3     102,626       5.5     94,097       5.6

Other income, net

    (547)       (0.0 %)      (1,263)       (0.1 %)      (1,039)       (0.1 %)      (1,027)       (0.1 %)      (116)       0.0
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Income (loss) before income taxes

    56,528       4.2     (131,662)       (13.4 %)      (168,794)       12.4 %)      (37,229)       (2.0 %)      (48,061)       (2.9 %) 
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Income tax expense (benefit)

    15,046       1.1     (34,519)       (3.5 %)      (39,298)       (2.9 %)      (8,088)       (0.4 %)      (11,640)       (0.7 %) 
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Net income (loss)

  $ 41,482       3.1   $ (97,143)       (9.9 %)    $ (129,496)       (9.5 %)    $ (29,141)       (1.6 %)    $ (36,421)       (2.2 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of the Nine Months Ended October 2, 2021 and September 26, 2020

Revenue

 

     Nine Months Ended      Change  
     October 2, 2021      September 26, 2020      Amount      %  

Early childhood education centers

   $ 1,287,948      $ 955,173      $ 332,775        34.8

Before and after school sites

   $ 44,351      $ 29,942      $ 14,409        48.1
  

 

 

    

 

 

    

 

 

    

Total revenue

   $ 1,332,299      $ 985,115      $ 347,184        35.2
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue increased by $347.2 million, or 35.2%, for the nine months ended October 2, 2021 compared to the nine months ended September 26, 2020 primarily due to increased enrollment at centers and sites that had been impacted by temporary closures and reduced enrollment in the prior year due to the COVID-19 pandemic.

Revenue from early childhood education centers increased by $332.8 million, or 34.8%, for the nine months ended October 2, 2021 compared to the nine months ended September 26, 2020 primarily due to a $332.6 million increase from higher ECE same center revenues, of which a $314.6 million increase was from higher ECE same center occupancy and a $73.2 million increase was from higher tuition rates, partially offset by approximately $55.2 million decrease due to lower revenue from Governmental Stimulus. We define same center revenue to be revenues from centers that have been operated by us for at least 12 months. Higher amounts of revenue from

 

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Governmental Stimulus was recognized as incremental revenue in the nine months ended September 26, 2020 due to governmental stimulus and public subsidy funding received at centers that were temporarily closed or reduced enrollment during the COVID-19 pandemic. New and acquired centers contributed an additional $16.7 million in revenue partially offset by a decrease of $14.2 million from temporarily and permanently closed centers for the nine months ended October 2, 2021 compared to the nine months ended September 26, 2020. A temporarily closed center is a center that has ceased operations as of the end of the reporting period, but management intends on recommencing operations at some point in the future. A permanently closed center is a center that has ceased operations as of the end of the reporting period and management does not intend on reopening the center. Revenue decreases from temporarily and permanently closed centers is calculated as the difference between revenues recognized from those centers in the prior reporting period compared to revenue recognized in the current reporting period.

Revenue from before- and after-school sites increased by $14.4 million, or 48.1%, for the nine months ended October 2, 2021 compared to the nine months ended September 26, 2020 due to resuming before- and after-school programs at reopened schools and sites offering all-day care and learning programs for schools that transitioned to remote and hybrid (both remote and in-person) learning during the COVID-19 pandemic.

Cost of services (excluding depreciation and impairment)

 

    Nine Months Ended     Change  
    October 2, 2021     September 26, 2020     Amount     %  

Cost of services (excluding depreciation and impairment)

  $ 999,543     $ 843,058     $ 156,485       18.6

Cost of services (excluding depreciation and impairment) increased by $156.5 million, or 18.6%, for the nine months ended October 2, 2021 compared to the nine months ended September 26, 2020. Personnel costs and other center operating expenses increased by $152.6 million and $32.8 million, respectively, due to operating more centers and before- and after-school sites and increased enrollment. Additionally, rent expense increased by $13.8 million due to new and acquired centers, as well as from contractual rent increases. These increases were partially offset by $42.8 million in higher reimbursements from Governmental Stimulus in the nine months ended October 2, 2021.

Depreciation and amortization

 

     Nine Months Ended      Change  
     October 2, 2021      September 26, 2020      Amount     %  

Depreciation and amortization

   $ 61,233      $ 66,504      $ (5,271     (7.9 %) 

Depreciation and amortization decreased by $5.3 million, or 7.9%, for the nine months ended October 2, 2021 compared to the nine months ended September 26, 2020. The decrease was primarily due to a decrease in depreciation expense of $2.1 million due to lower capital expenditures and lower amortization of $3.1 million as a result of proprietary curricula and certain customer lists becoming fully amortized during the third quarter of fiscal 2020.

Selling, general, and administrative expenses

 

     Nine Months Ended      Change  
     October 2, 2021      September 26, 2020      Amount      %  

Selling, general, and administrative expenses

   $ 137,919      $ 116,352      $ 21,567        18.5

 

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Selling, general, and administrative expenses increased by $21.6 million, or 18.5%, for the nine months ended October 2, 2021 compared to the nine months ended September 26, 2020. The increase was primarily due to higher personnel costs of $18.4 million to support operating more centers and before- and after-school sites and professional fees of $4.1 million partially offset by a decrease in spending of $1.6 million on travel and meetings.

Impairment losses

 

     Nine Months Ended      Change  
     October 2, 2021      September 26, 2020      Amount     %  

Impairment losses

   $ 5,387      $ 18,904      $ (13,517     (71.5 %) 

Impairment losses decreased by $13.5 million, or 71.5%, for the nine months ended October 2, 2021 compared to the nine months ended September 26, 2020. The decrease was driven by lower impairment losses of $7.5 million related to center long-lived assets and a decrease in lease-related right of use asset impairments of $6.0 million in the current period, compared to higher impairment losses recognized in the comparative period due to disruption of cash flows caused by the COVID-19 pandemic.

Interest expense, net

 

     Nine Months Ended      Change  
     October 2, 2021      September 26, 2020      Amount     %  

Interest expense, net

   $ 72,236      $ 73,222      $ (986     (1.3 %) 

Interest expense, net decreased by $1.0 million, or 1.3%, for the nine months ended October 2, 2021 compared to the nine months ended September 26, 2020. The decrease was primarily driven by a decrease in long term debt interest of $3.6 million, partially offset by realized losses on cash flow hedges of $1.6 million.

Other income, net

 

     Nine Months Ended     Change  
     October 2, 2021     September 26, 2020     Amount      %  

Other income, net

   $ (547   $ (1,263   $ 716        (56.7 %) 

Other income, net decreased by $0.7 million, or 56.7%, for the nine months ended October 2, 2021 compared to the nine months ended September 26, 2020 primarily due to a decrease in sublease income and a favorable contract settlement in prior period.

Income tax expense (benefit)

 

     Nine Months Ended     Change  
     October 2, 2021      September 26, 2020     Amount      %  

Income tax expense (benefit)

   $ 15,046      $ (34,519   $ 49,565        (143.6 %) 

Income tax expense increased by $49.6 million for the nine months ended October 2, 2021 compared to the nine months ended September 26, 2020. The effective tax rate was 26.6% for the nine months ended October 2, 2021 compared to a tax benefit at an effective rate 26.2% for the nine months ended September 26, 2020. The change in the effective rate was primarily due to the relative impact of permanent differences and state tax liability in both periods.

 

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Comparison of the Fiscal Years Ended January 2, 2021 and December 28, 2019

Revenue

 

     Fiscal Years Ended      Change  
     January 2,
2021
     December 28,
2019
     Amount     %  

Early childhood education centers

   $ 1,325,097      $ 1,787,927      $ (462,830     (25.9 %) 

Before and after school sites

   $ 41,459      $ 87,737      $ (46,278     (52.7 %) 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

   $ 1,366,556      $ 1,875,664      $ (509,108     (27.1 %) 

Total revenue decreased by $509.1 million, or 27.1%, for fiscal 2020 compared to fiscal 2019 primarily due to temporary center and site closures and reduced enrollment at reopened centers and sites due to the COVID-19 pandemic.

