S-4 1 a2134046zs-4.htm S-4
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As filed with the Securities and Exchange Commission on April 21, 2004

Registration No. 333-            .



SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


Form S-4
REGISTRATION STATEMENT
Under The Securities Act of 1933


KINDERCARE LEARNING CENTERS, INC.
(Exact name of registrant as specified in its charter)

Delaware 8351 63-0941966
(Jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Numbers)

650 N.E. Holladay Street, Suite 1400
Portland, Oregon 97232
(503) 872-1300
(Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices)


Eva M. Kripalani, Esq.
KinderCare Learning Centers, Inc.
650 N.E. Holladay Street, Suite 1400
Portland, Oregon 97232
(503) 872-1300
(Name, address, including zip code, and telephone number, including area code, of agent for service)


Copies to:

David J. Sorkin, Esq.
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, New York 10017
(212) 455-2000


        Approximate date of commencement of proposed sale to the public: As soon as practicable after the 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. o

        If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) 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. o                         

        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. o                         


CALCULATION OF REGISTRATION FEE



Title of Each Class of
Securities to be Registered
  Amount to
be Registered(1)
  Amount of
Registration Fee(2)

Shares of Class A Common Stock, par value $0.01 per share(3)        
Shares of Class B Common Stock, par value $0.01 per share(4)        
Income Deposit Securities (IDSs)(5)   22,508,858   $26,808
      % Senior Subordinated Notes(6)        
Subsidiary Guarantees of    % Senior Subordinated Notes(7)        

(1)
Represents the maximum number of shares of Class A common stock and Class B common stock, principal amount of        % notes and number of IDSs of KinderCare Learning Centers, Inc. issuable by the Registrant in the recapitalization described herein, as provided in Rule 457(f)(1), and based on (a) the number of shares of KinderCare common stock, par value $0.01 per share, outstanding as of April 15, 2004, plus (b) the number of shares of KinderCare common stock that could be issued before the effective time of the recapitalization. This registration statement also relates to an additional indeterminate number of shares of Class A common stock and Class B common stock, in each case, par value $0.01 per share, that may be issued upon stock splits, stock dividends or similar transactions in accordance with Rule 416 under the Securities Act.

(2)
Estimated solely for the purpose of calculating the amount of the registration fee required by the Securities Act of 1933 and computed pursuant to Rule 457(f) under the Securities Act based on the ultimate maximum number of shares of the common stock of the Registrant to be issued to stockholders of the Registrant pursuant to the merger described herein. Pursuant to Rules 457(f) and 457(c) under the Securities Act of 1933, the registration fee was calculated based on the product of (1) 22,508,858 shares of KinderCare common stock, par value $0.01 per share, to be received by the Registrant and cancelled in the recapitalization described herein, and (2) $9.40 per share, the average of the high and low sales prices for shares of KinderCare common stock quoted on the OTC Bulletin Board on April 15, 2004.

(3)
Includes Class A common stock in an amount to be determined at the time of pricing of a concurrent public offering of IDSs by KinderCare Learning Centers, Inc.

(4)
Includes shares of Class B common stock in an amount to be determined at the time of pricing of the public offering.

(5)
Each IDS represents one share of Class A common stock and        % senior subordinated notes of KinderCare Learning Center, Inc., the principal amount, interest rate and certain other terms of which will be determined at the time of pricing of the public offering.

(6)
Includes an indeterminate principal amount of notes of the same series as the notes, which will be received by holders of notes in the future on one or more occasions in the event of a subsequent issuance of IDSs, upon an automatic exchange of portions of the notes for identical portions of such additional notes.

(7)
Each of the subsidiaries of KinderCare Learning Centers, Inc. listed in the "Table of Additional Registrants" below will issue a guarantee with respect to the notes. Pursuant to Rule 457(n) under the Securities Act of 1933, no separate fee for the guarantees is payable.


        The Registrants hereby amend this registration statement on such date or dates as may be necessary to delay its effective date until the Registrants 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, or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.





Table of Additional Registrant Guarantors

Exact Name of Registrant Guarantor
as Specified in its Charter

  State or Other
Jurisdiction of
Incorporation
or Organization

  I.R.S.
Employer
Identification
Number

  Address Including Zip Code,
Telephone Number Including
Area Code, of Registrant
Guarantor's Principal
Executive Offices

KC Development, LLC   Delaware   63-1086588   650 N.E. Holladay Street,
Suite 1400
Portland, Oregon 97232
(503) 872-1300

KC Distance Learning, Inc.

 

Delaware

 

63-1120500

 

650 N.E. Holladay Street,
Suite 1400
Portland, Oregon 97232
(503) 872-1300

KinderCare Real Estate, LLC

 

Delaware

 

63-1120501

 

650 N.E. Holladay Street,
Suite 1400
Portland, Oregon 97232
(503) 872-1300

Mulberry Child Care Centers, Inc.

 

Delaware

 

04-3056834

 

650 N.E. Holladay Street,
Suite 1400
Portland, Oregon 97232
(503) 872-1300

Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This proxy statement/prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale is not permitted or would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.

PRELIMINARY PROXY STATEMENT/PROSPECTUS
DATED                        , 2004, SUBJECT TO COMPLETION

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                        , 2004

Dear Fellow Stockholder:

        You are invited to attend a special meeting of stockholders at                        on                         , 2004 at             a.m., local time.

        At the special meeting, you will be asked to consider and vote upon a recapitalization proposal. The recapitalization will consist of the conversion of each share of KinderCare's existing common stock into cash and new securities of KinderCare, which will result in a reorganization of the capital structure of KinderCare. Pursuant to the recapitalization, which will be effected through the merger of a wholly owned subsidiary of KinderCare into KinderCare, each KinderCare stockholder will have the right to elect to receive the following for each share of common stock owned by such stockholder:

    at least $            in cash, without interest, plus      Income Deposit Security, or IDS, of KinderCare; or

    at least $            in cash, without interest, plus      share of Class B common stock, par value $0.01 per share, of KinderCare.

        Each IDS initially represents one share of Class A common stock and a      % senior subordinated note due 2014, subject to extension of maturity, with $                   principal amount. We are engaged in a public offering of our IDSs and separate      % senior subordinated notes due 2014 (not represented by IDSs), subject to extension of maturity. Completion of the recapitalization is conditioned on approval of a restated certificate of incorporation containing various amendments to KinderCare's certificate of incorporation that will be made as a result of the recapitalization, as well as the concurrent completion of the public offering of our IDSs and separate notes. In addition, the completion of the recapitalization is a condition to the public offering. We expect that the recapitalization will occur concurrently with the closing of the public offering.

        The number of shares of Class B common stock issuable in the recapitalization will be subject to proration if necessary to limit the total number of issued and outstanding shares of Class B common stock to            shares, which represents        % of the outstanding voting power of KinderCare after giving effect to the public offering and    % of the overall value of KinderCare's equity, or    % of the outstanding voting power and    % of the overall value of KinderCare's equity if the underwriters' over-allotment option to purchase additional IDSs is exercised in full.

        The number of IDSs and the number of shares of Class B common stock to be issued in the recapitalization and the amount of cash to be paid in the recapitalization will be determined at the time the public offering is priced. Approximately      % of the IDSs to be issued in the recapitalization will be placed in an escrow for a period of up to 30 days to cover any purchase under the underwriters' over-allotment option in the public offering. To the extent that the underwriters' over-allotment option is exercised, holders of our existing common stock will receive cash instead of the escrowed IDSs as part of their merger consideration.

        If you fail to validly make an election, including if you do not make any election, you will be deemed to have made a cash and IDS election. To make your election, the election form must be properly completed and submitted by             a.m., local time, on                        , 2004, which is the day of the special meeting. The attached proxy statement/prospectus includes information on pages 79 and 200 as to the elections available to you and how to make them.

        The shares of existing common stock are currently quoted on the OTC Bulletin Board under the symbol "KDCR." After the recapitalization, the existing common stock will no longer be outstanding and we do not expect that the Class A common stock or the Class B common stock will be listed on an exchange. We will apply to list the IDSs on the                        under the trading symbol "            ."

        The accompanying proxy statement/prospectus provides detailed information about the recapitalization. Please read the entire proxy statement/prospectus and the appendices carefully. For risks in connection with the recapitalization, see "Risk Factors" beginning on page 34.

        Our board of directors urges you to sign, date and mail the enclosed proxy in the postage-paid envelope as to how you would like your shares voted.

Thank you for your continued support.


 

 


David J. Johnson
Chairman and Chief Executive Officer

        Upon a subsequent issuance by us of IDSs or notes of the same series (not represented by IDSs), a portion of your notes may be automatically exchanged for an identical principal amount of the notes issued in such subsequent issuance, and in that event your IDSs or notes will be replaced with new IDSs or notes, as the case may be. In addition to the notes represented by the IDSs, the registration statement of which this proxy statement/prospectus is a part also registers the notes and new IDSs to be issued upon any such subsequent issuance. For more information regarding these automatic exchanges and the effect they may have on your investment, see "Description of NotesCovenants Relating to IDSsProcedures Relating to Subsequent Issuance" on page 172 and "Special Factors—Material U.S. Federal Income Tax ConsiderationsConsequences to U.S. HoldersNotes—Additional Issuances" on page 69.

        Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the securities to be issued under this proxy statement/prospectus or determined if this proxy statement/prospectus is accurate or adequate. Any representation to the contrary is a criminal offense.

        The date of this proxy statement/prospectus is                        , 2004, and it is first being mailed or otherwise delivered to KinderCare stockholders on or about                        , 2004.


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KinderCare Learning Centers, Inc.
650 N.E. Holladay Street, Suite 1400
Portland, Oregon 97232


NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON                        , 2004


        A special meeting of KinderCare Learning Centers, Inc. stockholders will be held at                        on                         , 2004 at              a.m., local time. The purpose of the meeting is to consider and vote upon the following proposals:

    1.
    to adopt a Recapitalization Agreement and Plan of Merger, dated as of                 , 2004, between KinderCare Learning Centers, Inc. and KLC Merger Sub, Inc., a wholly owned subsidiary of KinderCare, providing for the merger of KLC Merger Sub, Inc. with and into KinderCare, with KinderCare as the surviving corporation; and

    2.
    to approve KinderCare's restated certificate of incorporation, which includes the following amendments:

    increasing the number of authorized shares of common stock, $0.01 par value per share, from                        to                         , which will be divided into the following series:                        will be shares of existing common stock with one vote per share,                         will be shares of Class A common stock with one vote per share,                         will be shares of Class B common stock with one vote per share and                        will be shares of Class C common stock with one vote per share;

    providing that shares of Class A common stock and Class B common stock vote together as a single class on all matters presented to the stockholders for a vote, except as required by law, and except that Class A common stock and Class B common stock will be entitled to vote separately on any amendment to our restated certificate of incorporation that would disproportionately and adversely affect the rights of such series of common stock;

    providing that the dividend rate on each share of Class B common stock will equal            multiplied by the dividend rate on each share of Class A common stock and that dividends cannot be declared on the Class A common stock unless a corresponding proportionate dividend is declared on the Class B common stock;

    providing that, after the second anniversary of the recapitalization and subject to certain conditions described in our restated certificate of incorporation, each share of Class B common stock will be convertible, at the holder's option, into either one IDS or, if the IDSs have automatically separated or are otherwise not outstanding prior to the time of such conversion, one share of Class A common stock and a note having a principal amount equal to the note which was represented by each IDS at the time of the public offering; and

      providing that at any time on and after the third anniversary of the recapitalization, KinderCare will have the option to force conversion of all of the then-outstanding shares of Class B common stock into IDSs on the terms and subject to the conditions described in our restated certificate of incorporation; and

    3.
    to vote on any other matter as may properly come before the special meeting.

        Proposals 1 and 2, both of which relate to the recapitalization, are separate matters to be voted upon by KinderCare stockholders but are expressly conditioned upon the approval of the other proposal (but not proposal 3). This means that BOTH of these proposals must be adopted or approved, as applicable, by KinderCare stockholders in order for KinderCare to obtain the requisite stockholder approval of the recapitalization. The transactions described in this document will not be completed, even if all of the other conditions are satisfied or waived, if the requisite stockholder approval of these two proposals is not received.

        Adoption of the recapitalization agreement and approval of our restated certificate of incorporation each requires the affirmative vote of the holders of a majority of the outstanding shares of KinderCare's existing common stock. In addition, approval of our restated certificate of incorporation is a condition to the completion of the recapitalization. KinderCare's directors and executive officers and their affiliates have indicated that they intend to vote the shares they hold, and the shares over which they exercise voting control, for the recapitalization proposals. As of April 20, 2004, these directors, executive officers and affiliates were entitled to vote, or exercised voting power over shares entitled to vote, approximately 17,967,810 shares of existing common stock, or approximately 91.1% of the outstanding shares of existing common stock. Assuming that these directors, executive officers and affiliates continue to own a majority of the issued and outstanding shares of existing common stock on the record date for the special meeting, the requisite vote of the holders of shares of existing common stock to adopt the Recapitalization Agreement and Plan of Merger and to approve our restated certificate of incorporation would be assured. Your participation is still important, however, because you are being offered the opportunity to make an election as to the form of merger consideration that you would like to receive in the recapitalization.

        In the merger, each share of existing common stock will be converted into the right to receive, based upon the holder's election and subject, in certain circumstances, to proration, one of the following:

    at least $            in cash, without interest, plus            Income Deposit Security, or IDS, of KinderCare; or

    at least $            in cash, without interest, plus            share of Class B common stock, par value $0.01 per share, of KinderCare.

        A copy of the Recapitalization Agreement and Plan of Merger is attached as Appendix A to the proxy statement/prospectus accompanying this notice.

        The record date for the special meeting is                        , 2004. Only stockholders of record at the close of business on that date can vote at the meeting. A list of KinderCare stockholders entitled to vote at the special meeting will be available for examination, during ordinary business hours, for 10 days before the meeting at KinderCare's corporate offices, 650 N.E. Holladay Street, Suite 1400, Portland, Oregon 97232. Stockholders will have one vote for each share of existing common stock held as of the record date.

        We have not authorized anyone to give you information that differs from the information in the accompanying proxy statement/prospectus. If you receive any different information, you should not rely on it. The information contained in the accompanying proxy statement/prospectus speaks as of the date below. You should not infer that the information has not changed from that date.



        A form of proxy and a proxy statement/prospectus containing more detailed information with respect to the matters to be considered at the special meeting are included with this notice.

    By Order of the Board of Directors,

 

 


Eva M. Kripalani
Senior Vice President, General Counsel and Secretary
                        , 2004
   

IMPORTANT
Whether or not you plan to attend the meeting, please provide your proxy by filling in, signing, dating, and promptly mailing the accompanying proxy card in the enclosed envelope.



TABLE OF CONTENTS

 
  Page
Questions and Answers About the Recapitalization   1
Summary   13
Risk Factors   34
Cautionary Statement Regarding Forward-Looking Statements   50
The Special Meeting   51
Special Factors   55
The Recapitalization   78
Capitalization   86
Comparative Per Share Data   87
Market Price of Existing Common Stock and Dividend Information   88
Dividend Policies   89
Selected Historical Consolidated Financial and Other Data   90
Unaudited Pro Forma Condensed Consolidated Financial Data   93
Management's Discussion and Analysis of Financial Condition and Results of Operations   100
Business   121
Management   140
Principal Stockholders   147
Related Party Transactions   149
Description of Certain Indebtedness   150
Description of Capital Stock   153
Description of IDSs   159
Description of Notes   164
The Recapitalization Agreement   200
Securities Eligible for Future Sale   205
Comparison of Rights of KinderCare Stockholders Before and After the Recapitalization   206
Legal Matters   207
Experts   207
Stockholder Proposals for 2004   207
Other Matters   207
Where You Can Find More Information   208

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APPENDICES

 
   
   
APPENDIX A   Form of Recapitalization Agreement and Plan of Merger, dated as of                    , 2004 between KinderCare Learning Centers, Inc. and KLC Merger Sub, Inc.   A-1

APPENDIX B

 

Section 262 of the General Corporation Law of the State of Delaware

 

B-1

APPENDIX C

 

Formulae Used in Calculations of Payments in Recapitalization

 

C-1

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QUESTIONS AND ANSWERS ABOUT THE RECAPITALIZATION

The Recapitalization

Q:
Why is KinderCare proposing the recapitalization?

A:
KinderCare believes the recapitalization will provide significant value and liquidity for KinderCare stockholders. KinderCare believes the recapitalization will allow the holders of its existing common stock to retain a continuing interest in the company and, at the same time, allow all stockholders the opportunity to obtain substantial immediate liquidity through the distribution of cash in the merger.

    For a more detailed discussion of why KinderCare is proposing the recapitalization, you should carefully consider the reasons, as well as the potentially negative factors and risks, in the section titled "Special Factors—Recommendation of the KinderCare Board of Directors" beginning on page 55.

Q:
Why is the recapitalization being accomplished through a merger and what is KLC Merger Sub, Inc.?

A:
We have structured the recapitalization as a merger because this structure allows you, in addition to receiving cash, a choice, subject to proration, between IDSs, which include a note as well as Class A common stock, on the one hand, and Class B common stock, on the other hand. KLC Merger Sub, Inc. is a Delaware corporation newly formed by KinderCare in order to facilitate the merger.

Q:
When is the special meeting?

A:
The special meeting will take place on                        , 2004. The location of the meeting is specified on the cover page of this document.

Q:
Are there risks I should consider in deciding whether to vote for the merger?

A:
Yes. In evaluating the merger, you should carefully consider the factors discussed in the section titled "Risk Factors" beginning on page 34.

Q:
What will KinderCare's dividend policy be following the recapitalization?

A:
Upon completion of the recapitalization, our board of directors is expected to adopt a dividend policy where, if we have lawfully available funds after the payment of interest on the notes, our board of directors will declare dividends on our Class A common stock and Class B common stock. Initial annual dividends are expected to be approximately $                  per share of Class A common stock and $                  per share of Class B common stock. The dividend payments are subject to applicable law and the terms of our revolving credit facility and other then-outstanding indebtedness, and our board of directors may, in its discretion, modify or repeal this dividend policy.

Q:
What will my U.S. federal income tax treatment be in the recapitalization?