Revenue from early childhood education centers decreased by $462.8 million, or 25.9%, for fiscal 2020 as compared to fiscal 2019 primarily due to a $426.1 million decrease from lower ECE same center revenues, of which a $528.9 million decrease was from lower ECE same center occupancy for temporary closures and reduction of enrollment at essential and reopened centers, partially offset by a $102.8 million increase primarily due to Governmental Stimulus and tuition rate increases, which were $13.5 million. We define same center revenue to be revenues from centers that have been operated by us for at least 12 months. Revenue decreased by $48.5 million from temporarily and permanently closed centers for fiscal 2020 compared to fiscal 2019 while revenue from new and acquired centers increased by $2.5 million. A temporarily closed center is a center that has ceased operations as of the end of the reporting period, but management intends on recommencing operations at some point in the future. Permanent closed center is a center that has ceased operations as of the end of the reporting period and management does not intend on reopening the center. Revenue decreases from temporarily and permanently closed centers is calculated as the difference between revenues recognized from those centers in the prior reporting period compared to revenue recognized in the current reporting period.

Revenue from before- and after-school sites decreased by $46.2 million, or 52.7%, for fiscal 2020 as compared to fiscal 2019 due to the temporary closure of programs as elementary schools transitioned to remote or hybrid learning during the COVID-19 pandemic. Several sites transitioned to offering all-day care and learning programs during this time and resumed before- and after-school programs once schools reopened.

Cost of services (excluding depreciation and impairment)

 

     Fiscal Years Ended      Change  
     January 2, 2021      December 28, 2019      Amount     %  

Cost of services (excluding depreciation and impairment)

   $ 1,152,063      $ 1,486,430      $ (334,367     (22.5 %) 

Cost of services (excluding depreciation and impairment) decreased by $334.4 million, or 22.5%, for fiscal 2020 compared to fiscal 2019. The decrease was primarily due to a decrease in personnel costs of $219.7 million from placing teachers and staff at temporarily closed locations on furlough as a result of actions taken in response to the COVID-19 pandemic. Further, center operating expenses decreased due to reimbursements from Governmental Stimulus of $60.9 million and temporary center closures.

Depreciation and amortization

 

     Fiscal Years Ended      Change  
     January 2, 2021      December 28, 2019      Amount     %  

Depreciation and amortization

   $ 87,919      $ 99,255      $ (11,336     (11.4 %) 

 

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Depreciation and amortization decreased by $11.3 million, or 11.4%, for fiscal 2020 compared to fiscal 2019. The decrease was primarily due to full amortization of accreditations during fiscal 2019 resulting in lower amortization of $7.8 million during fiscal 2020 and proprietary curricula and certain client lists becoming fully amortized during the third quarter of fiscal 2020 resulting in a decrease in amortization of $2.1 million.

Selling, general, and administrative expenses

 

     Fiscal Years Ended      Change  
     January 2, 2021      December 28, 2019      Amount     %  

Selling, general, and administrative expenses

   $ 158,409      $ 202,701      $ (44,292     (21.9 %) 

Selling, general, and administrative expenses decreased by $44.3 million, or 21.9%, for fiscal 2020 compared to fiscal 2019. The decrease was primarily driven by actions taken in response to the COVID-19 pandemic, which resulted in a decrease in personnel costs of $18.8 million through salary reductions, furloughing, job sharing, and reductions in the corporate and field workforce, as well as a decrease in spending of $13.4 million on professional services, and a decrease of $12.0 million in travel and meeting expenses.

Impairment losses

 

     Fiscal Years Ended      Change  
     January 2, 2021      December 28, 2019      Amount      %  

Impairment losses

   $ 38,645      $ 22,908      $ 15,737        68.7

Impairment losses increased by $15.7 million, or 68.7%, for fiscal 2020 compared to fiscal 2019. The increase was primarily driven by a $9.6 million increase in impairment losses related to center long-lived assets due to disruption to cash flows caused by the COVID-19 pandemic and partial impairment of KCE at Work client relationships definite-lived intangible assets of $4.1 million during fiscal 2020 due to client attrition and optimization of our clients portfolio.

Interest expense, net

 

     Fiscal Years Ended      Change  
     January 2, 2021      December 28, 2019      Amount     %  

Interest expense, net

   $ 99,353      $ 102,626      $ (3,273     (3.2 %) 

Interest expense, net decreased by $3.3 million, or 3.2%, for fiscal 2020 compared to fiscal 2019. Lower interest rates on long-term debt during fiscal 2020 resulted in a decrease of $12.1 million, which was partially offset by realized losses on cash flow hedges of $8.4 million.

Other income, net

 

     Fiscal Years Ended     Change  
     January 2, 2021     December 28, 2019     Amount     %  

Other income, net

   $ (1,039   $ (1,027   $ (12     1.2

Other income, net increased by 1.2% for fiscal 2020 compared to fiscal 2019 due to a favorable contract settlement in fiscal 2020.

 

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Income tax benefit

 

     Fiscal Years Ended   Change  
     January 2, 2021   December 28, 2019   Amount    %  
Income tax benefit    $(39,298)   $(8,088)   $(31,210)      385.9

Income tax benefit increased by $31.2 million for fiscal 2020 compared to fiscal 2019. The effective tax rate was 23.3% for fiscal 2020 compared to 21.7% for fiscal 2019. The change in the effective rate was primarily due to an increase in the valuation allowance recorded in fiscal 2020, partially offset by the relative impact of permanent differences and state and local taxes due in both years.

Comparison of the Fiscal Years Ended December 28, 2019 and December 29, 2018

Revenue

 

     Fiscal Years Ended      Change  
     December 28, 2019      December 29, 2018      Amount      %  

Early childhood education centers

   $ 1,787,927      $ 1,598,949      $ 188,978        11.8

Before and after school sites

   $ 87,737      $ 76,100      $ 11,637        15.3
  

 

 

    

 

 

    

 

 

    

Total revenue

   $ 1,875,664      $ 1,675,049      $ 200,615        12.0

Total revenue increased by $200.6 million, or 12.0%, for fiscal 2019 compared to fiscal 2018.

Revenue from early childhood education centers increased by $189.0 million, or 11.8%, primarily due to higher revenue from same centers and acquired centers primarily as a result of the Rainbow acquisition. Revenue from same centers increased by $96.0 million, of which $34.1 million was due to increased enrollment and occupancy and $61.9 million was a result of tuition rate increases. Revenue in fiscal 2019 from the Rainbow acquisition completed in August 2018 contributed an additional $101.2 million, in addition to $10.1 million from other acquired and new centers. These increases were partially offset by $17.1 million as a result of center closures.

Revenue from before- and after-school sites increased by $11.6 million, or 15.3%, due to increased number of sites, increased enrollment and price increases.

Cost of services (excluding depreciation and impairment)

 

     Fiscal Years Ended      Change  
     December 28, 2019      December 29, 2018      Amount      %  

Cost of services (excluding depreciation and impairment)

   $ 1,486,430      $ 1,329,497      $ 156,933        11.8

Cost of services (excluding depreciation and impairment) increased by $156.9 million, or 11.8%, for fiscal 2019 compared to fiscal 2018, consistent with revenue growth. The increase is largely driven by personnel costs, rent expense and other costs. Personnel costs increased by $91.0 million as a result of higher enrollment, operating acquired centers, higher wage and fringe benefits. Rent expense increased by $31.8 million due to acquired and new centers, and the adoption of Accounting Standards Codification 842, Leases (“ASC 842”). Other center and site operating costs increased $34.2 million, of which $23.4 million was for additional costs for operating acquired and new centers and $10.8 million due to increased enrollment.

Depreciation and amortization

 

     Fiscal Years Ended      Change  
     December 28,
2019
     December 29,
2018
     Amount      %  

Depreciation and amortization

   $ 99,255      $ 94,708      $ 4,547        4.8

 

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Depreciation and amortization increased by $4.5 million, or 4.8%, for fiscal 2019 compared to fiscal 2018. The increase was due to an increase of $7.7 million of depreciation primarily due to acquisitions and new center openings and $1.7 million for finance lease right-of-use asset after the adoption of ASC 842, partially offset by $4.8 million lower amortization as accreditations became fully amortized during fiscal 2019.

Selling, general, and administrative expenses

 

     Fiscal Years Ended      Change  
     December 28, 2019      December 29, 2018      Amount      %  

Selling, general, and administrative expenses

   $ 202,701      $ 188,570      $ 14,131        7.5

Selling, general, and administrative expenses increased by $14.1 million, or 7.5%, for fiscal 2019 compared to fiscal 2018. The increase was primarily related to higher personnel costs of $21.6 million for increased support of expanded operations and repurchases of profit interest units, partially offset by decreased spending on professional fees due to spending in 2018 related to the Rainbow acquisition.

Impairment losses

 

     Fiscal Years Ended      Change  
     December 28, 2019      December 29, 2018      Amount      %  

Impairment losses

   $ 22,908      $ 16,354      $ 6,554        40.1

Impairment losses increased by $6.6 million, or 40.1%, for fiscal 2019 compared to fiscal 2018. The increase was primarily related to $9.4 million impairment of operating lease right-of-use assets due to implementation of ASC 842 and impairment of the Rainbow Child Care Center trade name of $0.9 million, partially offset by a $3.6 million decrease in retirements and impaired centers.

Interest expense, net

 

     Fiscal Years Ended      Change  
     December 28, 2019      December 29, 2018      Amount      %  

Interest expense, net

   $ 102,626      $ 94,097      $ 8,529        9.1

Interest expense, net increased by 9.1% for fiscal 2019 compared to fiscal 2018. The increase was primarily due to incremental borrowing in fiscal 2018 under long-term debt to finance the Rainbow acquisition.

Other income, net

 

     Fiscal Years Ended     Change  
     December 28, 2019     December 29, 2018     Amount     %  

Other income, net

   $ (1,027   $ (116   $ (911     785.3

Other income, net increased by $0.9 million, or 785.3%, for fiscal 2019 compared to fiscal 2018 due to increase in miscellaneous insurance proceeds.

Income tax benefit

 

     Fiscal Years Ended   Change  
     December 28, 2019   December 29, 2018   Amount    %  
Income tax benefit    $(8,088)   $(11,640)   $3,552      (30.5%)  

 

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Income tax benefit decreased by $3.6 million for fiscal 2019 compared to fiscal 2018. The effective tax rate was 21.7% for fiscal 2019 compared to 24.2% for fiscal 2018. The change in the effective rate was primarily due to the relative impact of permanent differences and state and local taxes due, as well as adjustments to prior year estimates.

Non-GAAP Financial Measures

To supplement our financial statements, which are prepared and presented in accordance with GAAP, we also provide the below non-GAAP financial measures. EBIT, EBITDA, Adjusted EBITDA, and Adjusted net (loss) income (collectively referred to as the “non-GAAP financial measures”) are not presentations made in accordance with GAAP, and should not be considered as an alternative to net income or loss, income or loss from operations, or any other performance measure in accordance with GAAP, or as an alternative to cash provided by operating activities as a measure of our liquidity. Consequently, our non-GAAP financial measures should be considered together with our financial statements, which are prepared in accordance with GAAP.

We present EBIT, EBITDA, Adjusted EBITDA and Adjusted net (loss) income because we consider them to be important supplemental measures of our performance and believe they are useful to securities analysts, investors and other interested parties. Specifically, Adjusted EBITDA and Adjusted net (loss) income allows for an assessment of our operating performance without the effect of charges that do not relate to the core operations of our business.

EBIT, EBITDA, Adjusted EBITDA and Adjusted net (loss) income have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

they do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on indebtedness;

 

   

they do not reflect income tax expense or the cash requirements for income tax liabilities;

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will have to be replaced in the future, and EBIT, EBITDA, Adjusted EBITDA and Adjusted net (loss) income do not reflect cash requirements for such replacements;

 

   

they do not reflect our cash used for capital expenditures or contractual commitments;

 

   

they do not reflect changes in or cash requirements for working capital; and

 

   

other companies, including other companies in our industry, may calculate these measures differently than we do, limiting their usefulness as a comparative measure.

EBIT, EBITDA and Adjusted EBITDA

EBIT is defined as net income (loss) adjusted for net interest expense and income tax expense (benefit). EBITDA is defined as EBIT adjusted for depreciation and amortization. Adjusted EBITDA is defined as EBITDA adjusted for COVID-19 related costs, equity-based compensation, management and advisory fee expenses, acquisition-related costs and other costs because these charges do not relate to the core operations of our business. We present EBIT, EBITDA and Adjusted EBITDA because we consider them to be an important supplemental measure of our performance and believe they are useful to securities analysts, investors, and other interested parties. We believe Adjusted EBITDA is helpful to investors in highlighting trends in our core operating performance compared to other measures, which can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments.

 

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The following table shows EBIT, EBITDA and Adjusted EBITDA for the periods presented and the reconciliation to its most comparable GAAP measure, net income (loss), for the periods presented:

 

     Nine Months Ended     Fiscal Years Ended  
     October 2,
2021
     September 26,
2020
    January 2,
2021
    December 28,
2019
    December 29,
2018
 

Net income (loss)

   $ 41,482      $ (97,143   $ (129,496   $ (29,141   $ (36,421

Add back:

           

Interest expense, net

     72,236        73,222       99,353       102,626       94,097  

Income tax expense (benefit)

     15,046        (34,519     (39,298     (8,088     (11,640
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

EBIT

   $ 128,764      $ (58,440   $ (69,441   $ 65,397     $ 46,036  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Add back:

           

Depreciation and amortization

     61,233        66,504       87,919       99,255       94,708  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 189,997      $ 8,064     $ 18,478     $ 164,652     $ 140,744  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Add back:

           

COVID-19 related costs(1)

     —          2,322       18,809       —         —    

Equity-based
compensation(2)

     710        1,316       1,486       3,616       2,234  

Management and advisory fee expenses(3)

     3,648        3,648       4,864       4,865       4,865  

Acquisition related costs(4)

     363        223       236       4,256       6,760  

Other costs(5)

     3,612        644       644       2,360       —    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 198,330      $ 16,217     $ 44,517     $ 179,749     $ 154,603  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net (loss) income

Adjusted net (loss) income is defined as net income (loss) before income tax adjusted for amortization of intangible assets, COVID-19 related costs, equity-based compensation, management and advisory fee expenses, acquisition-related costs and other costs because these charges do not relate to the core operations of our business. We present Adjusted net (loss) income because we consider it to be an important measure used to evaluate our operating performance internally. We believe the use of Adjusted net (loss) income provides investors with consistency in the evaluation of the Company as it provides a meaningful comparison of past, present and future operating results, as well as a more useful financial comparison to our peers. We believe this supplemental measure can be used to assess the financial performance of our business without regard to certain costs that are not representative of our continuing operations.

 

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The following table shows Adjusted net (loss) income for the periods presented and the reconciliation to its most comparable GAAP measure, net income (loss), for the periods presented:

 

     Nine Months Ended     Fiscal Years Ended  
     October 2,
2021
     September 26,
2020
    January 2,
2021
    December 28,
2019
    December 29,
2018
 

Net income (loss)

     $41,482        $(97,143)     $ (129,496   $ (29,141   $ (36,421

Income tax expense (benefit)

     15,046        (34,519     (39,298     (8,088     (11,640
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before income tax:

     $56,528        $(131,662)     $ (168,794   $ (37,229   $ (48,061
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Add back:

           

Amortization of intangible assets

     6,530        9,668       11,932       23,056       29,082  

COVID-19 related costs(1)

     —          2,322       18,809       —         —    

Equity-based compensation(2)

     710        1,316       1,486       3,616       2,234  

Management and advisory fee expenses(3)

     3,648        3,648       4,864       4,865       4,865  

Acquisition related costs(4)

     363        223       236       4,256       6,760  

Other costs(5)

     3,612        644       644       2,360       —    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted income (loss) before income tax

     71,391        (113,841     (130,823     923       (5,120

Adjusted income tax expense (benefit)(6)

     18,990        (29,940     (34,406     (230     (640
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net income (loss):

   $ 52,401      $ (83,901)     $ (96,417)     $ 1,153     $ (4,480)  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Explanation of add backs:

 

(1)

For the nine months ended September 26, 2020, COVID-19 related costs represent non-cash impairment costs for long-lived assets as result of disruption of cash flows caused by the COVID-19 pandemic. For the fiscal year ended January 2, 2021, COVID-19 related costs represent non-cash impairment costs for long-lived assets as result of disruption of cash flows caused by the COVID-19 pandemic and partial impairment of KCE at Work client list intangible assets due to extended remote work environments as a result of COVID-19 and client attrition.

(2)

Represents non-cash equity-based compensation expense in accordance with Accounting Standards Codification Topic 718, Compensation: Stock Compensation.

(3)

Represents amounts incurred for management and advisory fees with related parties in connection with the Services Agreement, which will be terminated in connection with this offering. See “Certain Relationships and Related Party Transactions—Services Agreement.”