A:
Subject to the assumptions and qualifications under the heading "Special Factors—Material U.S. Federal Income Tax Considerations" beginning on page 62, in general:

you would be treated as exchanging your existing common stock for the cash and any shares of Class B common stock and IDSs received in the recapitalization; and

you would recognize gain (but not loss) in an amount equal to the difference, if any, between (1) the sum of cash received, the fair market value of the shares of Class B common stock received and the fair market value of the IDSs received and (2) your tax basis in your shares of existing common stock surrendered in the recapitalization, but only to the extent of the sum of the cash and the fair market value of the notes represented by the IDSs you receive in the recapitalization.

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    Thus, regardless of your election, you may recognize gain up to the amount of cash received in the recapitalization. Furthermore, holders who make a cash and IDS election may have more gain recognition relative to holders who make a cash and Class B election, because gain may also be recognized to the extent of the fair market value of the notes represented by the IDSs.

    Option holders will recognize ordinary income in an amount equal to the consideration paid to the holder at the time the option is cancelled.

    For additional information (including your holding period and tax basis in your Class A common stock and notes represented by the IDSs and your Class B common stock), see "Special Factors—Material U.S. Federal Income Tax Considerations."

    Each stockholder and option holder is strongly urged to consult his or her tax advisor as to the specific tax consequences to such stockholder and option holder of the recapitalization, including the application of federal, state, local and foreign income and other tax laws in his or her particular facts and circumstances.

Q:
What stockholder vote is required to approve the recapitalization?

A:
Each of the recapitalization proposals must be approved by the holders of a majority of the outstanding shares of KinderCare's existing common stock.

    KinderCare's directors and executive officers and their affiliates have indicated that they intend to vote the shares they hold, and the shares over which they exercise voting control, for the recapitalization proposals. As of April 20, 2004, these directors, executive officers and affiliates were entitled to vote, or exercised voting power over shares entitled to vote, approximately 17,967,810 shares of existing common stock, or approximately 91.1% of the outstanding shares of existing common stock. Assuming that these directors, executive officers and affiliates continue to own a majority of the issued and outstanding shares of existing common stock on the record date for the special meeting, the requisite vote of the holders of shares of existing common stock to adopt the Recapitalization Agreement and Plan of Merger, which we refer to in this document as the recapitalization agreement, and to approve our restated certificate of incorporation would be assured. Your participation is still important, however, because you are being offered the opportunity to make an election as to the form of merger consideration that you would like to receive in the recapitalization.

Q:
When do you expect to complete the recapitalization?

A:
We are working toward completing the recapitalization as quickly as possible. We hope to complete the recapitalization on or shortly after                        , 2004, the date of the special meeting. However, we cannot assure you as to when or if the recapitalization will occur.

Q:
How will the recapitalization affect stock options to acquire KinderCare common stock?

A:
Assuming that the recapitalization and the public offering result in a change of control of KinderCare, immediately prior to the recapitalization, all unvested options to purchase shares of our common stock held by our employees under our stock-based compensation plans will become fully vested. Outstanding options will cease to be exercisable and will be cancelled upon the recapitalization, but holders of cancelled options will be provided the same consideration as our existing stockholders in the recapitalization with respect to a number of shares having a fair market value equal to the "spread" of the relevant option (the excess of the fair market value of the underlying shares at the time of the recapitalization over the exercise price of the stock option).

Q:
How will the cash portion of the recapitalization be financed?

A:
We intend to finance cash payments in the recapitalization with a portion of the

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    proceeds of the public offering and cash on hand.

Q:
Is the completion of the recapitalization subject to regulatory approval?

A:
Yes. To complete the recapitalization:

KinderCare must file a certificate of merger and our restated certificate of incorporation with the Secretary of State of Delaware;

KinderCare may need to obtain approval from child care licensing authorities in certain states to complete the recapitalization, other than those which, if not obtained, would not have a material adverse effect on KinderCare; and

if a filing becomes necessary under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, all waiting periods under that act must have expired or terminated.

    KinderCare does not need to comply with any other federal or state regulatory requirements or obtain any other regulatory approvals to complete the recapitalization.

Q:
Does any stockholder have any appraisal rights in the recapitalization?

A:
Yes. Under Delaware law, appraisal rights are available to stockholders of KinderCare with respect to the recapitalization.

Q:
What are appraisal rights?

A:
Instead of receiving cash and either                  IDS or                  share of Class B common stock for each share of existing common stock that you own in the merger, you have the right under Delaware law to have the fair value of your common stock appraised by the Delaware Court of Chancery and then paid to you in cash. In order to demand appraisal, you must make a written demand for appraisal before the vote on the recapitalization agreement at the special meeting, you must not vote to adopt the recapitalization agreement and you must satisfy the other requirements under Delaware law which are described in greater detail in this proxy statement/prospectus under "The Recapitalization—Appraisal Rights."

The Merger Consideration

Q:
What elections can I make?

A:
There are two different elections available for each share of existing common stock:

Cash and IDS Election.  You can elect to receive at least $                  in cash plus                  IDS of KinderCare.

Cash and Class B Election.  You can elect to receive at least $                  in cash plus                   share of Class B common stock of KinderCare, subject to proration as described in this proxy statement/prospectus.

    Option holders will be provided with the same elections in connection with the cancellation of outstanding options.

    As described below, all holders are expected to receive IDSs even if they have not elected to do so. Certain of our stockholders who are affiliates of Kohlberg Kravis Roberts & Co. L.P., which we refer to as KKR in this document, and affiliates of Oaktree Capital Management, LLC, which we refer to as Oaktree in this document, have stated that they intend to make cash and Class B elections to receive the full number of shares of Class B common stock that is available. Therefore, if you make a cash and Class B election, then all shares of existing common stock for which stockholders elected to receive Class B common stock will receive a prorated amount of the available shares of Class B common stock, and your remaining shares of existing common stock will be converted into the right to receive                  IDS per share. Option holders' elections will be taken into account in performing the above calculation.

    As a result of KKR's and Oaktree's intended cash and Class B elections, if you make a cash and IDS election, you should not receive any Class B common stock.

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    If you fail to validly make an election, including if you do not make any election, you will be deemed to have made a cash and IDS election.

Q:
What are IDSs?

A:
IDSs are securities comprised of Class A common stock and notes. Each IDS initially represents:

one share of Class A common stock; and

a      % senior subordinated note due                        , 2014 (subject to extension of maturity as described in "Description of Notes") with $                   principal amount.

    The ratio of Class A common stock to principal amount of notes represented by an IDS is subject to change in the event of a stock split, recombination or reclassification of our common stock. For example, if we effect a two-for-one stock split, from and after the effective date of the stock split, each IDS will represent two shares of Class A common stock and the same principal amount of notes as it previously represented. Likewise, if we effect a recombination or reclassification of our Class A common stock, each IDS will thereafter represent the appropriate number of shares of Class A common stock on a recombined or reclassified basis, as applicable, and the same principal amount of notes as it previously represented.

Q:
What are the differences between the two elections?

A:
The most significant differences are:

Only the IDSs will be listed on a national securities exchange. Therefore, any shares of Class B common stock that you receive in connection with a cash and Class B election will be an illiquid security for which no market may be available. See "Description of Capital Stock—Our New Class B Common Stock."

If you make a cash and IDS election, you will receive IDSs for which you will be entitled to receive quarterly interest payments on the notes represented by the IDSs. Dividends on the shares of Class A common stock represented by the IDSs and the shares of Class B common stock will, however, only be paid if and to the extent dividends are declared by our board of directors and permitted by applicable law and the terms of our revolving credit facility, the indenture governing our notes and any other then-outstanding indebtedness of ours. Subject to the above limitations, we expect initial annual dividends to be approximately $                  per share of Class A common stock, and $                  per share of Class B common stock. However, our board of directors may, in its discretion, modify or repeal this dividend policy.

A cash and IDS election will reduce your percentage ownership interest in KinderCare capital stock more than a cash and Class B election.

If you make a cash and IDS election, you may have more gain recognition relative to holders who make a cash and Class B election, because gain may also be recognized to the extent of the fair market value of the notes represented by the IDSs (in addition to the extent of cash) received.

After the second anniversary of the recapitalization and subject to certain conditions described under "Description of Capital Stock—Our New Class B Common Stock," each share of Class B common stock will be convertible, at the option of the holder, into either one IDS or, if the IDSs have automatically separated or are otherwise not outstanding prior to the time of such conversion, one share of Class A common stock and a note having a principal amount equal to the note which was represented by each IDS.

      Shares of Class A common stock are not convertible directly into IDSs; however, they may be combined with the applicable number of notes to form IDSs.

4


    See "—Summary of Our New Common Stock," "Special Factors—Material U.S. Federal Income Tax Considerations" and "Comparison of Rights of KinderCare Stockholders Before and After the Recapitalization."

Q:
What payments can I expect to receive as a holder of IDSs?

A:
You will be entitled to receive approximately $                  per IDS per year, subject to our right or obligation, under certain circumstances specified in the indenture governing the notes and in our revolving credit facility, to defer interest payments on our notes. For a detailed description of these circumstances, see "Description of Notes—Terms of the Notes—Interest Deferral" and "Description of Certain Indebtedness—Revolving Credit Facility."

    You will also receive quarterly dividends on the shares of our Class A common stock represented by your IDSs, if and to the extent dividends are declared by our board of directors and permitted by applicable law and the terms of the credit facility, the indenture governing our notes and any of our other then-outstanding indebtedness. Specifically, the indenture governing our notes restricts our ability to declare and pay dividends on our Class A common stock as described under "Dividend Policies." In addition, the revolving credit facility restricts our ability to declare and pay dividends on our common stock as described under "Dividend Policies" and "Description of Certain Indebtedness—Revolving Credit Facility." Upon the closing of recapitalization and the public offering, our board of directors is expected to adopt a dividend policy which contemplates that, subject to applicable law and the terms of our then-outstanding indebtedness, initial annual dividends will be approximately $                  per share of our Class A common stock. However, our board of directors may, in its discretion, modify or repeal this dividend policy. We cannot assure you that we will pay dividends at this level in the future or at all. We cannot declare dividends on our Class A common stock unless at such time the corresponding proportionate dividend is declared on our Class B common stock.

    We expect to make interest and dividend payments quarterly on the    day of each            ,            ,             and                        to holders of record on the             day or the immediately preceding business day of such month.

Q:
What payments can I expect to receive as a holder of Class B common stock?

A:
You will be entitled to receive quarterly dividend payments on the shares of Class B common stock, if and to the extent dividends are declared by our board of directors and permitted by applicable law and the terms of our revolving credit facility, the indenture governing our notes and any of our other then-outstanding indebtedness. The indenture governing the notes and our revolving credit facility will each contain restrictions on our ability to declare and pay dividends on our Class B common stock. See "Dividend Policies," "Description of Notes—Certain Covenants—Limitation on Restricted Payments" and "Description of Certain Indebtedness."

Q:
Do I have voting rights as a holder of IDSs and Class B common stock?

A:
Yes. As a holder of IDSs, you will be able to vote with respect to the underlying shares of Class A common stock. As a holder of Class B common stock, you will be able to vote together as a class with the Class A common stock on all matters submitted to the stockholders for approval, except as required by law and except that holders of Class A common stock and Class B common stock will vote separately as a class on any amendment to our restated certificate of incorporation that would disproportionately and adversely affect the rights of such series of common stock.

5


Q:
Will my rights as a holder of IDSs be any different than the rights of a direct holder of the Class A common stock or notes?

A:
No. As a holder of IDSs, you are the beneficial owner of the Class A common stock and notes represented by your IDSs. As such, through your broker or other financial institution and The Depository Trust Company, known as DTC, you will have exactly the same rights, privileges and preferences, including voting rights, rights to receive distributions, rights and preferences in the event of a default under the indenture governing our notes, ranking upon bankruptcy and rights to receive communications and notices as a direct holder of the Class A common stock and notes, as applicable.

Q:
Can I separate my IDSs into shares of Class A common stock and notes or recombine shares of Class A common stock and notes to form IDSs?

A:
Yes. Holders of IDSs, whether purchased in the public offering or in a subsequent offering of IDSs of the same series, may, at any time after the earlier of 45 days from the date of the closing of the public offering or the occurrence of a change of control, through their broker or other financial institution, separate the IDSs into the shares of our Class A common stock and notes represented by the IDSs. Any holder of shares of our Class A common stock and notes may, at any time, through his or her broker or other financial institution, combine the applicable number of shares of Class A common stock and notes to form IDSs. Separation and recombination of IDSs may involve transaction fees charged by your broker and/or financial intermediary. See "Description of IDSs—Book Entry Settlement and Clearance—Separation and Combination."

Q:
Will my IDSs automatically separate into shares of Class A common stock and notes upon the occurrence of certain events?

A:
Yes. Separation of all of the IDSs will occur automatically upon the occurrence of any redemption, whether in whole or in part, of the notes, upon the maturity of the notes or upon an event of default under the terms of the notes.

Q:
What will happen to the IDSs I hold upon a stock split, recombination or reclassification of the Class A common stock?

A:
The ratio of shares of Class A common stock to principal amount of notes represented by an IDS is subject to change in the event of a stock split, recombination or reclassification of our Class A common stock. For example, if we elect to effect a two-for-one split of our Class A common stock, from and after the effective date of the stock split, each IDS will represent two shares of Class A common stock and the same principal amount of notes as it previously represented. Likewise, if we effect a recombination or reclassification of our Class A common stock, each IDS will thereafter represent the appropriate number of shares of Class A common stock on a recombined or reclassified basis, as applicable, and the same principal amount of notes as it previously represented. See "Description of the IDSs."

Q:
Will the IDSs be listed on an exchange?

A:
We expect them to be listed. We will apply to list the IDSs on the                        under the trading symbol "            ."

Q:
Will the shares of our Class B common stock and shares of our Class A common stock and the notes represented by the IDSs be separately listed on an exchange?

A:
Neither the Class B common stock nor the notes will be listed on any exchange. The shares of our Class A common stock will not be listed for separate trading on the                        until the minimum listing criteria on the                        are satisfied by our outstanding shares of Class A common stock no longer represented by IDSs for a period of 30 consecutive trading days. IDSs may be separated, through the holder's broker or other financial institution, into shares of Class A common stock and notes at any time after the earlier of 45 days from

6


    the date of the recapitalization or the occurrence of a change of control. See "Description of Capital Stock—Our New Class A Common Stock—Listing."

    The Class A common stock and the notes represented by the IDSs and the Class B common stock offered by this proxy statement/prospectus will be freely transferable without restriction or further registration under the Securities Act of 1933, unless they are purchased by affiliates as that term is defined in Rule 144 under the Securities Act.

Q:
What will happen if we issue additional IDSs or notes in the future?

A:
We may conduct future financings by selling additional IDSs or notes of the same series, which will have terms that are identical to those of the IDSs or notes, respectively, being sold in the public offering, except that if additional IDSs are issued 45 days or more from the closing of the public offering, they will be immediately separable, and if they are issued fewer than 45 days from the closing of the public offering, they will be separable on the same dates as the IDSs issued in the public offering may separate. Additional IDSs will also represent the same proportions of Class A common stock and notes as are represented by the then-outstanding IDSs. Although the notes represented by such IDSs or sold separately (not represented by IDSs) will have terms that are identical (except for the issuance date) to the notes being sold in the public offering and will be part of the same series of notes for all purposes under the indenture, it is possible that the new notes will be sold with original issue discount, referred to as OID, for U.S. federal income tax purposes. If such notes are issued with OID, all holders of IDSs of the same series (including the IDSs being offered hereby) and of outstanding notes not held in IDSs (including the notes being offered hereby) will automatically exchange a ratable portion of their outstanding notes for a portion of the new notes, whether held directly or in the form of IDSs, and will thereafter hold a unit consisting of new notes and old notes with a new CUSIP number or a new IDS (consisting of such note unit and Class A common stock) with a new CUSIP number. As a result of such exchanges, we intend to allocate and report the OID associated with the sale of the new notes among all holders of notes on a pro rata basis, which may adversely affect your tax treatment. In addition, if such notes are issued with OID, holders of such notes may not be able to recover the portion of their principal amount treated as unaccrued OID in the event of an acceleration of the notes or our bankruptcy prior to the maturity of the notes.

Q:
Is my Class B common stock convertible at my option?

A:
Yes. On the second anniversary of the completion of the recapitalization and subject to certain conditions described under "Description of Capital Stock—Our New Class B Common Stock," any outstanding shares of Class B common stock will be convertible, at the holder's option, into IDSs identical to those sold in the public offering on the basis of one IDS for each share of Class B common stock if, at such date, there is not a default or event of default under our indebtedness or the indebtedness of our subsidiaries. If there is a default under any such indebtedness on the second anniversary of the recapitalization, the Class B common stock will not be convertible until the time such default is cured or otherwise ceases to exist. The conversion ratio of one IDS per share of Class B common stock will be proportionately adjusted for any stock splits, dividends, combinations or reclassifications or in the event we issue any IDSs at less than fair market value prior to the date of such conversion.

    We will only be required to effect conversions of the Class B common stock at intervals of six months beginning with the second anniversary of the date of the recapitalization, unless a majority of the holders of the Class B common stock

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    request a conversion with respect to a majority of their shares of Class B common stock.

Q:
Is the Class B common stock convertible at KinderCare's option?

A:
Yes. At any time on and after the third anniversary of the recapitalization, we will have the option to force conversion of all of the then-outstanding shares of Class B common stock into IDSs on the same terms and subject to the same conditions as those for a conversion of the Class B common stock at your option described in the preceding answer.

Q:
Are my shares of Class B common stock freely transferable?

A:
Yes. The shares of Class B common stock offered by this proxy statement/prospectus will be freely transferable without restriction or further registration under the Securities Act of 1933, unless they are purchased by affiliates as that term is defined in Rule 144 under the Securities Act. You should be aware that any shares of Class B common stock that you receive in connection with a cash and Class B election will be an illiquid security for which no market may be available.

Q:
How are the terms of the IDSs and Class B common stock different from the existing common stock?

A:
After the recapitalization occurs, your rights as a holder of IDSs will be governed by our restated certificate of incorporation and our notes indenture. If you make a cash and Class B election, your rights as a holder of shares of Class B common stock will be governed by our restated certificate of incorporation. The form of our restated certificate of incorporation is attached as Annex II to the recapitalization agreement included in this document as Appendix A. The differences are described beginning on page 206 of this document.

    Because IDSs are securities comprised of both Class A common stock and notes, holders of IDSs will have rights related to both Class A common stock and notes. With respect to the Class A common stock represented by the IDSs, holders of IDSs will have rights similar to those of holders of existing common stock before the recapitalization, except that:

    our board of directors cannot declare dividends on the Class A common stock represented by the IDSs unless at such time the corresponding proportionate dividend is declared on the Class B common stock; and

    we expect that the IDSs will be listed on the                        .

    In addition to having the rights of a holder of Class A common stock, a holder of IDSs will also have the rights of a holder of notes represented by the IDSs, which entitles the holder to, among other things:

    cash interest payments on the notes represented by the IDSs payable quarterly in arrears, subject to interest deferral;

    a cash payment of the principal amount of the notes represented by the IDSs on                        , 2014, the maturity date of the notes, subject to extension of maturity;

    a cash payment of 101% of the principal amount of the notes represented by the IDSs upon a change of control of KinderCare; and

    an option to separate the IDSs into the shares of Class A common stock and notes represented thereby at any time after the earlier of 45 days from the closing of the recapitalization or the occurrence of a change of control.

    Generally, holders of Class B common stock will have rights similar to those of holders of existing common stock before the recapitalization, except that:

    the dividend rate on each share of Class B common stock will equal            multiplied by the dividend rate on each share of Class A common stock; and

8


    after the second anniversary of the recapitalization and subject to certain conditions described in "Description of Capital Stock—Our New Class B Common Stock," each share of Class B common stock will be convertible, at the holder's option, into either one IDS or, if the IDSs have been automatically separated or are otherwise not outstanding prior to the time of such conversion,            share of Class A common stock and a note having a principal amount equal to the note which was represented by each IDS.

Q:
What happens if stockholders elect to receive more Class B common stock than is available?

A:
KKR and Oaktree have stated that they intend to make a cash and Class B election to receive the full number of shares of Class B common stock that is available. Therefore, if any other stockholders elect to receive Class B common stock for their shares of existing common stock, then all shares of existing common stock for which stockholders elected to receive Class B common stock will be converted into the right to receive:

$    multiplied by the number of shares of existing common stock owned by such stockholder; plus

the number of shares of Class B common stock determined by dividing                        by the aggregate number of shares of Class B common stock elected under the cash and Class B election (which quotient we refer to as the Class B proration factor); plus

the number of IDSs equal to the difference between one and the Class B proration factor.

    The foregoing calculation will take into account the elections of option holders in connection with the cancellation of outstanding options.

Q:
What happens if stockholders elect to receive less Class B common stock than is available?

A:
KKR and Oaktree have stated that they intend to make a cash and Class B election to receive the full number of shares of Class B common stock that is available. Therefore, if no other stockholders or option holders elect to receive Class B common stock, then KKR and Oaktree will receive the full amount of the available shares of Class B common stock.

Q:
If I make a cash and IDS election, will I be guaranteed to receive the full amount of the cash consideration and number of IDSs I elected to receive?

A:
Yes, subject to the escrow of up to                IDSs to cover the underwriters' over-allotment option under the public offering for a period of up to 30 days. To the extent that the underwriters exercise their over-allotment option, you will receive cash instead of the escrowed IDSs as part of your merger consideration.

Q:
In what form will the IDSs, the securities represented by the IDSs, and the Class B common stock be issued?

A:
The IDSs, the securities represented by the IDSs, and the Class B common stock will be issued in book entry form only. This means that you will not be a registered holder of IDSs, the securities represented by the IDSs or the Class B common stock, and you will not receive a certificate for your IDSs, the securities represented by your IDSs or the Class B common stock. You must rely on your broker or other financial institution that will maintain your book entry position to receive the benefits and exercise the rights of a holder of IDSs or Class B common stock.

How to Elect the Form of Merger Consideration to Be Received

Q:
What do I need to do with the election and transmittal form?

A:
If you wish to make an election as to what you want to receive in the recapitalization,

9


    you must complete the election and transmittal form that you have received or will be receiving and tell us what you want. The election and transmittal form must be sent to the exchange agent at one of the addresses below:

    If sent through the mail:
    Registrar and Transfer Company
    10 Commerce Drive
    Cranford, NJ 07016-0645
    Attn: Corporate Actions
    If delivered by hand:
    Registrar and Transfer Company
    c/o The Depository Trust Company
    Transfer Agent Drop
    55 Water Street
    New York, NY 10041-0099

    If sent by overnight delivery service:
    Registrar and Transfer Company
    10 Commerce Drive
    Cranford, NJ 07016-0645
    Attn: Corporate Actions
    If sent by facsimile transmission (fax):
    Registrar and Transfer Company
    (908) 497-2311 (fax)
    (800) 368-5948 (telephone confirmation)

    In order for your election to be valid, the exchange agent must receive your validly completed election and transmittal form by the start of the special meeting, which is scheduled for              a.m., local time, on                        , 2004.

    If you cannot send in your stock certificates by such time, you may send a notice of guaranteed delivery, with your completed election and transmittal form, promising to send in your actual certificates so that they are received by 5:00 p.m., local time, on                        , 2004, the second trading day after the special meeting, all in accordance with the instructions set forth under "The Recapitalization Agreement—Method of Making Elections." The requirement to send in stock certificates does not apply to option holders.

    Please note that if you send your election by fax, you must use the guaranteed delivery procedure, and your stock certificates must be physically delivered by an "eligible institution" to the exchange agent (by hand, mail or by overnight delivery service) and must actually be received by the exchange agent by 5:00 p.m., local time, on                        , 2004, the second trading day after the date of the special meeting of stockholders. In addition, there are certain practical risks of attempting delivery by fax.

    If you hold shares in book entry form at Registrar and Transfer Company, you need not surrender stock certificates relating to such shares.

Q:
What happens if I do not return the election and transmittal form?

A:
If you fail to return the election and transmittal form and other documents on time, you will be deemed to have made a cash and IDS election for each of your KinderCare shares; however, failure to send in the election and transmittal form and related documents could delay your actual receipt of the merger consideration. Promptly following the closing of the recapitalization, Registrar and Transfer Company, the exchange agent, will mail a letter of transmittal to any stockholder of record as of the effective time of the recapitalization who has not returned an election and transmittal form. A stockholder who has not completed and returned the election and transmittal form should complete and return the letter of transmittal received after the closing, together with his or her stock certificates, in order to receive the merger consideration.

    Comparable rules will apply to option holders in connection with the cancellation of outstanding options for merger consideration.

Q:
Where can I get additional election and transmittal forms or other information?

A:
We have retained MacKenzie Partners, Inc. as information agent to assist you in connection with the recapitalization. Persons in the United States and Canada may call MacKenzie Partners, Inc. toll free at (800)

10


    322-2885, persons outside the United States and Canada and banks, brokers and other financial institutions may call (212) 929-5500 (collect) to request additional documents and to ask any questions.

Q:
Do I need to submit the election form if my shares are held in a brokerage account?

A:
Yes. Your broker cannot make an election for you unless you complete and return an election and transmittal form. If you fail to do so, your shares will be classified as undesignated shares, and you will be deemed to have made a cash and IDS election.

Q:
What if my broker holds my shares for me in "street name"?

A:
In the event that your KinderCare shares are held in "street name," your broker should provide you with instructions as to making an election.

Q:
Can I revoke or change my election once I have submitted the election and transmittal form?

A:
Yes. You can revoke your original election by submitting a written notice of revocation to the exchange agent before the start of the special meeting, which is scheduled for             a.m., local time, on                        , 2004. Additionally, you may change your original election and make a new election by submitting a notice of revocation and by indicating on the written notice of revocation the new election choice that you wish to make. If you wish to submit a new election, you should refer to the instructions and other materials that accompany the election and transmittal form.

Q:
Can I make partial elections?

A:
Yes. The election and transmittal form provides for an election to be made with respect to all or any portion of your KinderCare shares. You may make an election to receive any combination of the available options. Just complete and mail in the election and transmittal form together with your stock certificates so that you have made elections for all of your KinderCare shares. The number of shares of Class B common stock in the cash and Class B election is subject to proration.

How to Vote Your Shares

Q:
How can I vote my shares?

A:
After you have carefully read this entire document, please vote your shares of KinderCare common stock. You may do this in one of the following ways:

completing, signing, dating and mailing your proxy card in the enclosed postage prepaid envelope; or

attending the special meeting and submitting a properly executed proxy or ballot. If a broker holds your shares in "street name," you will need to get a proxy from your broker to vote your shares in person.

    This will enable your shares to be represented and voted at the special meeting. If you sign and send in your proxy card and do not indicate how you want to vote, we will count your proxy card as a vote in favor of the proposals submitted at the special meeting.

Q:
If my broker holds my shares in "street name," will my broker vote my shares for me?

A:
No. Your shares will not be voted unless you follow the directions that your broker provides to you regarding how to vote your shares.

Q:
Can I change my vote after I have mailed my signed proxy card?

A:
Yes. You can change your vote at any time before your proxy is voted at the special meeting. You can do this in one of three ways:

by submitting written notice to KinderCare's Secretary before the meeting that you have revoked your proxy;

by submitting another proxy by mail that is later dated and properly signed; or

by voting in person at the special meeting.

11


Q:
Will option holders be entitled to vote the shares underlying unexercised options?

A:
No. Option holders will not be entitled to vote the shares underlying unexercised options, which means that they will not be entitled to vote the shares underlying options that are cancelled in the recapitalization in exchange for merger consideration.

Q:
What happens to my current KinderCare stock certificates if the recapitalization is terminated or delayed?

A:
If the recapitalization is terminated, the exchange agent will promptly return your KinderCare stock certificates. In the unlikely event that the recapitalization does not close shortly after the date it is approved at the special meeting, we expect to retain stock certificates pending completion of the recapitalization.

Q:
Will I be sent new KinderCare stock certificates in the recapitalization?

A:
No. If the recapitalization is approved, the IDSs and Class B common stock to be received in the recapitalization will be represented only in book entry form and stock certificates will not be delivered to stockholders.

    A number of companies have adopted such a "certificateless" book entry system, whereby stockholders' ownership and transfers are recorded on the books of the Company without the need for stockholders to physically hold or, if they wish to transfer or sell their stock, to deliver stock certificates.

    However, following the recapitalization, stockholders will, if they so desire, be able to obtain physical certificates for their stock by following the instructions contained in the confirmation of book entry sent to them by the exchange agent.

Q:
Where can I find more information about KinderCare?

A:
We file reports and other information with the SEC. You may read and copy this information at the SEC's public reference facilities. Please call the SEC at 1-800-SEC-0330 for information about these facilities. This information is also available on the SEC's website at http://www.sec.gov. Following the recapitalization, our future public filings are expected to be available for inspection at the offices of                         . You can also request copies of these documents from us. Please see "Where You Can Find More Information."

Q:
Who can answer my questions?

A:
If you have any questions, please contact MacKenzie Partners, Inc., our information agent, at:

    MacKenzie Partners, Inc.
    105 Madison Avenue
    New York, New York 10016
    (800) 322-2885 (toll free)
    (212) 929-5500 (call collect)

    email: proxy@mackenziepartners.com

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SUMMARY

        This summary highlights selected information from this document. It does not contain all of the information that is important to you and is qualified by the more detailed information contained throughout the rest of this document. We urge you to read carefully the entire document and the other documents referred to in this document to fully understand the recapitalization.

        Throughout this document, we refer to KinderCare Learning Centers, Inc., a Delaware corporation, and its consolidated operations as "we," "our", "us" and "KinderCare," unless otherwise indicated.

        Throughout this document, we use the term "EBITDA," which is not an indicator of performance or other measure in accordance with generally accepted accounting principles in the United States of America and is more fully described in "Selected Historical Consolidated Financial and Other Data."

The Recapitalization (page 78)

        As a result of the recapitalization, each current stockholder of KinderCare will have the right to make one of the following two elections to receive, in exchange for each share of common stock owned by such stockholder:

    (1)
    at least $            in cash plus    IDS; or

    (2)
    at least $            in cash plus    share of Class B common stock.

        Option holders will be provided with the same elections in connection with the cancellation of outstanding options.

        Holders failing to make elections will be treated as if they made the first of the two elections listed above. If you fail to validly make an election, you will be deemed to have made a cash and IDS election. The second election to receive cash and Class B common stock may be subject to proration, as only            shares of Class B common stock are generally available for distribution to stockholders.

        As described below, all holders are expected to receive IDSs even if they have not elected to do so. Certain of our stockholders who are affiliates of KKR or affiliates of Oaktree have indicated that it is their intention to elect the full number of shares of Class B common stock that is available. Therefore, if you make a cash and Class B election, then all shares of existing common stock for which stockholders elected to receive Class B common stock will receive a prorated amount of the available shares of Class B common stock, and your remaining shares of existing common stock will be converted into the right to receive one IDS per share.

        Option holders' elections will be taken into account in performing the above calculation.

        As a result of KKR's and Oaktree's intended cash and Class B elections, if you make a cash and IDS election, you should not receive any Class B common stock.

Transactions Related to the Recapitalization (page 78)

Our Existing Equity Investors

        KKR-KLC L.L.C., an affiliate of KKR, Oaktree, an affiliate of The TCW Group, Inc., some of our officers and employees and a number of other public holders (which own a small percentage of our shares) are the owners of all our outstanding common stock and stock options prior to recapitalization. In this proxy statement/prospectus, we refer to these existing owners of our common stock as the "existing equity investors." See "Principal Stockholders."

        The recapitalization and the public offering are parts of our overall plan to recapitalize and to refinance a portion of our existing debt. This recapitalization and refinancing will consist of the following transactions:

Concurrent Public Offerings

        We are currently engaged in a public offering of our IDSs and separate notes (not represented by IDSs), which we refer to together as the public offering in this document. We will use a portion of the proceeds of the public offering to make the cash payment to our existing equity investors in connection with the recapitalization. The price at which the IDSs will be initially offered to the public in the public

13



offering, and the principal amount and interest rate of the notes, have not yet been determined, but will be determined at the pricing date of the public offering and will be the result of negotiations between KinderCare and the underwriters for the public offering. The cash amount and the number of shares of Class B common stock issued in the recapitalization will be determined at the pricing date of the public offering. We expect that the recapitalization will occur concurrently with the closing of the public offering; however, closing of the public offering is a condition to the recapitalization.

Revolving Credit Facility

        Concurrently with the closing of the recapitalization and the public offering, we will enter into an amendment to our existing senior secured credit facility with a syndicate of financial institutions. In this proxy statement/prospectus, we refer to this credit facility as the "revolving credit facility." Our existing revolving credit facility allows us to borrow up to $125.0 million until July 9, 2008 and is secured by first mortgages or deeds of trusts on 119 of our owned centers and certain other collateral. It includes borrowing capacity of up to $75.0 million for letters of credit and up to $10.0 million for selected short-term borrowings. See "Description of Certain Indebtedness—Revolving Credit Facility."

Tender Offer and Consent Solicitation

        Concurrently with the recapitalization and the public offering, we will commence a tender offer and consent solicitation with respect to all of our $179.4 million outstanding 9.5% senior subordinated notes due 2009 for an expected total consideration of $         million. The closing of the recapitalization and the public offering is conditioned upon the receipt of the tender and consent of at least a majority in aggregate principal amount of our outstanding senior subordinated notes due 2009. Holders of our senior subordinated notes due 2009 that provide consents are obligated to tender their notes in the offer, and holders of our senior subordinated notes due 2009 that tender their notes are obligated to provide consents. Upon obtaining the minimum required consents in the tender offer and consent solicitation, we will enter into a supplemental indenture with the trustee of the senior subordinated notes due 2009 that will eliminate all of the material restrictive covenants contained in the indenture governing the senior subordinated notes due 2009. The consummation of the tender offer and consent solicitation is conditioned upon the closing of the recapitalization and the public offering. We intend to redeem any senior subordinated notes due 2009 not tendered after the completion of the recapitalization and the public offering. We will use a portion of the net proceeds from the public offering to pay for the senior subordinated notes due 2009 accepted for purchase in the tender offer and consent solicitation or redeemed by us after the recapitalization and the public offering. See "Description of Certain Indebtedness—Senior Subordinated Notes."

CMBS Mortgage Loan

        In July 2003, one of our subsidiaries entered into a loan agreement with various lenders to refinance our existing borrowings, referred to as the CMBS loan. The loan is secured by mortgages or deeds of trust on 475 child care centers owned by our subsidiary borrower, with a net book value of $326.1 million at March 5, 2004. Because these mortgaged centers, referred to as the CMBS centers, are owned by our subsidiary borrower and subject to the CMBS loan, recourse to the CMBS centers by our creditors, including holders of notes, will be effectively subordinated to recourse by holders of the CMBS loan. The subsidiary borrower under the CMBS loan will not guarantee the notes. We will use a portion of the net proceeds from the recapitalization and the public offering to pre-fund some CMBS loan amortization and interest payments. See "Description of Certain Indebtedness—Mortgage Loan."

Escrow of IDSs (page 80)

        At the effective time of the merger, KinderCare will cause to be deposited with                        , for the benefit of the holders of the IDSs received as merger consideration, up to            IDSs to cover the underwriters' over-allotment option under the public offering

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or, alternatively, distributable to our existing equity investors. To the extent that the underwriters exercise their over-allotment option within the 30-day period, the purchased IDSs will be released from the escrow account to the underwriters pursuant to the escrow agreement, and the purchase price received by the Company from the underwriters will be kept in an escrow account, for the benefit of the holders of the IDSs received as merger consideration, until the end of the 30-day period. Upon termination of the escrow, any cash remaining in the escrow account after compensation of the escrow agent and any other obligations under the escrow agreement and any IDSs (without interest) remaining in the escrow account will be distributed to KinderCare stockholders in proportion to the number of their IDSs that were held in escrow as part of the merger consideration.

Announcement of Final Terms of the Recapitalization; Announcement Date (page 80)

        On the business day following the pricing date of the public offering, we will:

    issue a press release setting forth certain information (described below) relating to the recapitalization; and

    post this information on our website, www.kindercare.com.

        The press release and web posting described in the previous paragraph will include:

    the amount of the cash proceeds to be received by us from the sale of the IDSs and separate notes if the public offering is completed;

    a statement of the interest rate and any material terms of the notes sold as part of the IDSs and as the separate notes; and

    a statement of the maximum number of shares of Class B common stock and the cash amount per share to be received by existing equity investors in the recapitalization.

        We call the date that we issue the press release the announcement date. On or promptly following the announcement date, we will also file with the SEC a post-effective amendment to our Registration Statement on Form S-4 of which this proxy statement/prospectus forms a part to reflect the final pricing information of the public offering and the definitive terms of the recapitalization.