(4)

Represents costs incurred in connection with completed acquisitions, including transaction, integration and severance related costs.

(5)

Other costs include professional fees incurred for both contemplated and completed debt and equity transactions as well as costs incurred in connection with this offering.

(6)

The non-GAAP tax rate used to calculate Adjusted net (loss) income was approximately 26.6% and 26.3% for the nine months ended October 2, 2021 and September 26, 2020, respectively. The non-GAAP tax rate used to calculate adjusted net (loss) income was approximately 26.3%, (24.9)% and 12.5% for the fiscal years ended January 2, 2021, December 28, 2019 and December 29, 2018, respectively. The non-GAAP tax rates represent the GAAP tax rate for the period as adjusted by the estimated tax impact of the items adjusted from the measure and excluding non-recurring impacts of tax rate changes and valuation allowances.

 

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Unaudited Quarterly Results of Operations Data

The following table sets forth our unaudited quarterly condensed consolidated statements of operations data for each of the quarters indicated. The information for each quarter has been prepared on a basis consistent with our audited consolidated financial statements included in this prospectus, and reflects, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair statement of the financial information presented. Our historical results are not necessarily indicative of the results that may be expected in the future. The following quarterly financial data (in thousands, except where otherwise noted) should be read in conjunction with our financial statements included elsewhere in this prospectus.

 

    October 2,
2021
    July 3,
2021
    April 3,
2021
    January 2,
2021
    September 26,
2020
    June 27,
2020
    March 28,
2020
 

Revenue

  $ 475,121     $ 456,916     $ 400,262     $ 381,441     $ 327,020     $ 212,031     $ 446,064  

Operating Expenses:

             

Cost of services (excluding depreciation and impairment)

    334,011       324,551       340,981       309,005       275,347       203,081       364,630  

Depreciation and amortization

    21,149       20,064       20,020       21,415       20,630       23,488       22,386  

Selling, general and administrative expenses

    50,858       46,376       40,685       42,057       37,961       32,325       46,066  

Impairment losses

    3,686       1,080       621       19,741       2,153       7,963       8,788  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    409,704       392,071       402,307       392,218       336,091       266,857       441,870  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    65,417       64,845       (2,045     (10,777     (9,071     (54,826     4,194  

Interest expense, net

    24,220       24,044       23,972       26,131       24,164       24,427       24,631  

Other (income) expense, net

    (116     (219     (212     224       (792     (254     (217
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    41,313       41,020       (25,805     (37,132     (32,443     (78,999     (20,220

Income tax expense (benefit)

    11,035       10,438       (6,427     (4,779     (10,083     (19,993     (4,443
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 30,278     $ 30,582     ($ 19,378   ($ 32,353   ($ 22,360   ($ 59,006   ($ 15,777
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Liquidity and Capital Resources

Our principal uses of cash are payment of our operating expenses, such as personnel salaries and benefits, debt service, rents paid to landlords and capital expenditures. Our primary sources of cash are cash provided by operations, current cash balances and borrowings available under the First Lien Revolving Facility.

In July 2020, we raised capital by issuing $50.0 million in senior secured notes and received $25.0 million in cash contribution from an issuance of $50.0 million Class C Preferred Units at Parent with the remainder of the cash held with Parent. Refer to Note 12, Long-Term Debt, and Note 20, Related Party Transactions, in our audited annual consolidated financial statements included elsewhere in this prospectus for further information regarding the new debt financing and additional equity contribution. During fiscal 2020, we undertook several actions to manage costs and improve liquidity, including seeking government-sponsored financial relief under the CARES Act. See “—COVID-19 Impact Update” for more information.

We expect to continue to meet our liquidity requirements for at least the next 12 months under current operating conditions with cash generated from operations, cash on hand, and to the extent necessary and available, through borrowings under the Credit Agreements. If the need arises for additional expenditures, we may seek additional funding. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth under “Risk Factors.” We will also incur significant expenses as a public company that we have not incurred as a private company, including costs associated with public company reporting requirements of the Exchange Act, as well as the corporate governance standards of the Sarbanes-Oxley Act and the New York Stock Exchange. In the future, we may attempt to raise additional capital through the sale of equity securities or debt financing arrangements. Any future indebtedness we incur may result in terms that could be unfavorable to equity investors. We cannot provide assurance that we will be able to raise additional capital in the future on favorable terms, or at all. Any inability to raise capital could adversely affect our ability to achieve our business objectives.

Debt Facilities

Our $1,525.0 million senior credit facilities consist of a $1,200.0 million First Lien Term Loan Facility, a $115.0 million First Lien Revolving Facility and a $210.0 million Second Lien Facility.

The effective interest rate was 4.75% on the First Lien Term Loan Facility, 9.25% on the Second Lien Facility, 6.00% on the outstanding borrowings under the First Lien Revolving Facility, 3.75% on outstanding letters of credit, and 0.50% on the unused portion of the First Lien Revolving Facility as of October 2, 2021.

The weighted average interest for the First Lien Term Loan Facility was 4.75% and 5.25% for the nine months ended October 2, 2021 and September 26, 2020, respectively. The weighted average interest for the Second Lien Facility was 9.25% and 9.86% for the nine months ended October 2, 2021 and September 26, 2020, respectively. The weighted average interest for the First Lien Revolving Facility was 6.0% and 6.60% for the nine months ended October 2, 2021 and September 26, 2020, respectively.

There were no outstanding borrowings under the First Lien Revolving Facility as of October 2, 2021 and January 2, 2021, and outstanding letters of credit totaled $62.3 million and $59.1 million, respectively.

All obligations under the Credit Agreements are secured by substantially all of our assets. The Credit Agreements contain various financial and nonfinancial loan covenants and provisions.

Under the First Lien Credit Agreement, the financial loan covenant is a quarterly maximum first lien net leverage ratio, to be tested only if, on the last day of each fiscal quarter, the amount of revolving loans and letters of credit outstanding under the First Lien Revolving Facility (excluding undrawn letters of credit not to exceed $40.0 million) exceeds 30% of total revolving commitments on such date. As this threshold was not met as of

 

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October 2, 2021, the quarterly maximum first lien net leverage ratio financial covenant was not in effect. Additionally, an amendment to the First Lien Credit Agreement, entered into in June 2020, temporarily requires that we do not permit liquidity, defined as cash and cash equivalents plus the unused portion of the First Lien Revolving Facility, to be less than $30.0 million as of the last day of each month. The minimum liquidity financial covenant will be in effect through the fiscal quarter ended October 2, 2021 and subsequently until the earlier of the fiscal quarter ended April 2, 2022 or the date upon which we elect to convert back to the calculation of the first lien net leverage ratio financial covenant prior to the amendment. Nonfinancial loan covenants restrict our ability to, among other things, incur additional debt; make fundamental changes to the business; make certain restricted payments, investments, acquisitions, and dispositions; or engage in certain transactions with affiliates.

The Notes Purchase Agreement consists of $50.0 million aggregate principal amount of the First Lien Notes which were issued to certain members of Parent in July 2020.

The effective interest rate was 9.50% on the First Lien Notes as of both October 2, 2021 and September 26, 2020. Accrued interest on the First Lien Notes is classified with long-term debt due to our ability and intent to elect the paid-in-kind option for interest payments. We elected to capitalize interest on the First Lien Notes of $1.2 million on January 6, 2021, $1.3 million on April 6, 2021 and $1.3 million on July 6, 2021, which corresponds to the dates the interest was determined to be paid.

All obligations under the Notes Purchase Agreement are secured by substantially all the assets of the Company and its subsidiaries. The obligations rank equally in right of payment with the First Lien Credit Agreement. The Notes Purchase Agreement contains various nonfinancial loan covenants and provisions. Nonfinancial loan covenants restrict the Company’s ability to, among other things, incur additional debt; make fundamental changes to the business; make certain restricted payments, investments, acquisitions, and dispositions; or engage in certain transactions with affiliates.

We did not incur debt issuance costs during the nine months ended October 2, 2021 and we did not incur loss on extinguishment of debt during the nine months ended October 2, 2021 or September 26, 2020. We incurred debt issuance costs of $1.3 million during the nine months ended September 26, 2020 related to the First Lien Notes. Debt issuance costs are amortized over the terms of the related debt instruments, and amortization expense is included within interest expense on the unaudited condensed consolidated statements of operations and comprehensive income/(loss).