Our Corporate Information (page 121)

    KinderCare Learning Centers, Inc.
    650 N.E. Holladay Street, Suite 1400
    Portland, Oregon 97232
    (503) 872-1300

        We are a Delaware corporation organized on November 14, 1986. Our website addresses include kindercare.com, kindercareatwork.com, mulberrychildcare.com, kcdistancelearning.com, keystonehighschool.com, creditmakeup.com, iqacademies.com and go2iq.com. The information on our websites is not incorporated by reference in this proxy statement/prospectus.

KLC Merger Sub, Inc.

        KLC Merger Sub, Inc. is a newly formed Delaware corporation and a wholly owned subsidiary of KinderCare. It has no operations and was created only to facilitate the merger.

Material U.S. Federal Income Tax Considerations (page 62)

        In general, for U.S. federal income tax purposes, you will recognize gain (but not loss) if you exchange your existing common stock for a combination of (1) Class B common stock and cash, (2) IDSs and cash, or (3) Class B common stock, IDSs and cash, in an amount equal to the lesser of (A) the excess, if any, of the sum of the cash, the fair market value of the Class B common stock and the fair market value of the IDSs you receive in the recapitalization, as the case may be, over your tax basis in the existing common stock surrendered in the recapitalization, and (B) the cash and the fair market value of the notes underlying the IDSs that you receive, if any, in the recapitalization. However, the U.S. federal income tax consequences for a particular stockholder or option holder will depend upon such holder's particular facts and circumstances and, in certain cases, gain recognized by a stockholder pursuant

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to the recapitalization may be taxable as a dividend. In general, option holders will recognize ordinary income in an amount equal to the consideration paid to the holder at the time the option is cancelled. Because the tax consequences of the elections will depend upon your individual facts and circumstances, you should consult your tax advisors for a full understanding of the tax consequences to you of the recapitalization and the elections available to you. For a more detailed discussion of the material U.S. federal income tax considerations associated with the recapitalization, see "Special Factors—Material U.S. Federal Income Tax Considerations."

Appraisal Rights (page 83)

        Stockholders who make a written demand for appraisal before the vote on the recapitalization agreement at the special meeting, do not vote in favor of the adoption of the recapitalization agreement and who satisfy the other requirements under the Delaware General Corporation Law will have the right to receive, instead of the consideration paid in the recapitalization, payment for the fair value of their shares as of the effective date of the recapitalization, as determined by the Delaware Court of Chancery.

Per Share Market Price Information (page 88)

        Shares of our existing common stock are traded in the over-the-counter market and listed for quotation on the Over-the-Counter Bulletin Board, or OTC Bulletin Board, maintained by the Nasdaq Stock Market, Inc. and in the "pink sheets" under the symbol "KDCR." The last reported sale price of KinderCare common stock on April 20, 2004, the last full trading day before the public announcement of the recapitalization, was $9.40 per share.

        As of April 20, 2004, there were 19,721,646 shares of KinderCare common stock outstanding and employee stock options outstanding to purchase 2,787,212 shares of KinderCare common stock.

Interests of Certain Persons in the Recapitalization (page 59)

        KKR and Oaktree have indicated that it is their intention to make the cash and Class B elections with respect to their shares of common stock. In addition, our executive officers own employee stock options, which, assuming the recapitalization and the public offering result in a change of control, will fully vest immediately before the closing of the recapitalization and public offering. Outstanding options will be cancelled in exchange for merger consideration, and we will offer option holders the same elections as we are offering to you. As a result, KKR and Oaktree's ownership interests in KinderCare may not be reduced as significantly in the recapitalization relative to other stockholders and option holders, depending on the number of elections by other stockholders to receive a portion of the merger consideration in cash and IDSs. However, it should be noted that all stockholders and option holders will have the right to make cash and Class B elections.

Stock Option Plans (page 81)

        In connection with the recapitalization, assuming the recapitalization and the public offering result in a change of control, outstanding stock options held by employees will fully vest immediately prior to the recapitalization. Outstanding options will be canceled in exchange for merger consideration, less the exercise price.

Conditions to the Recapitalization (page 203)

        Before we can complete the recapitalization, we must satisfy a number of conditions. These conditions include, but are not limited to, the following:

    the adoption of the recapitalization agreement and approval of our restated certificate of incorporation by KinderCare stockholders;

    receipt of required consents from third parties;

    the completion of the public offering; and

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    the absence of any legal prohibitions against the recapitalization.

        We will complete the recapitalization shortly after all of the conditions to the recapitalization have been satisfied or waived. We expect to complete the recapitalization on or shortly after                        , 2004, the date of the special meeting, to approve the recapitalization.

Termination and Amendment of the Recapitalization Agreement (page 204)

        The board of directors of KinderCare may terminate the recapitalization at any time before the closing of the recapitalization if it determines that it is appropriate to do so. To the fullest extent permitted by law, the board of directors of KinderCare and its wholly owned subsidiary, KLC Merger Sub, Inc., by mutual consent, may amend the recapitalization agreement at any time before the closing of the recapitalization.

Listing of IDSs, Class A Common Stock and Class B Common Stock (page 82)

        The IDSs to be issued in the recapitalization will be listed on                        under the ticker symbol "            ."

        We do not expect that the Class A common stock or the Class B common stock will trade on an exchange and we currently do not expect an active trading market for the Class A common stock or the Class B common stock to develop. However, we will use reasonable efforts to list the Class A common stock for separate trading on the                         if a sufficient number of shares of Class A common stock are held separately to meet the minimum distribution requirements for separate trading of the                        for at least 30 consecutive trading days.

        Because our existing common stock will be converted into Class A common stock and Class B common stock in the recapitalization and will no longer exist, our existing common stock will no longer be quoted on the OTC Bulletin Board.

Comparison of Rights of KinderCare Stockholders Before and After the Recapitalization (page 206)

        After the recapitalization, KinderCare stockholders who receive any Class B common stock for their existing KinderCare shares will continue to have rights similar to those they had as KinderCare stockholders before the recapitalization, except that:

    holders of Class B common stock will be entitled to vote separately as a class on any amendment to our restated certificate of incorporation that would disproportionately and adversely affect the rights of such series of common stock;

    dividends cannot be declared on the Class A common stock unless a corresponding proportionate dividend is declared on the Class B common stock;

    after the second anniversary of the recapitalization and subject to certain conditions described in "Description of Capital Stock—Our New Class B Common Stock," each share of Class B common stock will be convertible, at the holder's option, into either one IDS or, if the IDSs have been automatically separated or are otherwise not outstanding prior to the time of such conversion, one share of Class A common stock and a note having a principal amount equal to the note which was represented by each IDS; and

    at any time on and after the third anniversary of the recapitalization, we will have the option to force conversion of all of the then-outstanding shares of Class B common stock into IDSs on the same terms and subject to the same conditions as those for a conversion of the Class B common stock at your option described in the preceding bullet point.

        Because IDSs are securities comprised of both Class A common stock and notes, holders of IDSs will have rights related to both Class A common stock and notes. With respect to the Class A common stock represented by the IDSs, holders of IDSs will have rights similar to those

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of holders of existing common stock before the recapitalization, except that:

    our board of directors cannot declare dividends on the Class A common stock represented by the IDSs unless at such time the corresponding proportionate dividend is declared on the Class B common stock; and

    we expect that the IDSs will be listed on                        .

        In addition to having the rights of a holder of Class A common stock, a holder of IDSs will also have the rights of a holder of notes represented by the IDSs, which entitles the holder to, among other things:

    cash interest payments on the notes represented by the IDSs payable quarterly in arrears, subject to interest deferral;

    a cash payment of the principal amount of the notes represented by the IDSs on                        , 2014, the maturity date of the notes, subject to extension of maturity;

    a cash payment of 101% of the principal amount of the notes represented by the IDSs upon a change of control of KinderCare; and

    an option to separate the IDSs into the shares of Class A common stock and notes represented thereby at any time after the earlier of 45 days from the closing of the recapitalization or the occurrence of a change of control, and the ability to recombine such shares of Class A common stock and notes.

Our Capital Structure

        The following chart reflects our capital structure immediately after the recapitalization:

LOGO

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Risk Factors (page 34)

        You should carefully consider the information under the heading "Risk Factors" and all other information in this proxy statement/prospectus.

Financing the Recapitalization (page 61)

        The total amount of cash used to complete the recapitalization, including to pay related fees and expenses, is estimated to be approximately $                   million. We intend to obtain such funds from a portion of the proceeds of the public offering and from cash on hand.

The Special Meeting (page 51)

        The special meeting of KinderCare's stockholders is scheduled to be held at                        , on                        , 2004 at             a.m., local time. At the special meeting, you will be asked to:

1.
adopt the Recapitalization Agreement and Plan of Merger, dated                , 2004, between KinderCare Learning Centers, Inc. and KLC Merger Sub, Inc., a wholly owned subsidiary of KinderCare Learning Centers, Inc.;

2.
approve KinderCare's restated certificate of incorporation, which includes the following amendments:

increasing the number of authorized shares of common stock, $0.01 par value per share, from                        to                         , which will be divided into the following series:                        will be shares of our existing common stock,                         will be shares of Class A common stock with one vote per share,                         will be shares of Class B common stock with one vote per share and                        will be shares of Class C common stock with one vote per share;

providing that shares of Class A common stock and Class B common stock vote together as a single class on all matters presented to the stockholders for a vote, except as required by law, and except that Class A common stock and Class B common stock will be entitled to vote separately on any amendment to our restated certificate of incorporation that would disproportionately and adversely affect the rights of such series of common stock;

providing that the dividend rate on each share of Class B common stock will equal            multiplied by the dividend rate on each share of Class A common stock and that dividends cannot be declared on the Class A common stock unless a corresponding proportionate dividend is declared on the Class B common stock;

providing that, after the second anniversary of the recapitalization and subject to certain conditions described in our restated certificate of incorporation, each share of Class B common stock will be convertible, at the holder's option, into either one IDS or, if the IDSs have automatically separated or are otherwise not outstanding prior to the time of such conversion,            share of Class A common stock and a note having a principal amount equal to the note which was represented by each IDS at the time of the public offering; and

providing that at any time on and after the third anniversary of the recapitalization, KinderCare will have the option to force conversion of all of the then-outstanding shares of Class B common stock into IDSs on the terms and subject to the conditions described in our restated certificate of incorporation; and

3.
vote on any other matter as may properly come before the special meeting.

        As of the date of this proxy statement/prospectus, our board of directors is not aware of any other matters to be brought before the special meeting.

        Proposals 1 and 2, both of which relate to the recapitalization, are separate matters to be voted upon by KinderCare stockholders but are expressly conditioned upon the approval of the

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other proposal (but not proposal 3). This means that BOTH of these proposals must be adopted or approved, as applicable, by KinderCare stockholders in order for KinderCare to obtain the requisite stockholder approval of the recapitalization. The transactions described in this document will not be completed, even if all of the other conditions are satisfied or waived, if the requisite stockholder approval of these two proposals is not received.

Record Date for Voting (page 52)

        You can vote at the special meeting if you owned shares of our existing common stock at the close of business on                        , 2004, the record date.

Vote Required (page 52)

        Adoption of the recapitalization agreement and approval of our restated certificate of incorporation each requires the affirmative vote of the holders of a majority of the outstanding shares of KinderCare's existing common stock.

        KinderCare's directors and executive officers and their affiliates have indicated that they intend to vote the shares they hold and the shares over which they exercise voting control, for the recapitalization proposals. As of April 20, 2004, these directors, executive officers and affiliates were entitled to vote, or exercised voting power over shares entitled to vote, approximately 17,967,810 shares of existing common stock, or approximately 91.1% of the outstanding shares of existing common stock. Assuming that these directors, executive officers and affiliates continue to own a majority of the issued and outstanding shares of existing common stock on the record date for the special meeting, the requisite vote of the holders of shares of existing common stock to adopt the recapitalization agreement and approve our restated certificate of incorporation would be assured.

General Information About this Proxy Statement/Prospectus

        We utilize a financial reporting schedule comprised of 13 four-week periods and our fiscal year ends on the Friday closest to May 31. References to years in this proxy statement/prospectus as they relate to our financial, operating and other information refer to our fiscal years unless otherwise noted. The information presented refers to the 52 weeks ended June 1, 2001 as "fiscal year 2001," the 52 weeks ended May 31, 2002 as "fiscal year 2002" and the 52 weeks ended May 30, 2003 as "fiscal year 2003." Our first fiscal quarter is comprised of 16 weeks, while the remaining quarters are each comprised of 12 weeks.

        We have restated amounts previously reported to reflect the results of operations for the 60 centers closed since the end of fiscal year 2002 through March 5, 2004 as discontinued operations.

        Throughout this document, unless otherwise noted, we have assumed no exercise of the underwriters' over-allotment option to purchase additional IDSs.

        Unless the context otherwise requires, references in this proxy statement/prospectus to the "notes" refer collectively to the notes represented by IDSs and the notes sold separately, and references to the "public offering" refer collectively to the concurrent public offering of IDSs, including the shares of Class A common stock and notes represented by such IDSs, and $             million aggregate principal amount of notes offered separately (not represented by IDSs).

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Our Company

Overview

        KinderCare is the nation's leading for-profit provider of early childhood education and care services based on number of centers and licensed capacity. We provide services to infants and children up to 12 years of age, with a majority of the children from the ages of six weeks to five years old. At March 5, 2004, licensed capacity at our centers was approximately 166,000, and we served approximately 126,000 children and their families at 1,245 child care centers. We distinguish ourselves by providing high quality educational programs, a professional and well-trained staff and clean, safe and attractive facilities. We focus on the development of the whole child: physically, socially, emotionally, cognitively and linguistically. In addition to our primary business of center-based child care, we also own and operate a distance learning company serving teenagers and young adults through our subsidiary, KC Distance Learning, Inc.

        Education is core to our mission. We have developed a series of educational programs, including five separate proprietary age-specific curricula, tailored for (1) infants and toddlers, (2) two-year olds, (3) preschool, (4) kindergarten and (5) school ages between six and 12. We also offer tutorial programs in the areas of literacy, reading, foreign languages and mathematics. In furtherance of our focus on quality educational programming, we pursue accreditation by various accrediting bodies that have been approved by states as meeting quality improvement initiatives.

        At March 5, 2004, we operated 1,245 centers across 39 states, 1,176 of which were branded with the KinderCare name and 69 of which were branded with the Mulberry name. We operate two types of centers: community centers and employer-sponsored centers. The vast majority of our centers are community centers which are designed to meet the general needs of families within a given area. Our employer-sponsored centers partner with companies to provide on-site or near-site education and child care for their employees. All of our centers are open year round. Tuition is generally collected on a weekly basis, in advance, and tuition rates vary for children of different ages and by location.

Industry

        The early childhood education and care services industry offers attractive opportunities to for-profit providers. According to an industry analysis by Marketdata Enterprises, the U.S. child care industry generated an estimated $40 billion in 2000 and is estimated to generate approximately $60 billion in 2005. This growth has been driven by a number of factors, including the number of mothers in the workplace, increases in the population of children under the age of five, an expanding awareness of the importance of early childhood development, a shift toward center-based care, availability of federal and state government support of child care service providers and employer-sponsored child care services.

Our Business Strengths

        Our objective is to continue to build on our position as the nation's leading for-profit provider of quality early childhood education and care services by further enhancing our competitive operating strengths, which include the following:

        Leading Market Position.    We are the nation's leading for-profit provider of early childhood education and care services in the highly fragmented child care industry. Our current licensed capacity represented more than 25% of the aggregate licensed capacity of the top 40 for-profit child care service providers at January 1, 2004. Our position as the industry leader with a large, nationwide customer base gives us both the ability to spread the costs of programs and services, such as curriculum development, training programs and other management processes, over a large number of centers and a valuable distribution network for new products and services.

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        Strong Brand Identity and Reputation.    With more than 30 years of experience in the industry, we believe that we enjoy strong brand recognition and a reputation for quality. Established in 1969, our KinderCare brand provides a valuable asset in an industry where personal trust and parent referrals play an important role in retaining existing customers and attracting new customers.

        High Quality Educational Programs.    We have developed high quality proprietary curricula targeted to children in each of the various age and development levels we serve. We also pursue accreditation of our centers by various accrediting bodies, including the National Association for the Education of Young Children, referred to as NAEYC. Accreditation strengthens the quality of our centers. In certain states, these quality initiatives are tied to financial incentives such as higher child care assistance reimbursement rates and property tax incentives. At March 5, 2004, we had 483 centers accredited by NAEYC and approximately 360 centers actively pursuing NAEYC accreditation.

        Stable and Predictable Financial Model.    We believe KinderCare benefits from an attractive financial model with stable revenues, cash flows and margins. Our net revenues from child care centers increased from approximately $610.7 million during fiscal year 1999 to $838.6 million during fiscal year 2003. Our EBITDA increased from $101.0 million to $123.4 million during the same period, despite the effect of an increase in rent expense from $27.8 million to $51.8 million for the same period as a result of our previous synthetic lease facility, leased center acquisitions and our sale-leaseback program. Our net cash flows provided by operating activities have shown moderate growth, with an increase from $61.8 million for fiscal year 1999 to $78.4 million for fiscal year 2003.

        Over the past several years, we have pursued a strategy of increasing our net revenues through enhanced center yield management. We have done so by balancing an increase in tuition rates against the gradual decline in occupancy at our centers and by expanding our fee-based service offerings. Our average weekly tuition rate increased from $113.45 to $144.45 from fiscal year 1999 to fiscal year 2003 accompanied by a decline in our occupancy rate from 69.9% to 63.3% during the same period. In fiscal years 2001, 2002 and 2003, comparable center net revenues grew 3.1%, 1.1% and 1.4%, respectively.

        During the fourth quarter of fiscal year 2002, we embarked on a program of selling centers to individual real estate investors and concurrently signing long term leases to continue operating the centers. Historically, we believe this has been an efficient way to finance growth and reduce leverage. Assuming the market for such transactions remains favorable, we expect this effort to continue with our remaining owned centers and our new centers as we develop them. We will continue using the proceeds of these sales to fund our growth by developing and opening new centers. In addition to developing new centers, we routinely analyze the profitability of our existing centers. If a center is identified as underperforming, we will evaluate the center for closure to minimize the resulting financial liability.

        Ability to Attract and Retain a Qualified Workforce.    We believe our ability to provide attractive employee benefits and recognition programs gives us a competitive advantage in attracting and retaining a high quality workforce, which is an important factor in the successful operation of our centers.

        Experienced Management Team.    The top six members of our senior management average approximately eight years of experience with us. In addition, our six region vice presidents and 81 area managers average over nine years with us. Our senior management has introduced and overseen quality initiatives such as NAEYC accreditation and improved training programs, developed systems to allow focus on labor productivity and expense control and built 213 new centers, acquired 89 centers and closed 201 underperforming centers.

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Growth Opportunities

        We are pursuing the following growth opportunities:

        Increase Existing Center Revenue.    We have ongoing initiatives to increase center revenue by:

    Sharing best practices—Center directors are incentivized to share best practices;

    Providing incentives for center directors—Bonus programs reward center directors for enrollment growth and overall operating profit performance;

    Using targeted marketing—Targeted marketing programs include a referral program under which parents receive tuition credits for every new customer enrollment referral and a variety of direct mail solicitation, telephone directory and internet yellow pages listings and local advertising vehicles. We also periodically hold open house events and have established parent forums to involve parents in center activities and events;

    Maintaining competitive tuition pricing—In coordination with center directors, we carefully manage occupancy and tuition rates at the classroom level to maximize net revenue yield from each of our centers;

    Increasing the number and availability of supplemental fee programs—We offer tutorial programs in the areas of literacy, reading, foreign languages and mathematics in the majority of our centers for a supplemental fee and are exploring additional supplemental fee programs; and

    Continuing to operate clean, safe and attractive facilities—We continue to maintain and upgrade our facilities on a regularly scheduled basis to enhance their curb appeal.

        Continue to Open Centers.    Many attractive markets across the United States offer opportunities to locate new community and employer-sponsored centers. We plan to expand by opening 15 to 30 new, higher capacity centers per year in locations where we believe the market for center-based child care will support tuition rates higher than our current average rates. We opened 28 new centers during fiscal year 2003 and expect to open 17 new centers during fiscal year 2004. We believe we have multiple sources of funding available to fund new center openings, including our sale-leaseback program, our revolving credit facility and cash flows from operations. Our new centers typically produce positive EBITDA in their first full year of operation and positive net income by the end of their second full year of operation.

        Pursue Strategic Acquisitions.    We plan to continue making selective acquisitions of existing high quality centers. Our strong market position enhances the opportunities to capitalize on consolidation of the highly fragmented early childhood education and care services industry. In addition to making center acquisitions, we plan to continue evaluating investment and acquisition opportunities for companies in the education industry that offer educational content and services to children, teenagers and adults.

        Increase Profitability Through Operational Efficiencies.    We have developed a culture dedicated to operational efficiencies. We focus on center-level economics, which hold each center director accountable for profitability. Strong controls have helped us contain costs and leverage our overhead over our large, nationwide center base.

        Expand Our Distance Learning Operations.    Our subsidiary, KC Distance Learning, Inc., is based in Bloomsburg, Pennsylvania and operates three business units: Keystone National High School, Learning and Evaluation Center and IQ Academies. We plan to expand our distance learning operations by offering these services in additional states and increasing sales of these services.

        Establish Strategic Relationships.    Through our strategic partnerships, we offer our customers proprietary conveniences and discounts, including access to various educational products and toys. Our large, nationwide base of centers with its associated customer base gives our strategic partners access to a valuable distribution network for such products and services.

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Summary of Our New Common Stock

 
  Class A Common Stock
(Represented by the IDSs)

  Class B Common Stock
Shares outstanding following the recapitalization               shares.               shares.

Voting rights

 

Each outstanding share will carry one vote per share and holders of Class A common stock will vote together with the Class B common stock as a single class, except as required by law and except that such holders of Class A common stock will vote separately as a class on any amendment to our restated certificate of incorporation that would disproportionately and adversely affect the rights of Class A common stock.

 

Each outstanding share will carry one vote per share and holders of Class B common stock will vote together with the Class A common stock as a single class, except as required by law and except that such holders of Class B common stock will vote separately as a class on any amendment to our restated certificate of incorporation that would disproportionately and adversely affect the rights of Class B common stock.

Dividends

 

You will receive quarterly dividends if and to the extent dividends are declared by our

 

Same as the Class A common stock, except that:
    board of directors and permitted by applicable law and the terms of our then-outstanding indebtedness. Specifically, the notes indenture and our revolving credit facility both restrict our ability to     subject to applicable law and the terms of our then-outstanding indebtedness, initial annual dividends will be approximately $                  per share of our Class B common stock; and
    declare and pay dividends on our common stock as described in detail under "Dividend Policies." Upon the closing of the recapitalization, our board of directors is expected to adopt a dividend policy which contemplates that, subject to applicable law and the terms of our then-outstanding indebtedness, initial annual dividends will be approximately $                  per share of our Class A common stock. However, our board of directors may, in its discretion, modify or     the dividend rate on each share of Class B common stock will equal            multiplied by the dividend rate on each share of Class A common stock.
             

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    repeal this dividend policy. We cannot assure you that we will pay dividends at this level in the future or at all. We cannot declare dividends on our Class A common stock unless at such time a corresponding proportionate dividend is declared on our Class B common stock.        

Dividend payment dates

 

If declared, dividends will be paid quarterly on the            day of each                        ,                         ,                         and                         to holders of record on the            day or the immediately preceding business day of such month.

 

Same as the Class A common stock.

Listing

 

We do not anticipate that our Class A common stock will trade separately on an exchange, and we currently do not expect an active trading market for our common stock to develop.

 

We do not anticipate that our Class B common stock will trade on an exchange, and we currently do not expect an active trading market for our common stock to develop.

 

 

However, we will use reasonable efforts to list our Class A common stock for separate trading on the            if a sufficient number of shares of our Class A common stock are held separately to meet the minimum distribution requirements for separate trading on the            for at least 30 consecutive trading days.

 

Our Class B common stock will be freely transferable without restriction or further registration under the Securities Act, unless purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act.

 

 

Our Class A common stock will be freely transferable without restriction or further registration under the Securities Act, unless purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act.

 

 

 

 
             

25



Optional Conversion

 

No optional conversion.

 

After the second anniversary of the recapitalization and subject to certain conditions described under "Description of Capital Stock—Our New Class B Common Stock," each share of Class B common stock will be convertible, at the option of the holder, into either one IDS or, if the IDSs have automatically separated or are otherwise not outstanding prior to the time of such conversion, one share of Class A common stock and a note having a principal amount equal to the note which was represented by each IDS. The conversion ratio of each share of Class B common stock into an IDS (or Class A common stock and notes) will be protected against dilution to the extent that the ratio of Class A common stock to principal amount of notes represented by an IDS changes in the event of a stock split, recombination or reclassification of the Class A common stock.

 

 

 

 

We will only be required to effect conversions of the Class B common stock at intervals of six months beginning with the second anniversary of the date of the recapitalization, unless a majority of the holders of the Class B common stock request a conversion with respect to a majority of their shares of Class B common stock.

Mandatory Conversion

 

No mandatory conversion.

 

At any time on and after the third anniversary of the recapitalization, KinderCare has the option to force conversion of all of the then-outstanding shares of Class B common stock into IDSs on the same terms as those described above under "Optional Conversion."

Class Restrictions

 

Shares of Class A common stock may be combined with notes to form IDSs.

 

Shares of Class B common stock may
not be combined with any other securities to form IDSs.

26



Summary of Notes Represented by the IDSs

Issuer   KinderCare Learning Centers, Inc.

Notes

 


 

$             million aggregate principal amount of    % senior subordinated notes represented by IDSs; and

 

 


 

$            million aggregate principal amount of    % senior subordinated notes sold separately (not represented by IDSs).

 

 


 

Assuming the exchange of all of our Class B common stock for IDSs pursuant to their terms. $             million aggregate principal amount of notes would be outstanding.

 

 


 

Each note will have a principal amount of $            .

Interest rate

 

    % per year.

Interest payment dates

 

Interest will be paid quarterly in arrears on the            day of each            ,             ,            and            , commencing ,             2004 to holders of record on the            day or the immediately preceding business day of such month.

Interest deferral

 

Prior to            , 2009, we may, subject to certain restrictions, defer interest payments on our notes on one or more occasions for up to an aggregate period of eight (8) quarters. In addition, after            , 2009 but before            2014, we may, subject to certain restrictions, defer interest payments on our notes on two occasions for up to three (3) quarters. If the maturity of the notes is extended, we may defer interest during each extension period in the same manner as during the period from            , 2009, through            , 2014.

 

 

During any interest deferral period and so long as any deferred interest or interest on deferred interest remains outstanding, we will not be permitted to make any payment of dividends on the common stock.

 

 

For a detailed description of interest deferral provisions of the indenture, see "Description of Notes—Terms of the Notes—Interest Deferral."

 

 

In the event that interest payments on the notes are deferred, you would be required to include accrued interest in your income for U.S. federal income tax purposes even if you do not receive any cash interest payments.
         

27



Maturity date

 

The notes will mature on            , 2014. We may extend the maturity of our notes for two additional successive five-year terms if the following conditions are satisfied:

 

 


 

during the twelve-month period ending on the last day of the fiscal quarter ending at least 45 days before the then-current maturity date, our ratio of net debt to EBITDA under the indenture is less than            to            ;

 

 


 

no event of default, including certain events of bankruptcy, insolvency or reorganization of us or our subsidiaries, under the indenture has occurred and is continuing; and

 

 


 

no event of default has occurred and is continuing with respect to any of our other outstanding indebtedness or could occur as a result of the extension.

Optional redemption

 

We may not redeem the notes at our option prior to            , 2009. After            , 2009, we may redeem for cash all or part of the notes upon not less than 30 or more than 60 days' notice by mail to the holders of notes, as described in the indenture. If we redeem any notes, there will be an automatic separation of IDSs.

Change of control

 

Upon the occurrence of a change of control, as defined under "Description of Notes—Repurchase at the Option of Holders—Change of Control," each holder of notes will have the right to require us to repurchase that holder's notes at a price equal to 101% of the principal amount of the notes being repurchased, plus any accrued but unpaid interest to but not including the repurchase date. In order to exercise that right, a holder of IDSs must separate its IDSs into the shares of Class A common stock and notes represented thereby and hold the notes separately.

Guarantees of notes

 

The notes will be fully and unconditionally guaranteed, on an unsecured senior subordinated basis, by certain of our direct and indirect wholly owned domestic subsidiaries. The notes will not be guaranteed by our subsidiaries which are the borrower and operator of the CMBS centers under the CMBS loan and our foreign subsidiaries. The guarantees will be subordinated to the guarantees issued by the subsidiary guarantors under the credit facility.
         

28



Subsequent issuances may affect
tax treatment

 


The indenture governing the notes will provide that in the event we issue additional notes with a new CUSIP number having terms that are otherwise identical to the notes (except for the issuance date) in connection with the issuance by us of additional IDSs, each holder of IDSs or separately held notes, as the case may be, agrees that a portion of such holder's notes, whether held as part of IDSs or separately, will be exchanged for a portion of the notes acquired by the holders of such subsequently issued notes, and the records of any record holders of notes will be revised to reflect such exchanges. Consequently, following each such subsequent issuance and exchange, each holder of IDSs or separately held notes, as the case may be, will own notes of each separate issuance in the same proportion as each other holder. However, the aggregate principal amount of notes owned by each holder will not change as a result of such subsequent issuance and exchange. Any subsequent issuance of notes by us may affect the tax treatment of the IDSs and notes. See "Special Factors—Material U.S. Federal Income Tax Considerations—Consequences to U.S. Holders—Notes—Additional Issuances."

Ranking of notes and guarantees

 

The notes will be our and any guarantor's unsecured senior subordinated indebtedness, will be subordinated in right of payment to all our and any guarantor's existing and future senior indebtedness, and will rank
pari passu in right of payment with all our and any guarantor's existing and future pari passu indebtedness and trade payables. The notes will also be effectively subordinated to any of our and any guarantor's secured indebtedness to the extent of the value of the assets securing the indebtedness.

 

 

The indenture governing the notes will permit us and our guarantors to incur additional indebtedness, including senior indebtedness, subject to specified limitations. On a pro forma basis at March 5, 2004:

 

 


 

we would have had $            million aggregate principal amount of senior secured indebtedness outstanding under the revolving credit facility plus approximately $         million of letters of credit, which would have been guaranteed on a senior secured basis by the guarantors of the notes;
         

29



 

 


 

we would have had $             million of
pari passu indebtedness outstanding, including trade payables; and

 

 


 

the non-guarantor subsidiaries, including the CMBS subsidiaries, would have had total liabilities, excluding liabilities owed to us, of $             million and the total assets of these subsidiaries would have accounted for    % of our assets.

Restrictive covenants

 

The indenture governing the notes will contain covenants with respect to us and our restricted subsidiaries that will restrict:

 

 


 

the incurrence of additional indebtedness and the issuance of preferred stock and certain redeemable capital stock;

 

 


 

the payment of dividends on, and redemption of, capital stock;

 

 


 

a number of other payments, including investments;

 

 


 

specified sales of assets;

 

 


 

specified transactions with affiliates;

 

 


 

the creation of liens; and

 

 


 

consolidations, mergers and transfers of all or substantially all of our assets.

Listing

 

We do not anticipate that our notes will be separately listed on any exchange.

30



Summary Historical Consolidated Financial Information

        The following table sets forth our summary consolidated financial information derived from our audited consolidated financial statements for each of our fiscal years in the three-year period ended May 30, 2003. The following table also sets forth our summary historical financial information derived from our unaudited consolidated financial statements for the forty weeks ended March 7, 2003 and March 5, 2004, which are also included in this proxy statement/prospectus.

        The information in the table below is only a summary and should be read in conjunction with our audited consolidated financial statements for fiscal years 2001, 2002 and 2003 and the related notes, our unaudited consolidated financial statements for the forty weeks ended March 7, 2003 and March 5, 2004 and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations," all as included elsewhere in this proxy statement/prospectus. The figures for interim periods shown below are not necessarily indicative of results for the applicable full fiscal year.

 
  Fiscal Year Ended
  Forty Weeks Ended
 
 
  June 1, 2001
  May 31, 2002
  May 30, 2003
  March 7, 2003
  March 5, 2004
 
 
  (in thousands, except per share data, child care center data and ratios)

 
Statement of Operations Data:                                
Revenues, net   $ 721,076   $ 806,746   $ 838,584   $ 635,097   $ 649,105  
Operating income     74,514     74,163     72,414     49,798     49,192  
Interest expense, net (a)     (48,233 )   (43,512 )   (40,612 )   (31,576 )   (36,060 )
Loss on minority investment (b)         (2,265 )   (6,700 )        
Net income     15,671     16,543     13,415     10,055     6,389  

Per Share Data (c):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Basic net income per share     0.82     0.83     0.68     0.51     0.32  
Diluted net income per share     0.81     0.82     0.67     0.51     0.32  

Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Depreciation and amortization     45,315     57,533     57,284     42,997     46,153  
Capital expenditures (d)     94,269     95,843     83,114     69,731     41,345  
Net cash provided by operating activities     69,671     87,466     78,359     48,461     59,220  
EBITDA (e)     120,807     130,155     123,386     93,212     94,634  
Rent     37,296     46,910     51,770     39,514     41,709  
Ratio of earnings to fixed charges (f)     1.42 x   1.45 x   1.42 x   1.39 x   1.25 x
Comparable center net revenue growth (g)     3.1 %   1.1 %   1.4 %   1.3 %   0.0 %

Child Care Center Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Number of centers at end of period     1,242     1,264     1,264     1,264     1,245  
Center licensed capacity at end of period     162,000     166,000     167,000     167,000     166,000  
Average weekly tuition rate (h)   $ 129.34   $ 137.72   $ 144.45   $ 143.85   $ 152.04  
Occupancy (i)     68.3 %   65.6 %   63.3 %   62.5 %   59.3 %

31


 
   
  March 5, 2004
 
  May 30, 2003
  Actual
  Pro Forma
As
Adjusted

 
  (in thousands)

Balance sheet data:                
Property and equipment, net   $ 660,939   $ 716,887    
Total assets     811,093     905,590    
Total long-term obligations, including current portion     470,976     532,403    
Stockholders' equity     135,159     142,179    

(a)
Interest expense, net was comprised of the following, in thousands:

 
  Fiscal Year Ended
  Forty Weeks Ended
 
 
  June 1,
2001

  May 31,
2002

  May 30,
2003

  March 7,
2003

  March 5,
2004

 
  Interest income   $ 582   $ 560   $ 420   $ 215   $ 712  
  Interest expense     (48,815 )   (44,072 )   (41,032 )   (31,791 )   (31,563 )
  Loss on the early
extinguishment of debt
                    (5,209 )
   
 
 
 
 
 
    $ (48,233 ) $ (43,512 ) $ (40,612 ) $ (31,576 ) $ (36,060 )
   
 
 
 
 
 
(b)
Investments, wherein we do not exert significant influence or own over 20% of the investee's stock, are accounted for under the cost method. During fiscal years 2002 and 2003, we wrote down a minority investment by $2.3 million and $6.7 million, respectively.

(c)
The per share amounts have been adjusted to reflect the 2-for-1 stock split, which was effective August 19, 2002.