The First Lien Revolving Facility matures in August 2023, the First Lien Term Loan Facility and First Lien Notes mature in February 2025, and the Second Lien Facility matures in August 2025.

Refer to the unaudited interim condensed consolidated financial statements included elsewhere in this prospectus for further information regarding our debt facilities.

As of October 2, 2021, we were in compliance with all covenants of the Credit Agreements.

We do not engage in off-balance sheet financing arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

 

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Cash flows

The following table summarizes our cash flows (in thousands) for the periods presented:

 

     Nine Months Ended     Fiscal Years Ended  
     October 2,
2021
    September 26,
2020
    January 2,
2021
    December 28,
2019
    December 29,
2018
 

Cash provided by operating activities

   $ 161,619     $ 39,910     $ 13,592     $ 117,333     $ 90,955  

Cash used in investing activities

   $ (52,337   $ (37,017   $ (48,482   $ (94,486   $ (295,462

Cash (used in) provided by financing activities

   $ (10,045   $ 54,127     $ 47,769     $ (8,672   $ 198,805  

Net change in cash equivalents, and restricted cash

   $ 99,237     $ 57,020     $ 12,879     $ 14,175     $ (5,702

Cash, cash equivalents, and restricted cash at beginning of period

   $ 57,235     $ 44,356     $ 44,356     $ 30,181     $ 35,883  

Cash, cash equivalents, and restricted cash at end of period

   $ 156,472     $ 101,376     $ 57,235     $ 44,356     $ 30,181  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

Cash provided by operating activities increased by $121.7 million for the nine months ended October 2, 2021 compared to the nine months ended September 26, 2020. Net income, adjusted for non-cash items, increased by $171.6 million due to re-opening of centers and sites due to the recovery from the COVID-19 pandemic. The net changes in operating assets and liabilities resulted in a $49.9 million decrease in cash provided by operating activities primarily due to changes in leases and prepaid rent as a result of making rent payments in the current period and deferring rent payments as part of cash conservation activities in response to the COVID-19 pandemic in the comparative period. This decrease was partially offset by changes in accounts payable and accrued liabilities due to an additional payroll week accrued for in the current period.

Cash provided by operating activities decreased by $103.7 million for fiscal 2020 compared to fiscal 2019. Net loss, adjusted for non-cash items, increased by $121.1 million due to temporary center and site closures as a response to the COVID-19 pandemic. A temporarily closed center or site is a center or site that has ceased operations as of the end of the reporting period, but management intends on recommencing operations at some point in the future. The net changes in operating assets and liabilities resulted in a $17.4 million increase in cash provided by operating activities as a result of deferred rent payments, reimbursements received from Governmental Stimulus, and extended payment terms with vendors, partially offset by an additional payment for interest on long-term debt.

Cash provided by operating activities increased by $26.4 million for fiscal 2019 compared to fiscal 2018. Net loss, adjusted for non-cash items resulted in an increase to cash provided by operations of $15.7 million due to higher enrollment, and acquired and new centers. The net changes in operating assets and liabilities resulted in a $10.7 million increase in cash provided by operating activities as a result of fewer early lease termination payments, partially offset by higher interest payments.

Net cash used in investing activities

Cash used in investing activities increased by $15.3 million for the nine months ended October 2, 2021 compared to the nine months ended September 26, 2020. The increase was primarily due to a $9.9 million increase in payments for acquisitions and a $5.1 million increase in purchases of property, plant and equipment.

 

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Cash used in investing activities decreased by $46.0 million for fiscal 2020 compared to fiscal 2019. The decrease was primarily due to a $46.2 million reduction in capital expenditures in response to the COVID-19 pandemic.

Cash used in investing activities decreased by $201.0 million for fiscal 2019 compared to fiscal 2018. The decrease was due to a $204.1 million decrease in payments for acquisitions primarily for the Rainbow acquisition in 2018, partially offset by a $6.2 million increase in capital expenditures related to investments in new center development in 2019.

Net cash (used in) provided by financing activities

Cash used in financing activities was $10.0 million for the nine months ended October 2, 2021 compared to cash provided by financing activities of $54.1 million for the nine months ended September 26, 2020. The change was due to $48.7 million issuance of long-term debt, net of issuance costs and contributions from Parent of $25.0 million, partially offset by $10.0 million in net repayments on the First Lien Revolving Facility during the nine months ended September 26, 2020.

Cash provided by financing activities increased by $56.4 million for fiscal 2020 compared to fiscal 2019. The increase was primarily due to issuance of long-term debt, net of issuance costs of $49.0 million and contributions from Parent of $25.0 million. This change was partially offset by an increase in net repayments under the First Lien Revolving Facility and an additional principal payment of long-term debt in fiscal 2020.

Cash used in financing activities decreased by $207.5 million for fiscal 2019 compared to fiscal 2018. The decrease was primarily due to $201.0 million of incremental borrowing in 2018 for the Rainbow acquisition and $3.9 million for one fewer payment on long-term debt in fiscal 2018.

Cash requirements

We early adopted the amendments enacted by the SEC to modernize, simplify, and enhance certain financial disclosure requirements in Regulation S-K. Specifically, the requirement for tabular disclosure of contractual obligations has been eliminated. See Note 10 and Note 13 of the audited consolidated financial statements included elsewhere in this prospectus for additional detail related to our contractual obligations.

As of October 2, 2021, we have cash requirements for leases, long-term debt payments and other liabilities. For lease related information, see Note 5 of the unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. Long-term debt obligations of $1.4 billion are expected to be paid out as follows: $2.9 million for the remainder of 2021, $32.3 million in 1-3 years, and $1.4 billion in 3-5 years.

As of January 2, 2021, we have the following obligations:

 

   

Long-term debt obligations of $1.8 billion are expected to be paid out as follows: $89.0 million in 2021, $175.3 million in 1-3 years, and $1.5 billion in 3-5 years.

 

   

Self-insurance obligations of $46.1 million are expected to be paid out as claims are settled and cash outflows cannot be estimated reliably.

 

   

Deferred compensation plan of $18.4 million is expected to be paid out based on the individual plan participant and cash outflows cannot be estimated reliably.

 

   

Deferred employer payroll tax of $26.7 million is expected to be paid out as follows: $12.4 million in 2021 and $14.3 million in 2022.

 

   

Interest rate derivative contracts of $9.1 million and a promissory note of $3.3 million are all expected to be paid out in 2021.

 

   

Other liabilities of $3.7 million is comprised of various payables and expected to be paid out based on the contractual terms.

 

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Software service arrangements which include certain information technology, labor software, and maintenance services of $8.0 million are expected to be paid out as follows: $6.3 million in 2021, $1.4 million in 2022 and $0.4 million in 2023.

Certain agreements may have cancellation penalties for which, if we were to cancel, we would be required to pay approximately up to $3.5 million. Such cancellation penalties cannot be estimated as we cannot predict the occurrence of future agreement cancellations.

There have not been significant changes to these contractual obligations as of October 2, 2021.

Critical Accounting Policies and Significant Judgments and Estimates

The preparation of our financial statements in conformity with GAAP requires us to make estimates and judgments that affect our financial statements and accompanying notes. Amounts recorded in our financial statements are, in some cases, estimates based on our management’s judgment and input from actuaries and other third parties and are developed from information available at the time. We evaluate the appropriateness of these estimates on an ongoing basis. Actual outcomes may vary from the estimates, and changes, if any, are reflected in current period earnings.

The accounting policies that we believe are critical in the preparation of our financial statements are described below. For a description of our other significant accounting policies, see Note 1 in our audited consolidated financial statements for fiscal 2020 included elsewhere in this prospectus.

Revenue Recognition

Our revenue is derived primarily from tuition charged for providing early childhood education and care services.

Based on past practices and client specific circumstances, we grant price concessions to clients that impact the total transaction price. These price concessions represent variable consideration. We estimate variable consideration using the expected value method, which includes our historical experience with similar clients and the current macroeconomic conditions. We constrain the estimate of variable consideration to ensure that it is probable that significant reversal in the amount of cumulative revenue recognized will not occur in a future period when the uncertainty related to the variable consideration is subsequently resolved.

Goodwill and Indefinite-Lived Intangible Assets

Goodwill represents the excess of the cost over the fair value of the identifiable net assets of businesses acquired. Indefinite-lived intangible assets consist of various trade names.