(d)
Capital expenditures included the following, in thousands:

 
  Fiscal Years Ended
  Forty Weeks Ended
 
  June 1, 2001
  May 31, 2002
  May 30, 2003
  March 7, 2003
  March 5, 2004
New center development   $ 44,254   $ 63,990   $ 50,651   $ 44,274   $ 21,379
Maintenance capital expenditures     50,015     31,853     32,463     25,457     19,966
   
 
 
 
 
    $ 94,269   $ 95,843   $ 83,114   $ 69,731   $ 41,345
   
 
 
 
 
(e)
EBITDA was calculated as follows, in thousands:

 
  Fiscal Year Ended
  Forty Weeks Ended
 
 
  June 1,
2001

  May 31,
2002

  May 30,
2003

  March 7,
2003

  March 5,
2004

 
Net income   $ 15,671   $ 16,543   $ 13,415   $ 10,055   $ 6,389  
Interest expense, net     48,233     43,512     40,612     31,576     36,060  
Income tax expense     10,095     11,213     9,940     7,215     5,605  
Depreciation and amortization     45,315     57,533     57,284     42,997     46,153  
Discontinued operations:                                
  Interest expense     5     6     1     1      
  Income taxes     171     (412 )   (1,145 )   (623 )   (848 )
  Depreciation     1,317     1,760     3,279     1,991     1,275  
   
 
 
 
 
 
    EBITDA   $ 120,807   $ 130,155   $ 123,386   $ 93,212   $ 94,634  
   
 
 
 
 
 

32


      EBITDA is a non-GAAP financial measure of our liquidity. We believe EBITDA is a useful tool for certain investors and creditors for measuring our ability to meet debt service requirements. Additionally, management uses EBITDA for purposes of reviewing our results of operations on a more comparable basis. EBITDA does not represent cash flow from operations as defined by accounting principles generally accepted in the United States of America, which we refer to as "GAAP," is not necessarily indicative of cash available to fund all cash flow needs and should not be considered an alternative to net income under GAAP for purposes of evaluating our results of operations. A reconciliation of EBITDA to net cash provided by operating activities was as follows, in thousands:

 
  Fiscal Year Ended
  Forty Weeks Ended
 
 
  June 1,
2001

  May 31,
2002

  May 30,
2003

  March 7,
2003

  March 5,
2004

 
Net cash provided by operating activities   $ 69,671   $ 87,466   $ 78,359   $ 48,461   $ 59,220  
Income tax expense     10,095     11,213     9,940     7,215     5,605  
Deferred income taxes     116     (6,431 )   10,968     (5,624 )   9,103  
Interest expense, net     48,233     43,512     40,612     31,576     36,060  
Effect of discontinued operations on interest and taxes     176     (406 )   (1,144 )   (622 )   (848 )
Change in operating assets and liabilities     (6,997 )   (4,769 )   (16,332 )   12,052     (16,937 )
Other non-cash items     (486 )   (429 )   983     154     2,431  
   
 
 
 
 
 
  EBITDA   $ 120,807   $ 130,155   $ 123,386   $ 93,212   $ 94,634  
   
 
 
 
 
 
(f)
For purposes of determining the ratio of earnings to fixed charges, earnings are defined as income before income taxes, discontinued operations and a cumulative effect of a change in accounting principle, plus fixed charges. Fixed charges consist of interest expense, including capitalized interest, on all indebtedness, amortization of deferred financing costs and one-third of rental expense on operating leases representing that portion of rental expense that we deemed to be attributable to interest.

(g)
Comparable center net revenues include those centers that have been open and operated by us at least one year. Therefore, a center is considered comparable during the first four-week period it has prior year net revenues. Non-comparable center net revenues include those generated from centers that have been closed and our revenues from distance learning services. The fiscal year ended June 2, 2000 included 53 weeks of operations. If fiscal year 2000 were adjusted to a 52 week basis, the comparable center net revenue growth would have been 5.2% in fiscal year 2001.

(h)
We calculate the average weekly tuition rate as the actual tuition charged, net of discounts, for a specified time period, divided by "full-time equivalent," or FTE, attendance for the related time period. FTE attendance is not a strict head count. Rather, the methodology determines an approximate number of full-time children based on weighted averages. For example, an enrolled full-time child equates to one FTE, while a part-time child enrolled for five half-days equates to 0.5 FTE. The FTE measurement of center capacity utilization does not necessarily reflect the actual number of full- and part-time children enrolled.

(i)
Occupancy is a measure of the utilization of center capacity. We calculate occupancy as FTE attendance divided by the sum of the centers' licensed capacity during the related period.

33



RISK FACTORS

        You should consider the following matters in deciding whether to vote in favor of the recapitalization proposals. You should also consider the other information included in this document.

Risks Related to the Recapitalization

Completion of the recapitalization is contingent upon the closing of the public offering on terms and conditions acceptable to our board of directors and may not occur.

        The recapitalization is conditioned on the closing of the public offering. The price at which the IDSs will be offered to the public as well as the terms and conditions of the notes has not yet been determined but will be the result of negotiations between us and the underwriters in the public offering. We cannot assure you that the public offering will close on terms and conditions acceptable to our board of directors.

The trading price of any IDSs that you will receive in the recapitalization, and the price of the existing common stock immediately before the closing, may each be different from the price when you made your elections.

        The market value of the IDSs issued in the recapitalization may be different from the market price of a share of existing common stock at the time we first announced the recapitalization and before the completion of the recapitalization. Also, the trading price of any IDSs to be received by you may, at the time of closing and at the time new shares are credited to your account, be greater or less than the value of the IDSs at the completion of the recapitalization.

You will not receive as many shares of Class B common stock as you have elected.

        Stockholders and option holders electing to receive cash and Class B common stock in the recapitalization will not receive as many shares of Class B common stock as they elected to receive, because such elections are limited by the fact that only            shares of Class B common stock are available for distribution. Our largest stockholders, KKR and Oaktree, have stated that they intend to make cash and Class B elections to receive the full number of shares of Class B common stock that is available. Therefore, if you make a cash and Class B election, then all shares of existing common stock for which stockholders and option holders elected to receive Class B common stock will receive a prorated amount of the available shares of Class B common stock, and your remaining shares of existing common stock will be converted into the right to receive one IDS per share.

The recapitalization may not benefit KinderCare or our stockholders.

        The Class A common stock and the Class B common stock have no public market history and only a limited amount will be issued, which may result in limited liquidity. IDSs are a relatively new form of security for which market demand is uncertain. In addition, factors unrelated to our stock or our business, such as the general perception of the recapitalization by the investment community, may cause a decrease in the value of the Class B common stock and IDSs and impair their liquidity and marketability. Furthermore, securities markets worldwide have recently experienced significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, including increases in interest rates, could cause a reduction in the market price and liquidity of the Class B common stock and IDSs following the recapitalization, particularly if the recapitalization is not viewed favorably by the investment community.

34



The increased complexity in KinderCare's capital structure, or confusion in the marketplace about the recapitalization, could materially adversely affect the market price of KinderCare securities.

        The increased complexity in KinderCare's capital structure, and the potential difficulties investors may have in understanding the recapitalization and our new capital structure, may materially adversely affect the market price of our securities. In addition, confusion in the marketplace about what an IDS is and what it is intended to represent, or investors' reluctance to invest in IDSs, could materially adversely affect the market price of KinderCare securities.

After the recapitalization, our substantial indebtedness could adversely affect our financial health and restrict our ability to pay interest and principal on the notes and to pay dividends with respect to shares of our Class A common stock represented by the IDSs and our Class B common stock and impact our financing options and liquidity position.

        At March 5, 2004, we had $517.1 million of consolidated indebtedness and $142.2 million of consolidated stockholders' equity, and on a pro forma basis after giving effect to the offering and the use of proceeds described in this proxy statement/prospectus, we would have had $                  million of consolidated indebtedness and $                  million of consolidated stockholders equity. Our indebtedness after the offering will consist primarily of the CMBS loan, borrowings under our revolving credit facility and our notes. We may incur additional indebtedness in the future, subject to the limitations contained in the instruments governing our indebtedness. Accordingly, we will continue to have significant debt service obligations in the future. In addition, we may enter into additional debt agreements or other financing arrangements in the future that could impose additional financial and operational restrictions upon us.

        Our ability to make distributions, pay dividends or make other payments will be subject to applicable law and contractual restrictions contained in the instruments governing any indebtedness of ours and our subsidiaries, including our revolving credit facility. The degree to which we are leveraged on a consolidated basis could have important consequences to the holders of the IDSs, including:

    our ability in the future to obtain additional financing for working capital, capital expenditures or acquisitions may be limited;

    we may not be able to refinance our indebtedness on terms acceptable to us or at all;

    a significant portion of our cash flow from operations is likely to be dedicated to the payment of the principal of and interest on our indebtedness, thereby reducing funds available for future operations, capital expenditures and/or dividends on our common stock; and

    we may be more vulnerable to economic downturns or changes in interest rates and be limited in our ability to withstand competitive pressures.

        Although our revolving credit facility contains covenants that will restrict our ability to incur debt as described under "Description of Certain Indebtedness—Revolving Credit Facility," the indenture governing the notes allows us to issue an unlimited amount of notes so long as we issue additional shares of common stock in the appropriate proportionate amounts to represent additional IDSs.

        A failure to comply with the obligations contained in our borrowing agreements could result in an event of default under our borrowing agreements, which could result in acceleration of the debt related to the particular borrowing agreement, as well as the debt under other borrowing instruments that contain cross-acceleration or cross-default provisions.

        If we are unable to service our debt, we may be required to refinance all or a portion of our existing debt, to sell assets or to obtain additional financing. Such refinancing might not be possible, and such sales of assets or additional financing might not be achieved, which could lead to a bankruptcy proceeding.

35



Risks Relating to the IDSs, the Shares of Class A Common Stock, the Shares of Class B Common Stock and the Notes

Holders of our notes will be structurally subordinated to the debt of our non-guarantor subsidiaries, including the CMBS loan borrower, which owns the CMBS centers.

        In July 2003, one of our subsidiaries entered into a $300.0 million loan agreement with various lenders to refinance our existing borrowings, referred to as the CMBS loan. The balance outstanding at March 5, 2004 was $298.1 million. The loan is secured by mortgages or deeds of trust on 475 of our child care centers that are owned by that subsidiary borrower, referred to as the CMBS centers, as well as by certain cash collateral reserve accounts.

        Certain of our subsidiaries, including the CMBS loan borrower, will not be guarantors of our notes. As a result, no payments are required to be made to us from the assets of these subsidiaries. In the event of bankruptcy, liquidation or reorganization of any of the non-guarantor subsidiaries, holders of their indebtedness, including their trade creditors and the lenders of the CMBS loan, would generally be entitled to payment of their claims from the assets of those subsidiaries before any assets are made available for distribution to us for payment to you. As a result, our notes are effectively subordinated to the indebtedness of the non-guarantor subsidiaries.

        At March 5, 2004, our non-guarantor subsidiaries had total assets of $411.6 million and total liabilities, excluding liabilities owed to us, of $316.1 million. For the forty weeks ended March 5, 2004, our non-guarantor subsidiaries had net revenues of $211.5 million. The percentage of our assets, the amount of total liabilities and net revenues on a consolidated basis attributable to the non-guarantor subsidiaries that operate the CMBS centers and borrow under the CMBS loan were 41.6%, $307.8 million and $208.7 million, respectively, for and at March 5, 2004.

The CMBS loan contains restrictive covenants that could materially affect our cash flow and operations.

        The CMBS loan contains restrictive covenants that could materially affect our cash flow and operations. For example, if the net operating income, as defined in the CMBS loan agreement, from the CMBS centers falls below $60.0 million in any year, we must escrow 50% of the operating cash flows from the CMBS centers, or 100% of the cash flows from those centers if their net operating income falls below $50.0 million. These thresholds are adjusted as centers are released from the loan collateral. The net operating income of the CMBS centers for the 52 week period ended March 5, 2004 was approximately $80.2 million. To the extent that these provisions are triggered, we will not have any cash distributed up to us from the CMBS centers and, thus, this escrow requirement may limit the amount of cash we have available to make interest payments on the notes or to declare or pay dividends on our Class A common stock and our Class B common stock.

        The CMBS loan contains other provisions that may limit our operating or financial flexibility and that of the subsidiary borrower, including a prohibition on making alterations to the CMBS centers without the lenders' consent if such alterations could adversely affect the value of the CMBS centers, restrictions on transfer of the subsidiary borrower and a requirement to maintain certain levels of insurance. We are also required to maintain an interest rate cap agreement until the loan matures. If the CMBS loan is accelerated, we will be subject to restrictions on our ability to compete with the CMBS centers in their geographic regions, which could limit our ability to open and operate centers in these regions.

Because of the subordinated nature of the notes, holders of our notes may not be entitled to be paid in full, if at all, in a bankruptcy, liquidation or reorganization or similar proceeding.

        As a result of the subordinated nature of our notes and related guarantees, upon any distribution to our creditors or the creditors of the subsidiary guarantors in a bankruptcy, liquidation, reorganization or similar proceeding relating to us or the subsidiary guarantors or our or their property,

36



the holders of our senior indebtedness and senior indebtedness of the subsidiary guarantors will be entitled to be paid in full in cash before any payment may be made with respect to our notes or the subsidiary guarantees.

        In the event of a bankruptcy, liquidation, reorganization or similar proceeding relating to us or the subsidiary guarantors, holders of our notes will participate with all other holders of unsecured indebtedness of ours or the subsidiary guarantors similarly subordinated in the assets remaining after we and the subsidiary guarantors have paid all senior indebtedness. In any of these cases, we and the subsidiary guarantors may not have sufficient funds to pay all of our creditors, and holders of our notes may receive less, ratably, than the holders of senior indebtedness.

        Further, in the event of such bankruptcy proceedings, a party in interest may seek to subordinate the notes to all creditors under principles of equitable subordination or to recharacterize the notes as equity. While we believe that any such attempt should fail, there can be no assurance as to the outcome of such proceedings. In the event of such a subordination or recharacterization, you may not recover any amounts owing on the notes until all senior claims have been paid. Further, in the event of such a recharacterization you might be required to return any payments made to you on account of the notes, potentially up to six years prior to our bankruptcy, if it can be shown that at the time of such payment we were insolvent or rendered insolvent by reason of issuing the guarantee and the application of the proceeds of the guarantee, were engaged or about to engage in a business or a transaction for which the guarantor's remaining assets available to carry on its business constituted unreasonably small capital, or intended to incur, or believed that we would incur, debts beyond our ability to pay the debts as they mature.

        On a pro forma basis at March 5, 2004, our notes and the associated subsidiary guarantees would have ranked junior, on a consolidated basis, to $     million of outstanding senior secured indebtedness (including the amount outstanding under the CMBS loan) plus approximately $     million of letters of credit, and the subsidiary guarantees would have ranked junior to $     senior unsecured debt and pari passu with approximately $     million of outstanding indebtedness of ours and the subsidiary guarantors. In addition, at March 5, 2004, we had the ability to borrow up to an additional $58.9 million under our revolving credit facility (less amounts reserved for letters of credit), which would have ranked senior in right of payment to our notes.

The notes or the guarantees of the notes by our subsidiaries may not be enforceable.

        Under federal bankruptcy law and comparable provisions of state fraudulent transfer laws, the notes or the guarantees could be voided, or claims in respect of the notes or the guarantees could be subordinated to all other debt of ours or the guarantor, as applicable, if, among other things, we or the guarantor, at the time that we issued the notes or it assumed the guarantee:

    received less than reasonably equivalent value or fair consideration for issuing the notes or the guarantee and, at the time we issued the notes or it issued the guarantee:

    was insolvent or rendered insolvent by reason of issuing the notes or the guarantee and the application of the proceeds of the notes or the guarantee;

    was engaged or about to engage in a business or a transaction for which our or such guarantor's remaining assets available to carry on its business constituted unreasonably small capital;

    intended to incur, or believed that we or such guarantor would incur, debts beyond our or such guarantor's ability to pay the debts as they mature; or

    was a defendant in an action for money damages, or had a judgment for money damages docketed against us or such guarantor if, in either case, after final judgment, the judgment is unsatisfied.

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        In addition, any payment by us or the guarantor pursuant to the notes or the guarantees could be voided and required to be returned to us or the guarantor or to a fund for the benefit of the creditors of ours or the guarantor or the notes or the guarantee could be subordinated to other debt of ours or the guarantor.

        The measures of insolvency for the purposes of fraudulent transfer laws vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, a person would be considered insolvent if, at the time it incurred the debt:

    the sum of its debts, including contingent liabilities, was greater than the fair saleable value of its assets;

    the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or

    it could not pay its debts as they become due.

        We believe that immediately after the issuance of the notes and the guarantees, we and each of the guarantors will be solvent, will have sufficient capital to carry on our respective businesses and will be able to pay our respective debts as they mature. However, we cannot be sure as to what standard a court would apply in making these determinations or that a court would reach the same conclusions with regard to these issues. Regardless of the standard that the court uses, we cannot be sure that the issuance by us of the notes or by the subsidiary guarantors of the subsidiary guarantees would not be voided or that the notes or the subsidiary guarantees would not be subordinated to our or their other debt. If the guarantee of any subsidiary guarantor were voided, our notes would be effectively subordinated to the indebtedness of that subsidiary guarantor.

We may amend the terms of our revolving credit facility, or we may enter into new agreements that govern our senior indebtedness, and the amended or new terms may significantly affect our ability to pay interest and/or dividends to you.

        Our revolving credit facility contains significant restrictions on our ability to pay interest on the notes and dividends on the shares of Class A common stock and Class B common stock based on meeting certain tests and compliance with other conditions (including timely delivery of applicable financial statements), as described in detail under "Description of Certain Indebtedness—Revolving Credit Facility." As a result of general economic conditions, conditions in the lending markets, the results of our operations or for any other reason, we may elect or be required to amend or refinance our revolving credit facility, at or prior to maturity, or enter into additional agreements for senior indebtedness. Regardless of any protection you have in the indenture governing the notes, any such amendment, refinancing or additional agreement may contain covenants that could limit in a significant manner our ability to pay interest payments and/or dividends to you.

We are subject to restrictive debt covenants and other requirements related to our outstanding debt that limit our business flexibility by imposing operating and financial restrictions on our operations.

        The agreements governing our indebtedness impose significant operating and financial restrictions on us. These restrictions prohibit or limit, among other things:

    the incurrence of additional indebtedness and the issuance of preferred stock and certain redeemable capital stock;

    the payment of dividends on, and purchase or redemption of, capital stock;

    a number of other restricted payments, including investments;

    specified sales of assets;

    specified transactions with affiliates;

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    the creation of liens; and

    consolidations, mergers and transfers of all or substantially all of our assets.

        The terms of our revolving credit facility include other and more restrictive covenants and prohibit us from prepaying our other indebtedness, including the notes, while indebtedness under our revolving credit facility is outstanding. The revolving credit facility also requires us to maintain specified financial ratios and satisfy financial condition tests.

        Our ability to comply with the ratios or tests may be affected by events beyond our control, including prevailing economic, financial and industry conditions. A breach of any of these covenants, ratios or tests could result in a default under our revolving credit facility, the CMBS loan and/or the indenture. Certain events of default under our revolving credit facility would prohibit us from making payments on the notes, including payment of interest when due. In addition, upon the occurrence of an event of default under our revolving credit facility, the lenders could elect to declare all amounts outstanding under the revolving credit facility, together with accrued interest, to be immediately due and payable. If we were unable to repay those amounts, the lenders could proceed against the security granted to them to secure that indebtedness. If the lenders accelerate the payment of the indebtedness, our assets may not be sufficient to repay in full this indebtedness and our other indebtedness, including the notes.

We have the right to defer interest at any time prior to            , 2009, in which case you may not be paid any deferred interest until            , 2009, and if we were to defer interest at any time after            , 2009, and before            , 2014, you may not be paid all of the deferred interest owed to you until            , 2014.

        Our revolving credit facility and the indenture governing our notes contain restrictions on our ability to pay interest, subject to certain limitations. During the first five years that the notes are outstanding, we may defer interest for up to an aggregate period of eight quarters. During the period from            , 2009, through            , 2014, interest payments may be deferred for no more than three quarters in the aggregate at any time. Deferred interest will bear interest at the same rate as the notes. For any interest deferred during the first five years, we are not obligated to pay any deferred interest until            , 2009, so you may be owed a substantial amount of deferred interest that will not be due and payable until such date. For any interest deferred after            , we are not obligated to pay all of the deferred interest until            , so you may be owed a substantial amount of deferred interest that will not be due and payable until such date.

You may not receive the level of dividends provided for in the dividend policy our board of directors is expected to adopt upon the closing of this offering or any dividends at all.

        Our board of directors may, in its discretion, amend or repeal the dividend policy it is expected to adopt upon the closing of this offering. Our board of directors may decrease the level of dividends provided for in this dividend policy or entirely discontinue the payment of dividends. Future dividends with respect to shares of our capital stock, if any, will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions, business opportunities, provisions of applicable law and other factors that our board of directors may deem relevant. The indenture governing our notes and our revolving credit facility contain significant restrictions on our ability to make dividend payments, including, if we defer interest on the notes, restrictions on the payment of dividends until we have paid all deferred interest.

        In addition, our after-tax cash flow available for dividend and interest payments would be reduced if the notes were treated as equity rather than debt for U.S. federal income tax purposes. In that event, the stated interest on the notes could be treated as a dividend, and interest on the notes would not be deductible by us for U.S. federal income tax purposes. Our inability to deduct interest on the notes could materially increase our taxable income and, thus, our U.S. federal and applicable state income tax liability.

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Our interest expense may increase significantly and could cause our net income and distributable cash to decline significantly.

        The revolving credit facility will be subject to periodic renewal or must otherwise be refinanced. We may also be required to refinance the CMBS loan when it matures in 2008, or, if extended, 2009. We may not be able to renew or refinance the revolving credit facility or CMBS loan, or if either is renewed or refinanced, the renewal or refinancing may occur on less favorable terms. Borrowings under the revolving facility and the CMBS loan are made at a floating rate of interest, subject to interest rate hedging arrangements. In the event of an increase in the base reference interest rates or inability to replace our interest rate hedging arrangements, our interest expense will increase and could have a material adverse effect on our ability to make cash dividend payments to our stockholders. Our ability to continue to expand our business will, to a large extent, be dependent upon our ability to borrow funds under our revolving credit facility and to obtain other third-party financing, including through the sale of IDSs or any sale of securities. Such financing may not be available to us on favorable terms or at all.

We may not generate sufficient funds from operations to pay our indebtedness at maturity or upon the exercise by holders of their rights upon a change of control.

        A significant portion of our cash flow from operations will be dedicated to maintaining our child care centers and servicing our debt requirements. In addition, we currently expect to distribute a significant portion of any remaining cash earnings to our stockholders in the form of quarterly dividends. Moreover, prior to the maturity of our notes, we will not be required to make any payments of principal on our notes. We may not generate sufficient funds from operations to repay the principal amount of our indebtedness at maturity or in case you exercise your right to require us to purchase your notes upon a change of control. We may therefore need to refinance our debt or raise additional capital. These alternatives may not be available to us when needed or on satisfactory terms due to prevailing market conditions, a decline in our business or restrictions contained in our senior debt obligations.

The indenture governing our notes and our revolving credit facility permit us to pay a significant portion of our free cash flow to stockholders in the form of dividends.

        Although the indenture governing our notes and our revolving credit facility have some limitations on our payment of dividends, they permit us to pay a significant portion of our free cash flow to stockholders in the form of dividends and, following completion of this offering, we intend to pay quarterly dividends. Specifically, the indenture governing our notes permits us to pay up to the quarterly base dividend level in any fiscal quarter, which equals    % of our excess cash, as defined in the indenture, for the 12 fiscal month period divided by four, as more fully described in "Description of Notes—Certain Covenants." In addition, if the actual dividends paid in any fiscal quarter are less than the quarterly base dividend level, the indenture permits us to use the difference between the aggregate amount of dividends actually paid and the quarterly base dividend level for such quarter for the payment of dividends at a later date. The revolving credit facility will permit us to pay a portion of our cash to fund dividends on the shares of our common stock as described in detail in "Description of Certain Indebtedness—Revolving Credit Facility." Any amounts paid by us in the form of dividends will not be available in the future to satisfy our obligations under the notes.

Because we will use a significant portion of the proceeds of the public offering to pay the cash portion of the merger consideration with respect to shares of our existing common stock and to cancel options held by our existing equity investors, we will have less of the proceeds of the public offering available to repay our existing debt and for corporate purposes.

        We will use a significant portion of the net proceeds from the public offering to pay the cash portion of the merger consideration with respect to shares of our existing common stock and to cancel options held by our existing equity investors. As a result of these transactions with our existing equity

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investors, our total indebtedness will be higher after the public offering and the amount of net proceeds from the public offering that remain available to us for working capital or debt retirement will be less than if we had not undertaken these transactions. Having less of the net proceeds from this offering on a going forward basis may require us to borrow more money under our revolving credit facility or seek other sources of capital to repay debt, fund our operations or continue to expand our business.

Deferral of interest payments would have adverse tax consequences for you and may adversely affect the trading price of the notes.

        If we defer interest payments on the notes, you will be required to recognize interest income for U.S. federal income tax purposes in respect of interest payments on the notes represented by the IDSs or the notes, as the case may be, held by you before you receive any cash payment of this interest. In addition, we will not pay you this cash if you sell the IDSs or the notes, as the case may be, before the end of any deferral period or before the record date relating to interest payments that are to be paid.

        If we defer interest, the IDSs or the notes may trade at a price that does not fully reflect the value of accrued but unpaid interest on the notes.

The U.S. federal income tax consequences of the purchase, ownership and disposition of IDSs are unclear.

        No statutory, judicial or administrative authority directly addresses the treatment of the IDSs or instruments similar to the IDSs for U.S. federal income tax purposes. As a result, the U.S. federal income tax consequences of the purchase, ownership and disposition of IDSs are unclear. We believe that an IDS should be treated as a unit representing a share of common stock and notes. However, the IRS or the courts may take the position that the notes are equity, which could adversely affect the amount, timing and character of income, gain or loss in respect of your investment in IDSs, and materially increase our taxable income and, thus, our U.S. federal and applicable state income tax liability. This would reduce our after-tax cash flow and materially and adversely impact our ability to make interest and dividend payments on the notes and the common stock. Foreign holders could be subject to withholding or estate taxes with regard to the notes in the same manner as they will be with regard to the common stock. Payments to foreign holders would not be grossed-up for any such taxes. For discussion of these tax related risks, see "Special Factors—Material U.S. Federal Income Tax Considerations."

The allocation of the purchase price of the IDSs may not be respected.

        The purchase price of each IDS must be allocated between the share of Class A common stock and notes in proportion to their respective fair market values at the time of purchase. If our allocation is not respected, it is possible that the notes will be treated as having been issued with OID (if the allocation to the notes were determined to be too high) or amortizable bond premium (if the allocation to the notes were determined to be too low). You generally would have to include OID in income in advance of the receipt of cash attributable to that income and would be able to elect to amortize bond premium over the term of the notes.

The IRS may not view the interest rate on the notes as an arm's length rate.

        We plan to deduct the interest expense on the notes from taxable income for income tax purposes and to report the full benefit of the income tax deductions in our consolidated financial statements. If the IRS were to determine that the interest rate on the notes did not represent an arm's length rate, any excess amount over arm's length would not be deductible and could be recharacterized as a dividend payment instead of an interest payment. In addition, the reclassification of interest payments as dividend payments may give rise to an event of default under our revolving credit facility. In such case, our taxable income and, thus, our U.S. federal income tax liability could be materially increased, and we would have to provide an additional liability in our consolidated financial statements for the previously recorded benefit for the interest deductions. In addition, foreign holders could be subject to

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withholding or estate taxes with regard to the notes in the same manner as they will be with regard to the Class A common stock and Class B common stock. If the interest rate were determined to be less than the arm's length rate, the notes could be treated as issued with OID, which you would be required to include in income over the term of the notes in advance of the receipt of cash attributable to that income.

Because of the deferral of interest provisions, the notes may be treated as issued with original issue discount.

        Under applicable Treasury regulations, a "remote" contingency that stated interest will not be timely paid will be ignored in determining whether a debt instrument is issued with OID. Although there is no authority directly on point, we believe that the likelihood of deferral of interest payments on the notes is remote within the meaning of the Treasury regulations. Based on the foregoing, although the matter is not free from doubt because of the lack of direct authority, the notes would not be considered issued with OID at the time of their original issuance. If deferral of any payment of interest were determined not to be "remote," the notes would be treated as issued with OID at the time of issuance. In such case, all stated interest on the notes would be treated as OID, and all holders, regardless of their method of tax accounting, would be required to include stated interest in income on a constant accrual basis, possibly in advance of their receipt of the associated cash.

If we subsequently issue notes with significant OID, we may not be able to deduct all of the interest on those notes.

        It is possible that notes we issue in a subsequent issuance will be issued at a discount to their face value and, accordingly, may have "significant original issue discount" and thus be classified as "applicable high yield discount obligations," or AHYDOs. If any such notes were so treated, a portion of the OID on such notes could be nondeductible by us and the remainder would be deductible only when paid. This treatment would have the effect of increasing our taxable income and may adversely affect our cash flow available for interest payments and distributions to our equity holders.

Subsequent issuances of notes may adversely affect your tax treatment.

        The indenture governing our notes will provide that, in the event there is a subsequent issuance of notes with a new CUSIP number having terms that are otherwise identical (other than issuance date) to the notes offered hereby, each holder of IDSs or separately held notes, as the case may be, agrees that a portion of such holder's notes will be exchanged for a portion of the notes acquired by the holders of such subsequently issued notes. Consequently, immediately following such subsequent issuance, each holder of subsequently issued notes, held either as part of IDSs or separately, and each holder of existing notes, held either as part of IDSs or separately, will own an inseparable unit composed of a proportionate percentage of both the old notes and the newly issued notes. Therefore, subsequent issuances of notes with OID may adversely affect your tax treatment by increasing the OID, if any, that you were previously accruing with respect to the notes, resulting in your having to accrue interest income in advance of receiving the related cash payments.

        Following any subsequent issuance of notes with OID, we (and our agents) will report any OID on the subsequently issued notes ratably among all holders of IDSs and separately held notes, and each holder of IDSs and separately held notes will, by purchasing IDSs, agree to report OID in a manner consistent with this approach. However, the Internal Revenue Service may assert that any OID should be reported only to the persons that initially acquired such subsequently issued notes (and their transferees). In such case, the Internal Revenue Service might further assert that, unless a holder can establish that it is not a person that initially acquired such subsequently issued notes (or a transferee thereof), all of the notes held by such holder have OID. Any of these assertions by the Internal Revenue Service could create significant uncertainties in the pricing of IDSs and notes and could adversely affect the market for IDSs and notes.

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        For a discussion of these tax related risks, see "Special Factors—Material U.S. Federal Income Tax Considerations."

Any OID attributable to you could reduce the amount of principal you could recover from us in a bankruptcy proceeding.

        Under New York and federal bankruptcy law, holders of subsequently issued notes having OID may not be able to collect the portion of their principal face amount that represents unamortized OID as at the acceleration or filing date in the event of an acceleration of the notes or a bankruptcy of KinderCare prior to the maturity date of the notes. As a result, an automatic exchange that results in a holder receiving a note with OID could have the effect of ultimately reducing the amount such holder can recover from us in the event of an acceleration or bankruptcy.

If interest rates rise, the trading value of our IDSs may decline.

        We cannot predict the interest rate environment or guarantee that interest rates will not rise in the near future. Should interest rates rise or should the threat of rising interest rates develop, debt markets may be adversely affected. As a result, the trading value of our IDSs may decline.

Before the recapitalization and the public offering, there was no public market for our IDSs, notes, Class A common stock or Class B common stock and an inactive public market for shares of our then-outstanding common stock. The price of the IDSs or notes may fluctuate substantially, which could negatively affect holders of IDSs.

        The IDSs, notes, Class A common stock and Class B common stock have not had a public market history and prior to this offering, the shares of our then-outstanding common stock, while registered under the Securities Act and traded in the over-the-counter markets, have not traded actively. In addition, there has not been an active market in the United States for securities similar to the IDSs. We cannot assure you that an active trading market for the IDSs will develop in the future, which may cause the price of the IDSs and the notes sold separately in this offering to fluctuate substantially, and we currently do not expect that an active trading market for the shares of our Class A common stock or Class B common stock will develop until the notes are redeemed or mature. We do not intend to list our notes on any securities exchange. Accordingly, we cannot assure you that there will be a market for the notes. If the notes represented by your IDSs are redeemed or mature, or if there is a payment default on the notes for 90 days, the IDSs will automatically separate, and you will then hold the shares of our Class A common stock.

        The initial public offering price of the IDSs will be determined by negotiations among us, the existing equity investors and the representatives of the underwriters and may not be indicative of the market price of the IDSs after the recapitalization and the public offering. Factors such as quarterly variations in our financial results, announcements by us or others, developments affecting us or the child care industry, general interest rate levels and general market volatility could cause the market price of the IDSs to fluctuate significantly.

Future sales or the possibility of future sales of a substantial amount of IDSs, shares of our Class A common stock, our Class B common stock or our notes may depress the price of the IDSs and the shares of our Class A common stock, our Class B common stock and our notes.

        Future sales or the availability for sale of substantial amounts of IDSs or shares of our Class A common stock or our Class B common stock or a significant principal amount of our notes in the public market, including by the existing equity investors as described below, could adversely affect the prevailing market price of the IDSs, the shares of our Class A common stock, the shares of our Class B common stock and our notes and could impair our ability to raise capital through future sales of our securities.

        Our existing equity investors will own IDSs and shares of Class B common stock representing    % of voting power of all of our outstanding shares of our common stock after the public offering. Subject

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to the applicable contractual lock-up period and any securities law limits on affiliate resales, their IDSs (including IDSs after any conversion of their shares of Class B common stock) will be eligible for resale from time to time in any form of at-the-market, block or underwritten sales, whether as IDSs, shares of our common stock or our notes.

        We may issue shares of our Class A common stock and notes, which may be in the form of IDSs, our Class B common stock or other securities from time to time as consideration for future acquisitions and investments. In the event any such acquisition or investment is significant, the number of shares of our Class A common stock and the aggregate principal amount of notes, which may be in the form of IDSs, our Class B common stock or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be significant. In addition, we may also grant registration rights covering those IDSs, shares of our Class A common stock, shares of our Class B common stock, notes or other securities in connection with any such acquisitions and investments.

Our certificate of incorporation and by-laws and several other factors could limit another party's ability to acquire us and deprive our investors of the opportunity to obtain a takeover premium for their securities.

        Several provisions in our certificate of incorporation and by-laws will make it difficult for another company to acquire us and for you to receive any related takeover premium for your securities. For example, our by-laws do not allow stockholders to call a special meeting. Our certificate of incorporation authorizes the issuance of preferred stock without stockholder approval and upon such terms as the board of directors may determine.

Our annual and quarterly results of operations reflect seasonal fluctuations.

        Our revenues and the initial success of new centers are subject to seasonal fluctuations because enrollments are generally highest in September and January when children return to child care and/or school after summer and holiday vacations. Accordingly, July, August and December are particularly important times for new enrollments. In addition, enrollment generally decreases 5% to 10% during holiday periods and summer months. If we achieve less than satisfactory enrollment during these key months, we may not be able to compensate sufficiently for lower enrollment during the rest of the year. We may also be unable to adjust our expenses on a short-term basis to offset these fluctuations in revenues. This may cause us to experience insufficient cash flow to meet our ongoing capital needs during our low seasons. This imbalance in our cash flows may lead to seasonal volatility in the trading price of the IDSs due to a market reaction to our lower cash flow levels or any curtailment in our dividend payments to IDS holders or the commencement of any interest deferral.

Risks Relating to Our Business and the Industry

We face intense competition in the early childhood education and care services industry from numerous other types of providers.

        The early childhood education and care services industry is competitive and highly fragmented, with the most important competitive factors generally based upon reputation, location and price. Our competition consists principally of the following:

    other for-profit, center-based child care providers, including franchise organizations;

    preschool, kindergarten and before- and after-school programs provided by public schools;

    local nursery schools and child care centers, including church-affiliated and other non-profit centers;

    providers of child care services that operate out of homes; and

    substitutes for organized child care, such as relatives, nannies and one parent caring full-time for a child.

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        In many markets, we face competition from preschool services and before- and after-school programs offered by public schools that offer such services at little or no cost to parents. The number of school districts offering these services is growing, and we expect this form of competition to increase in the future.

        We also face competition from large, national, for-profit companies providing child care and education services, many of which offer these services at a lower price than we do. These other for-profit providers continue to expand in many of the same markets where we currently operate or plan to operate. According to a July 2001 study published by Marketdata Enterprises, the 40 largest providers of child care services totaled less than 5% of total licensed child care centers.

        Local nursery schools, child care centers and in-home providers generally charge less for their services than we do. Many denominational and other non-profit child care centers have lower operating expenses than we do and may receive donations and/or other funding to subsidize operating expenses. Consequently, operators of such centers often charge tuition rates that are less than our rates. In addition, fees for home-based care are normally substantially lower than fees for center-based care.

Litigation and adverse publicity concerning incidents at child care centers could hurt our reputation and limit our ability to obtain insurance.

        We believe our success in the child care business, where personal trust and parent referrals play a key role, is directly related to our reputation and favorable brand identity. We are periodically subject to claims and litigation alleging negligence, inadequate supervision and other grounds for liability arising from injuries or other harm to children. In addition, claimants may seek damages from us for child abuse, sexual abuse or other criminal acts arising out of alleged incidents at our centers. Any adverse publicity concerning such incidents at one of our child care centers, or child care centers generally, could greatly damage our reputation and could have an adverse effect on occupancy levels at our centers.

        Operators of child care centers have had difficulty obtaining general liability insurance or other liability insurance that covers child abuse, or have been able to obtain such insurance only at substantially higher rates, because of the adverse publicity risks discussed above and because the statutes of limitations for the bringing of child abuse and personal injury claims typically do not expire until a number of years after the child reaches the age of majority.