We test goodwill and indefinite-lived intangible assets for impairment on an annual basis in the fourth quarter or more frequently if impairment indicators exist. We may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit or an indefinite-lived intangible asset is less than its carrying amount. If, after assessing the totality of events and circumstances, we determine that it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is greater than its carrying amount, the quantitative impairment test is unnecessary.

If the quantitative impairment test is required, goodwill is tested for impairment by determining if reporting unit carrying values exceed their fair values. Fair value is estimated using an income approach model based on the present value of expected future cash flows utilizing a risk adjusted discount rate. The discount rate represents the weighted average cost of capital, which is reflective of a market participant’s view of fair value given current market conditions, expected rate of return, capital structure, debt costs, and peer company comparisons. The discount rate is believed to adequately reflect the overall inherent risk and uncertainty involved in the operations

 

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and industry. The cash flows that extend beyond the final year of the discounted cash flow model are estimated using a terminal value technique, whereby the estimated operating cash flows minus capital expenditures are adjusted for changes in working capital in the final year of the model and discounted by the risk-adjusted discount rate to establish the terminal value. The present value of the terminal value is included in the fair value estimate. If the carrying amount of the reporting unit exceeds fair value, an impairment charge will be recognized in an amount equal to that excess.

If a quantitative fair value measurement calculation is required for indefinite-lived intangible assets, we utilize the relief-from-royalty method for indefinite-lived trade names. The relief-from-royalty method assumes trade names have value to the extent their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate, and the weighted average cost of capital.

The determination of fair value requires management to apply significant judgment in formulating estimates and assumptions. These estimates and assumptions primarily include forecasts of future cash flows based on management’s best estimate of future sales and operating costs, capital expenditures, working capital, discount rates, growth rates, and general market conditions. As a result of the inherent uncertainty associated with formulating these estimates, actual results could differ from those estimates.

Long-Lived Assets

Long-lived assets consist of property and equipment and definite-lived intangible assets. Definite-lived intangible assets consist of trade names, client relationships, accreditations, leasehold interests, proprietary curricula, internally developed software, and covenants not-to-compete. We review and evaluate the carrying value and remaining useful lives of long-lived assets whenever events or changes in circumstances require impairment testing and/or a revision to the remaining useful life. If this review indicates a potential impairment, we would assess the recoverability of the asset by determining if the carrying value of the asset exceeds the sum of future undiscounted cash flows that could be generated by the asset. Such cash flows consider factors such as expected future operating income and historical trends, as well as the effects of potential management changes or increased marketing support. Impairment of property and equipment may not be appropriate under certain circumstances, such as a new or maturing center, recent or anticipated center management turnover, or an unusual, nonrecurring expense impacting the cash flow projection. To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount of the asset over its estimated fair value based on estimated future discounted cash flows including disposition sales proceeds, if applicable. We typically estimate fair value of the asset group using discounted cash flows which are based on unobservable inputs including future cash flow projections and discount rate assumptions.

In addition to the initial measurement of leases, we also completed impairment testing of its right-of-use assets and identified specific centers in the initial recoverability test that had carrying values in excess of the estimated undiscounted cash flows from the operation of those centers. For those centers, a fair value assessment for the long-lived assets was performed. The method applied in determining the fair value of the right-of-use assets was the discounted cash flow (“DCF”) method of the income approach to fair value. The predominant market-based inputs in the DCF method are the as-is market rents and discount rates. As a result of the above fair values assessments, we incurred impairment charges of $12.3 million and $9.4 million against right-of-use lease assets during fiscal 2020 and fiscal 2019, respectively.

Self-Insurance Obligations

We are self-insured for certain levels of workers’ compensation, employee medical, general liability, auto, property, and other insurance coverage. We purchase coverage at varying levels to limit our potential future losses, including stop-loss coverage for certain exposures. The nature of these liabilities may not fully manifest

 

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for several years. We estimate the obligations for liabilities incurred but not yet reported or paid based on available claims data and historical trends and experience, as well as future projections of ultimate losses. Assumptions may fluctuate based on actual claims.

In connection with our risk sharing arrangements, most of our internal estimates are periodically reviewed 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/or costs associated with claims made under these programs could have a material effect on our financial position and results of operations.

Equity-Based Compensation

We account for profit interest units (“PIUs”) granted to employees, officers, managers, directors and other providers of services by measuring the grant date fair value of the PIU and recognizing the resulting expense over the period during which the grantee is required to perform service in exchange for the PIU. As we have the repurchase right to buy back the vested PIU upon termination, we periodically reassess the probability of termination on an individual-grantee basis through the life of the PIU to ensure that they are appropriately classified. Equity-based compensation expense is only recognized for PIU subject to performance conditions if it is probable that the performance condition will be achieved. We recognize the effect of forfeiture in compensation costs based on actual forfeitures when they occur. For PIUs forfeited before completion of the requisite service period, previously recognized compensation cost is reversed in the period the PIU is forfeited.

We estimate the fair value of each PIU on the date of grant using the Monte Carlo option-pricing model. The determination of the fair value of each PIU using this option-pricing model is affected by our assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, the fair value of the common unit or common stock at the date of grant, the expected term of the awards, the expected stock price volatility over the term of the awards, risk-free interest rate, and dividend yield.

Fair Value: Historically, as there has been no public market for our the profit interest units, the fair value of our the profit interest units and common stock was determined by the Parent’s Board based in part on valuations of our the profit interest units prepared by a third-party valuation firm.

Expected term: For employee awards, we calculate the expected term using the “simplified” method, which is the simple average of the vesting period and the contractual term. The simplified method is applied as we have insufficient historical data to provide a reasonable basis for an estimate of the expected term.

Expected volatility: As we have been privately held since inception, there is no specific historical or implied volatility information available. Accordingly, we estimate the expected volatility on the historical stock volatility of a group of similar companies that are publicly traded over a period equivalent to the expected term of the equity-based awards.

Risk free interest rate: The risk-free interest rate is based on the U.S. constant maturity rates with remaining terms similar to the expected term of the profit interest units.

Expected dividend yield: We do not expect to declare a dividend to stockholders in the foreseeable future.

Leases

We recognize lease liabilities and right-of-use assets on the consolidated balance sheet based on the present value of the lease payments for the lease term. Our leases generally do not provide an implicit interest rate. Therefore, the present values of these lease payments are calculated using our incremental borrowing rates, which are estimated using key inputs such as credit ratings, base rates and spreads. The incremental borrowing rate is the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The rates are established based on our First Lien Term Loan Facility as this is the most senior collateralized debt. Variable lease payments may be based on an index or

 

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rate, such as consumer price indices, and include rent escalations or market adjustment provisions. Unless considered in-substance fixed lease payments, variable lease payments are expensed when incurred. Our lease agreements do not contain any material residual value guarantees.

The lease term for all of our leases includes the non-cancelable period of the lease. We do not include periods covered by lease options to renew or terminate the lease in the determination of the lease term until it is reasonably certain that the option will be exercised. This evaluation is based on management’s assessment of various relevant factors including economic, contractual, asset-based, entity-specific, and market-based factors, among others.

We have leases that contain lease and non-lease components. The non-lease components typically consist of common area maintenance. For all classes of leased assets, we have elected the practical expedient to account for the lease and non-lease components as a single lease component. For these leases, the lease payments used to measure the lease liability include all the fixed and in-substance fixed consideration in the contract.

For leases with a term of one year or less (“short-term leases”), we have elected to not recognize the arrangements on the balance sheet and the lease payments are recognized in the consolidated statement of income on a straight-line basis over the lease term. Variable lease payments associated with these leases are recognized and presented in the same manner as for all other leases.

We modify leases as necessary for a variety of reasons, including to extend or shorten the contractual lease term, or expand or reduce the leased space or underlying asset. In response to the broad effects of COVID-19, we re-negotiated certain lease terms with lessors and received rent concessions to mitigate the impact on our financial position and operations. These re-negotiations resulted in a material change to the terms of the leases, and as a result, the rent concessions did not qualify for the FASB COVID-19 relief. Therefore, we will account for these changes as lease modifications.

Income Taxes

We account for income taxes in accordance with the authoritative guidance, which requires income tax effects for changes in tax laws to be recognized in the period in which the law is enacted.

Deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. The guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized. We have determined that a valuation allowance is necessary against a portion of the deferred tax assets, but we anticipate that our future taxable income will be sufficient to recover the remainder of our deferred tax assets. However, should there be a change in our ability to recover our deferred tax assets that are not subject to a valuation allowance, we could be required to record an additional valuation allowance against such deferred tax assets. This would result in additional recorded tax expense or a reduced tax benefit in the period in which we determine that the recovery is not more likely than not.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. In accordance with the authoritative guidance on accounting for uncertainty in income taxes, we recognize liabilities for uncertain tax positions based on the two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained in audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activities. Any change in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision.

 

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Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk in the ordinary course of business. Market risk represents the risk of loss that may impact our results of operations or financial condition due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates.

Interest Rate Risk

As of October 2, 2021, we had $1.4 billion of total debt, net of debt issuance costs. The majority of our debt is floating-rate debt. Based on the borrowings outstanding under our Credit Facilities during the nine months ended October 2, 2021 we estimate that had the average interest rate on our borrowings increased by 100 basis points during this time period, our interest expense would have increased by approximately $1.4 million, including the impact of the interest rate hedge agreements.

We are exposed to interest rate risk and use derivatives to manage variable interest rates on our Credit Facilities. We do not hold or issue derivatives for trading or speculative purposes. We enter into interest rate swap agreements that are designated as cash flow hedges for accounting purposes to effectively convert a portion of our floating-rate debt to a fixed-rate basis. In February 2019, we entered into a pay-fixed-receive-float forward starting interest rate swap and an interest rate cap that commenced in April 2019 in order to hedge interest rate risk on a portion of the variable rate debt of our Credit Facilities. We are required to make quarterly premium payments of $0.1 million for the interest rate cap. Under the interest rate cap, we will receive variable amounts from a counterparty if interest rates rise above the strike rate on the contract. The notional amount for each instrument was $573.3 million as of October 2, 2021 and the derivatives are considered highly effective.

Internal Controls Over Financial Reporting

In the course of preparing the audited consolidated financial statements that are included elsewhere in this prospectus, our management determined that we have a material weakness in our internal controls over financial reporting. This material weakness was driven by lacking a control process in user access, change management controls to ensure the segregation of duties, and governance over IT general controls. These IT deficiencies, when aggregated, could impact effective segregation of duties as well as the effectiveness of IT-dependent controls that could result in misstatements potentially impacting all financial statement accounts and disclosures that would not be prevented or detected. There is also a risk of users having access to privileges beyond those necessary to perform their duties that could affect business process controls, which are dependent on IT systems, or electronic data and financial reports generated from those IT systems. We did not design or maintain an effective control environment as we lacked sufficient oversight of activities related to our internal control over financial reporting due to a lack of an appropriate level of experience and training commensurate with public company requirements.

In order to remediate this material weakness, we have taken and plan to take the following actions:

 

   

continuing to hire personnel with public company experience as our company continues to grow;

 

   

providing additional training for our personnel on internal controls over financial reporting;

 

   

implementing additional controls and processes, including those that operate at a sufficient level of precision or that evidence performance;

 

   

adopting processes and controls to better identify and manage segregation of duties; and

 

   

engaging an external advisor to assist with evaluating and documenting the design and operating effectiveness of internal controls and assisting with the remediation of deficiencies, as necessary.

 

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We and Deloitte & Touche LLP, our independent registered public accounting firm, were not required to, and did not, perform an evaluation of our internal controls over financial reporting as of January 2, 2021 or any prior period in accordance with the provisions of the Sarbanes-Oxley Act. Accordingly, we cannot assure you that we have identified all, or that we will not in the future have additional, material weaknesses. Material weaknesses may still exist when we report on the effectiveness of our internal controls over financial reporting as required under Section 404 of the Sarbanes-Oxley Act after the completion of this offering. See “Risk Factors—Risks Related to our Business—We have identified a material weakness in our internal controls over financial reporting and if our remediation of the material weakness is not effective, or if we fail to develop and maintain an effective system of disclosure controls and internal controls over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable laws and regulations could be impaired.”

 

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BUSINESS

Our Company

We are the largest private provider of high-quality ECE in the United States by center capacity. We are a mission driven organization, rooted in a commitment to providing all children with the very best start in life. We serve children ranging from 6 weeks to 12 years of age across our market leading footprint of 1,490 early childhood education centers with capacity of more than 195,000 children and contracts for more than 650 before- and after-school sites located in 40 states and the District of Columbia as of October 2, 2021. We believe families choose us because of our differentiated, inclusive approach and our commitment to delivering every child a high-quality educational experience in a nurturing and engaging environment. We operate all of our centers under the KinderCare brand and utilize a consistent curriculum and operational approach across our network.

We offer a differentiated value proposition to the children, families, schools and employers we serve, driven by our market-leading scale and commitment to quality, access and inclusion. We leverage our extensive network of community-based centers, employer-sponsored programs, and before- and after-school sites, to meet parents where they are; an important factor in the context of evolving work styles as a result of the COVID-19 pandemic. We utilize our proprietary curriculum with the goal of generating superior outcomes for children of all abilities and backgrounds. We use third-party assessment tools that consistently show children in our centers outperform their peers in other programs in readiness for kindergarten. We voluntarily seek accreditation at all of our centers and onsite programs, demonstrating our commitment to best practices for our sector. Our commitment to transparent, third-party validation of the quality and impact of our offerings is a critical factor for parents when selecting a center for their children. Our culture promotes high levels of employee engagement, which leads to better financial performance of our centers. Our expertise helping families access public subsidies for childcare is a core competency and drives greater levels of diversity and access in our centers.

We have built a reputation as a leader in early childhood education and care across our three go-to-market channels: KinderCare Learning Centers, KinderCare Education at Work and Champions.

 

   

KCLC is the largest private provider of community-based early childhood education centers in the United States by center capacity. As of October 2, 2021, KCLC operates approximately 1,400 KCLC centers. Most KCLC centers are accredited by accrediting bodies such as the NAEYC. The accreditation process evaluates curriculum, evidence of learning, operating practices and health and safety protocols. The majority of the unaccredited centers are newer to our fleet of centers – either as newly built centers or as acquisitions and are currently in various stages of the two-year accreditation process. Families typically become aware of KCLC through our strong brand recognition, public relations campaigns, digital and direct marketing efforts and word of mouth references before enrolling directly in a center. KCLC serves families with children between six weeks and 12 years of age. KCLC represented 79.2% and 77.2% of our 2020 and 2019 revenue, respectively.

 

   

KCE at Work is a leading provider of employer-sponsored childcare programs. As of October 2, 2021, KCLC operates 72 onsite employer-sponsored centers. The KCLC centers and onsite employer-sponsored centers together comprise our early childhood education centers. We work closely with employers to design programs that effectively address the childcare needs of their employees. Our ability to offer both onsite centers, as well as access to our own leading KinderCare center network, provides flexibility and accessibility to a broad range of employees. We currently serve more than 600 employers through onsite programs and tuition discount benefit programs for employees. KCE at Work represented 17.8% and 18.1% of our 2020 and 2019 revenue, respectively.

 

   

Champions is a leading private provider of before- and after-school programs in the United States. Our outsourced model provides an attractive value proposition to schools and districts. We provide staff, teachers and curriculum to deliver high-quality supplemental education and care to families and children onsite at schools we serve, and have contracts for more than 650 sites as of October 2, 2021. Champions represented 3.0% and 4.7% of our 2020 and 2019 revenue, respectively.

 

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Our operating strategy is designed to deliver a high-quality experience for every child and family we serve across all of our centers and sites. This self-reinforcing strategy is anchored in four pillars:

 

   

Educational Excellence. We leverage our proprietary curriculum combined with third-party assessment tools and voluntary accreditation to deliver a high-quality educational experience and provide objective validation of the quality and impact of our programs.

 

   

People & Engagement. We utilize a proprietary, data-driven approach to attract, hire and develop exceptional talent. We instill a culture that builds emotional connections between our employees and our mission and values, driving high engagement across our organization. Our internal surveys consistently demonstrate that a more engaged workforce leads to better financial performance of our centers.

 

   

Health & Safety. We consistently adhere to strict procedures across all of our centers to provide a healthy, safe environment for our children and our workforce and to deliver confidence and peace of mind to families. Our procedures address both the physical and mental health of children and are informed by input from the CDC and other third-party experts.

 

   

Operations & Growth. Our operational excellence enables us to deliver profitable growth and to fund consistent reinvestment into our service offerings. We utilize a robust technology platform and proprietary operating procedures to deliver a high-quality, consistent experience across our centers and sites. Our technology platform closely monitors activity across all centers and sites and allows us to stay connected with families on a daily basis through digital channels. We utilize this proprietary data to continuously refine our operations and adapt to changing market conditions and consumer preferences.

Our History

We have provided children and families with high-quality ECE for over 50 years. Throughout our history, we have empowered parents seeking to enter the workforce with options for excellent early childhood education and care. We have remained committed to providing broad access to our services throughout our history and, over the past decade, have become a leading advocate in our industry, working with legislators to promote greater access to early education for all families.

In 2012, Tom Wyatt became our CEO to lead our business transformation. Our primary stockholder, PG, acquired control of KinderCare in 2015 to further support this transformation. From 2012 to 2017, Tom and our leadership team implemented and refined our current operating strategy, based on our four pillars described above, to enhance our value to children and families and to drive improved operating performance. During this period, we optimized our center footprint by closing more than 380 centers, drove compound same center revenue growth of 4.5% and increased same center occupancy from 56% to 69%. We also made significant investments in our curriculum, human capital and technology infrastructure to accelerate growth and strengthen our commitment to quality.

Since 2017, we have executed on our multi-faceted growth strategy to extend our center footprint and reinforce our position as the largest private ECE provider in the United States by center capacity. We acquired 163 centers between fiscal 2018 and fiscal 2020 and opened 47 new greenfield centers. During the nine months ended October 2, 2021, we also acquired 10 additional centers and opened 26 new greenfield centers. We established our Growth Delivery, New Center Enrollment and New Center Operations teams, and developed and refined our new center management processes to enable us to quickly and consistently implement our operating procedures and curriculum, while driving growth in inquiries and enrollment. In 2019, prior to the onset of the COVID-19 pandemic, we grew to $1.9 billion in revenue, had $29 million in net loss and had $180 million in Adjusted EBITDA. From 2017 to 2019, we achieved 4.5% compound same center revenue growth. We increased same center occupancy to 72% in early 2020 from 69% in 2017. During this time we also maintained our cost of services excluding depreciation and impairment at approximately 79.2% to 79.4% of revenue.

In 2020, we had $1.4 billion in revenue, $129 million in net loss and $45 million in Adjusted EBITDA. Our same center revenue decreased by 25% primarily due to a decrease in same center occupancy to 47%. Our cost of

 

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services excluding depreciation and impairment increased to 84.3% of revenue in 2020 due to the impact of fixed operating costs on lower revenues and incurring higher costs from implementing enhanced health and safety protocols in response to COVID-19. During the first nine months of 2021, we had $1.3 billion in revenue, $41 million in net income and $198 million in Adjusted EBITDA. Our same center revenue increased by 36% compared to the first nine months of 2020, primarily due to an increase in same center occupancy to 62% from 45%. Our cost of services excluding depreciation and impairment improved to 75% of revenue during the first nine months of 2021 as compared to 86% for the first nine months of 2020 due to the impact of leveraging fixed costs over higher enrollments and reimbursements from Governmental Stimulus.

COVID-19 Impact Update

In March 2020, government-mandated closures of childcare centers, intended to curb the spread of COVID-19, significantly reduced enrollment across our industry. During the final two weeks of the first quarter of 2020, we temporarily closed 1,074 centers and 547 before- and after-school sites. A temporarily closed center or site, sometimes referred to as a “temporary closure,” is a center or site that has ceased operations as of the end of the reporting period, but management intends on recommencing operations at some point in the future. We kept more than 420 centers open to provide childcare to first responders, critical healthcare providers and families working in essential services. We undertook several actions to manage costs and improve liquidity, including curtailing all non-critical business spend, furloughing employees, temporarily reducing the salaries of the executive team and negotiating rent and benefit holidays or deferrals where possible.

During the second half of 2020, we reopened 1,021 centers and approximately 320 before- and after-school sites. As centers reopened, we brought many employees off furlough and reinstated salaries. We implemented enhanced health and safety protocols at all of our centers and sites to safely welcome children back. We proactively communicated with families to articulate our approach to safely reopening our centers and our commitment to supporting them and their children throughout the COVID-19 pandemic.

Since reopening our centers, enrollment has increased significantly. For the three months ended October 2, 2021, our same center occupancy increased to 64%, which represents 90% of our occupancy prior to the COVID-19 pandemic, well above the industry average of 79% of pre-COVID-19 occupancy levels. While many of the children who returned to our centers were previously enrolled in a KinderCare center, we believe other children transferred from centers that had closed during the COVID-19 pandemic. Approximately 13,000 centers, representing an estimated 20% to 25% of industry capacity, closed between September 2019 and September 2021 and have not reopened.

The CARES Act, signed into law on March 27, 2020, provided $3.5 billion in stimulus funding for childcare assistance. During fiscal 2020, we recognized $119.2 million in incremental revenue and $60.9 million for reimbursement of center operating expenses from Governmental Stimulus. We estimate that $111 million of the incremental revenue related to Governmental Stimulus with the remaining $8 million related to tuition adjustments. We believe that we will continue to receive these types of incremental revenue and reimbursement of center operating expenses for the foreseeable future. Bills passed by U.S. Congress subsequent to the CARES Act have approved $49 billion in incremental stimulus funding for ECE providers.

During the nine months ended October 2, 2021, we recognized $45.1 million in incremental revenue and $76.5 million for reimbursement of center operating expenses from Governmental Stimulus as compared to $101.1 million in incremental revenue and $33.7 million for reimbursement of center operating expenses from Governmental Stimulus during the nine months ended September 26, 2020. Of the incremental revenue recognized, we estimate that $34 million for the nine months ended October 2, 2021 and $96 million for the nine months ended September 26, 2020 related to Governmental Stimulus with the remainder related to tuition adjustments. The federal government passed additional legislation during fiscal 2020, such as the employer payroll tax deferral and employee retention credit, both of which we implemented.

 

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Our Industry

We compete in the U.S. ECE market. Over 17.5 million workers, or 20% of the American workforce, rely on childcare every day. According to the Bureau of Economic Research, the U.S. market for private expenditures on education-focused care for children zero to five years of age was $15.2 billion in 2019, and served annual enrollments of approximately 2.5 million children according to management estimates, while the total spending in the United States on childcare was approximately $42 billion, according to the Consumer Expenditure Survey in 2018. From 2012 to 2019, according to the Bureau of Economic Research, private expenditures on education-focused care grew from $10.5 billion to $15.2 billion, representing a compound annual growth rate over the period of 4.7%. We estimate that the market for private expenditures on education-focused care is expected to grow at a compound annual growth rate of 6.4% between 2021 and 2026, excluding any impact from Governmental Stimulus.

The ECE market is highly fragmented with more than 109,000 centers in the United States in 2017, according to the Office of Child Care. We estimate that the top three providers, including KinderCare, represented approximately 5% of total capacity as of January 1, 2020. The COVID-19 pandemic caused many providers to experience significant financial challenges and reduced enrollments due to government restrictions and consumer behavior. As a result, approximately 13,000 centers, representing an estimated 20% to 25% of industry capacity, closed between September 2019 and September 2021 and have not reopened, leaving families with fewer options for organized care.

According to management estimates, the employer-sponsored ECE market represented a small but meaningful portion of the overall ECE market with expenditures of approximately $3 billion in 2019. Increasingly, employers recognize the benefits of offering employees access to flexible, high-quality, affordable ECE options on either a full-time or back-up care basis. Evolving work styles are driving a preference for flexible ECE solutions with care options both onsite at corporate offices and in the communities in which employees live.

The market for before- and after-school programs serves children enrolled in pre-K-12 schools. According to the National Center for Education Statistics, there are more than 130,000 schools across the United States. Schools have long recognized the benefits of providing their families with access to before- and after-school care and education programs, though many schools have struggled to effectively manage and deliver such offerings. The lack of before- and after school care onsite creates challenges for children and families who need to travel to and from other providers, such as the YMCA, to access full-day care solutions. Third-party providers, such as Champions, are in the early stages of serving this market opportunity at scale.

We believe the market opportunity for scaled, quality ECE providers will continue to grow due to the following trends and market dynamics:

Broad recognition of the benefit of ECE drives growth in private spend and consistent public subsidy funding. Studies consistently show that organized early childhood education fosters the development of cognitive and social skills, bette