        To date, we have been able to obtain insurance in amounts we believe to be appropriate. However, insurance premiums may increase in the future as a consequence of conditions in the insurance business generally, or our situation in particular, and continuing publicity with respect to alleged instances of child abuse in the child care industry may result in our inability to obtain insurance. Furthermore, our current insurance coverage may not be sufficient in amount or type of coverage to protect us against all of such claims.

        We are subject to claims and litigation arising in the ordinary course of business, including claims and litigation involving allegations of physical or sexual abuse of children. We are aware of such allegations that have not yet resulted in claims or litigation. Any such allegations, claims or lawsuits, either individually or in the aggregate, may have a material adverse effect on our financial position, operating results or cash flows.

Our failure to comply with present or future governmental regulation and licensing requirements for child care centers could have a material adverse effect on our operations.

        Our centers are subject to numerous state and local regulations and licensing requirements. We have policies and procedures in place to assist in complying with such regulations and requirements. Although these regulations vary from jurisdiction to jurisdiction, government agencies generally review the fitness and adequacy of buildings and equipment, the ratio of staff personnel to enrolled children, staff training, record keeping, children's dietary program, the daily curriculum, compliance with health

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and safety standards and transportation safety. In most jurisdictions, these agencies conduct scheduled and unscheduled inspections of the centers and licenses must be renewed periodically. Most jurisdictions establish requirements for background checks or other clearance procedures for new employees of child care centers. Repeated failures of a center to comply with applicable regulations can subject it to sanctions, which might include probation or, in more serious cases, suspension or revocation of the center's license to operate and could also lead to sanctions against our other centers located in the same jurisdiction. In addition, this type of action could lead to negative publicity extending beyond that jurisdiction.

        A licensing authority may determine that a particular center is in violation of applicable regulations and may take action against that center and possibly other centers in the same jurisdiction. In addition, there may be unforeseen changes in regulations and licensing requirements, such as changes in the required ratio of child center staff personnel to enrolled children, that could increase our center staff operating expenses and, therefore have a material adverse effect on our operations. States in which we operate routinely review the adequacy of regulatory and licensing requirements and implement changes which may significantly increase our costs to operate in those states.

        State and local licensing regulations often provide that the licenses held by us may not be transferred. As a result, any transferee of a child care business must apply to the appropriate administrative body for a new license. The change in ownership of our equity capital effected pursuant to this offering and the recapitalization may be considered a transfer of our business under some applicable state and local regulations. As a result, we may, in certain circumstances, be required to apply for relicensing in certain jurisdictions. If relicensing is required, we may have to incur material expenditures to relicense our centers in such jurisdictions.

        Failure to comply with such laws or regulations or changes in such laws or regulations could have a material adverse effect on our operations. See "Business—Governmental Laws and Regulations Affecting Us."

Any reduction in, or other changes to, the general labor force reduces the need for our child care services.

        Demand for our child care services may be subject to fluctuations in general economic conditions, and our revenues depend, in part, on the number of working mothers and working single parents who require child care services. Recessionary pressure on the economy, and a consequent reduction in the general labor force, may adversely impact us because of the tendency of out-of-work parents to stop using child care services. In addition, demographic trends, including the increasing percentage of mothers in the workforce, as well as trends in the preference of working parents and employers for center-based child care, may not continue.

        Children attending our facilities are enrolled on a weekly basis. Accordingly, any change in economic conditions will impact us more quickly than it would businesses in which contracts are for a longer time period.

A loss or reduction of government funding for child care assistance programs or food reimbursement programs could adversely affect us.

        During fiscal year 2003 and the forty weeks ended March 5, 2004, approximately 21.6% and 20.1%, respectively, of our net revenues were generated from federal and state child care assistance programs, primarily the Child Care and Development Block Grant and At-Risk Programs. These programs are designed to assist low-income families with child care expenses and are administered through various state agencies. Although additional funding for child care may be available for low income families as part of welfare reform and the reauthorization of the Block Grant, we may not benefit from any such additional funding.

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        Federal or state child care assistance programs may not continue to be funded at current levels. Many states have recently experienced fiscal problems and have reduced or may in the future reduce spending on social services. A termination or reduction of child care assistance programs could have a material adverse effect on our business.

        Adverse changes to the national or local economies may result in an increase in the number of families eligible for child care assistance. In order to compensate for such increases, state or local governments have in the past, and may in the future, increase parent co-payments required under such programs or change the eligibility requirements to reduce the number of families eligible to participate in such programs. Because our rates are at the higher end of child care providers, an increase in the required parent co-payments may create a disincentive for parents to send their children to our centers. An increase in required parent co-payments also increases our exposure to the risk of nonpayment by these parents.

        In addition, states which reduce funding for child care may be unable to qualify to receive funds under the Temporary Assistance for Needy Families, or TANF, program. Such states may utilize funds under the Child Care and Development Block Grant to provide child care assistance to needy families in lieu of TANF funds, thereby reducing the amount of funds available to other families, including families that utilize our child care centers.

        At March 5, 2004, approximately 500 of our centers were entitled to receive reimbursement for meals and snacks that meet certain USDA nutritional guidelines through the Child and Adult Care Food Program (CACFP). During fiscal year 2003 and the forty weeks ended March 5, 2004, our CACFP reimbursements were $7.8 million and $6.3 million, respectively, which were recorded as a reduction of operating expense. If the CACFP is not funded at current levels or if changes to the program result in any of our centers no longer qualifying for the CACFP, we would experience a decline in reimbursements and a resultant inability to reduce our operating expense, which could have a material adverse effect on our business.

A termination or reduction of tax credits for child care could have a material adverse effect on our business.

        Tax incentives for child care programs can potentially benefit us. Section 21 of the Internal Revenue Code of 1986, as amended, referred to as the Code, provides a federal income tax credit ranging from 20% to 35% of specified child care expenses with maximum eligible expenses of $3,000 for one child and $6,000 for two or more children. The fees paid to us by eligible taxpayers for child care services qualify for these tax credits, subject to the limitations of Section 21 of the Code. However, these tax incentives are subject to change.

        Many states offer tax credits in addition to the federal credits discussed above. Credit programs vary by state and may apply to both the individual taxpayer and the employer. A termination or reduction of such tax credits could have a material adverse effect on our business.

If we are unable to successfully execute our growth strategy, our revenue growth, earnings and cash flow could be diminished.

        Our ability to increase revenues and operating cash flow significantly over time depends, in part, on our success in building and/or acquiring new centers on satisfactory terms, successfully integrating them into our operations and achieving operational maturity represented by stable revenues and cash flow within our targeted time frame. Acceptable acquisition opportunities and appropriate sites for our expansion program might not be available. The availability and price of sites and acquisition opportunities could be adversely impacted by the expansion activities of our competitors. In addition, our ability to take successful advantage of any available acquisition opportunity will be dependent, in part, on the availability of adequate financial resources, to which we may not have access. We also may have to incur material expenditures to relicense centers that we acquire in the future because state and

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local licensing regulations often do not allow family services companies, such as child care centers, to transfer their licenses.

        Our growth strategy also contemplates investing in or acquiring education-related businesses with which we may not have significant prior experience. Competition for such investment or acquisition opportunities has been significant and has driven up prices for such opportunities. Accordingly, such opportunities may not be available on reasonable terms, or, if available, may not be executed successfully.

        As our business develops and expands, we may need to implement enhanced operational and financial systems and may require additional employees and management, operational and financial resources. Failure to implement such systems successfully and to use such resources effectively could have a material adverse effect on us.

Since the fourth quarter of fiscal year 2002 until the present, we have relied on our real estate sale-leaseback transactions as a source of cash flow, and the availability of such transactions may be limited in the future.

        During the fourth quarter of fiscal year 2002, we began selling centers to individual real estate investors and concurrently signing long term leases to continue operating the centers. At March 5, 2004, sale-leaseback transactions contributed $162.7 million in gross proceeds. Subsequent to March 5, 2004, we closed $15.2 million in sales, which included six centers, and are currently in the process of negotiating another $69.9 million of sales related to 27 centers. However, the sale-leaseback market may cease to be a reliable source of cash flow for us in the future if capitalization rates become less attractive or other unfavorable market conditions develop. In addition, although new center construction is a potential source of assets for sale-leaseback transactions, our current inventory of assets suitable for sale-leaseback transactions is a limiting factor on future sale-leaseback transaction volume. In addition to the transactions relating to the 27 centers referred to above, we estimate that we have additional marketable inventory at April 16, 2004 of 74 centers with a market value of approximately $168.0 million.

Our insurance policies may prove inadequate to cover claims, and we may be unable to maintain our existing coverage in the future at current prices.

        Our insurance program currently includes the following types of policies: workers' compensation, comprehensive general liability, automobile liability, property, excess "umbrella" liability, directors' and officers' liability and employment practices liability. These policies provide for a variety of coverages, are subject to various limits, and include substantial deductibles or self-insured retentions. Special insurance is sometimes obtained with respect to specific hazards, if deemed appropriate and available at reasonable cost. Our owned centers are covered by blanket insurance policies, including property insurance with an aggregate coverage limit of $100,000,000. Claims in excess of, or not included within, our coverage may be asserted. To the extent that any claims are not covered by insurance, we will be forced to cover the associated costs ourselves, which will reduce the amount of cash we have available for other business purposes. We expect our insurance costs to continue to increase in the near future due partially to higher premiums, which will further reduce the amount of cash we will have available for other business purposes.

        After the terrorist attacks of September 11, 2001, insurance premiums for all new insurance policies increased dramatically. Prior to the attacks, we had entered into three-year insurance policies with fixed premiums, which expired in May 2002. The combined effect of these circumstances impacted the increase in our insurance costs. Our insurance policies will be up for renewal in May 2004, and we expect that the premiums we pay for the same level of insurance under any new policies may be greater than the premiums we currently pay.

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We are subject to audits by tax authorities which, if determined adversely, could have a material adverse effect on our cash flow and results of operations.

        From time to time, we are subject to audits of our tax returns by the IRS and state taxing authorities. We are currently in the review process of an IRS audit with respect to our fiscal years 1998, 1999 and 2000. We are unable to predict the outcome of this review. The results of this review and any future audits by the IRS or other taxing authorities could result in adjustments that could have a material adverse effect on our cash flows and results of operations.

If we are unable to attract and retain sufficient qualified employees, if minimum wage rates increase or if our employees unionize, our results of operations may be adversely affected.

        We believe that our success is largely dependent on our ability to attract and retain qualified employees. Many of our child care center staff are entry-level wage earning employees. Expenses for salaries, wages and benefits represented approximately 55.3% of net revenues for the forty weeks ended March 5, 2004. If we are unable to hire sufficient numbers of quality employees or are only able to hire such employees by providing significantly greater salaries, wages and benefits than we currently do as a result of increases in the federal or state minimum wage rates or other market conditions, our operations may be adversely affected.

        Since early 1998, union organization efforts in the child care industry have received considerable publicity. While union officials associated with the American Federation of State, County and Municipal Employees and Service Employees International have announced their intention to engage in a national effort to organize child care workers, organization efforts to date have been principally localized in Philadelphia and Seattle. Although we are not aware of any organization efforts at any of our centers, such efforts may occur and, if successful, could have an adverse effect on our relationships with employees and our labor costs. In addition, the general publicity surrounding such efforts, even if not focused on our centers, could result in increased wages for child care workers and, as a result, increase our labor costs.

The loss of any of our key management employees could adversely affect our business.

        Our success and growth strategy depend upon our senior management, particularly David J. Johnson, our chief executive officer. However, we do not have employment agreements with, or key man life insurance for, Mr. Johnson or any of our senior management. If any of our key employees becomes unable or unwilling to participate in the business and operations of our company and/or we are unable to continue to attract and retain additional highly qualified senior management personnel, our future business and operations could be materially and adversely affected.

Because we own or lease a substantial number of real properties, our results of operations could be adversely affected if environmental contamination is discovered on our properties.

        We are subject to federal, state and local environmental laws, regulations and ordinances that may impose liability for the costs of cleaning up, and damages resulting from, past spills, disposals and other releases of hazardous substances. In particular, under applicable environmental laws, we may be responsible for investigating and remediating environmental conditions and may be subject to associated liability, including lawsuits brought by private litigants, relating to our properties. These obligations could arise whether we own or lease the property at issue and regardless of whether the environmental conditions were created by us or by a prior owner or tenant. Environmental conditions unknown to us at this time relating to prior, existing or future properties may be discovered and have a material adverse effect on our results of operations. See "Business—Properties."

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

        Some of the statements under "Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this proxy statement/prospectus may include forward-looking statements which reflect our current views with respect to future events and financial performance. The forward-looking statements are subject to various known and unknown risks, uncertainties and other factors. When we use words such as "believes," "expects," "anticipates," "plans," "estimates," "projects," "may," "intends," "seeks" or similar expressions, we are making forward-looking statements.

        All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in these statements. We believe that these factors include the following:

    the effects of general economic conditions, including changes in the rate of inflation, tuition price sensitivity and interest rates;

    competitive conditions in the early childhood education and care services industry;

    various factors affecting occupancy levels, including, but not limited to, the reduction in or changes to the general labor force that would reduce the need for child care services;

    the availability of a qualified labor pool, the impact of labor organization efforts and the impact of government regulations concerning labor and employment issues;

    federal and state regulations regarding changes in child care assistance programs, welfare reform, transportation safety, tax rates, minimum wage increases and licensing standards;

    the loss or reduction of government funding for child care assistance programs or the establishment of a governmentally mandated universal child care benefit;

    our inability to successfully execute our growth strategy or plans designed to improve operating results, cash flow or our financial position, or to improve our disclosure controls and procedures;

    the availability of financing, additional capital or access to the sale-leaseback market;

    our difficulty in meeting or inability to meet our obligations to repay our indebtedness;

    the availability of sites and/or licensing or zoning requirements that may hinder our ability to open new centers;

    our ability to integrate acquisitions;

    our inability to successfully defend against or counter negative publicity associated with claims involving alleged incidents at our centers;

    our inability to obtain insurance at the same levels, or at costs comparable to those incurred historically;

    the effects of potential environmental contamination existing on any real property owned or leased by us; and

    other risk factors that are discussed in this proxy statement/prospectus and, from time to time, in our other Securities and Exchange Commission reports and filings.

        We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

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THE SPECIAL MEETING

        The matters to be considered at the special meeting are of great importance to KinderCare stockholders. Stockholders are urged to read carefully and consider the information presented in this proxy statement/prospectus and its appendices. Stockholders are also urged to submit a proxy to be voted at the special meeting by mailing in the enclosed proxy card.

Date, Place and Time

        The special meeting is scheduled to be held at                        , on                        , 2004 at             a.m., local time.

Purpose of the Special Meeting

        At the special meeting, you will be asked to consider and vote upon the following proposals:

    1.
    to adopt the Recapitalization Agreement and Plan of Merger, dated             , 2004, between KinderCare Learning Centers, Inc. and KLC Merger Sub, Inc., a wholly owned subsidiary of KinderCare Learning Centers, Inc.;

    2.
    to approve KinderCare's restated certificate of incorporation, which includes the following amendments:

    increasing the number of authorized shares of common stock, $0.01 par value per share, from                        to                         , which will be divided into the following series:                        will be shares of existing common stock with one vote per share,                        will be shares of Class A common stock with one vote per share,                         will be shares of Class B common stock with one vote per share and                        will be shares of Class C common stock with one vote per share;

    providing that shares of Class A common stock and Class B common stock vote together as a single class on all matters presented to the stockholders for a vote, except as required by law, and that Class A common stock and Class B common stock will be entitled to vote separately on any amendment to our restated certificate of incorporation that would disproportionately and adversely affect the rights of such series of common stock;

    providing that the dividend rate on each share of Class B common stock will equal        multiplied by the dividend rate on each share of Class A common stock and that dividends cannot be declared on the Class A common stock unless a corresponding proportionate dividend is declared on the Class B common stock;

    providing that, after the second anniversary of the recapitalization and subject to certain conditions described in our restated certificate of incorporation, each share of Class B common stock will be convertible, at the holder's option, into either one IDS or, if the IDSs have automatically separated or are otherwise not outstanding prior to the time of such conversion,            share of Class A common stock and a note having a principal amount equal to the note which was represented by each IDS at the time of the public offering; and

    providing that at any time after on and the third anniversary of the recapitalization, KinderCare will have the option to force conversion of all of the then-outstanding shares of Class B common stock into IDSs on the terms and subject to the conditions described in our restated certificate of incorporation; and

    3.
    to vote on any other matter as may properly come before the special meeting.

        Proposals 1 and 2, both of which relate to the recapitalization, are separate matters to be voted upon by KinderCare stockholders but are expressly conditioned upon the approval of the other

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proposal (but not proposal 3). This means that BOTH of these proposals must be adopted or approved, as applicable, by KinderCare stockholders in order for KinderCare to obtain the requisite stockholder approval of the recapitalization. The transactions described in this document will not be completed, even if all of the other conditions are satisfied or waived, if the requisite stockholder approval of these two proposals is not received.

Record Date; Stock Entitled to Vote; Quorum

        Holders of record of shares of existing common stock on the close of business on                        , 2004, the record date for the special meeting, are entitled to receive notice of and vote at the special meeting. On the record date,                        shares of existing common stock were issued and outstanding and entitled to vote at the special meeting. Each stockholder has one vote for each share of common stock held by such stockholder.

        Option holders will not be entitled to vote the shares underlying unexercised options, which means that they will not be entitled to vote the shares underlying options that are cancelled in the recapitalization in exchange for merger consideration.

        A quorum of stockholders is necessary for a valid meeting. The required quorum for the transaction of business at the special meeting is a majority of KinderCare's issued and outstanding capital stock entitled to vote on the record date. Abstentions and broker non-votes each will be included in determining the number of shares present at the special meeting for the purpose of determining the presence of a quorum.

        A broker non-vote occurs when a broker is not permitted to vote on a matter without instructions from the beneficial owner of the shares and no instruction is given. If your broker holds your shares in its name, your broker may not vote your shares on the recapitalization proposals absent instructions from you. Therefore, without your voting instructions, a broker non-vote will occur.

Adjournment

        The special meeting may be adjourned by the chairman of the meeting. The stockholders present at a meeting will not have authority to adjourn the meeting. If the meeting is to be reconvened, notice need not be given of the adjourned meeting if the time, date and place by which stockholders and proxy holders may be deemed to be present in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting must be given to each stockholder of record entitled to vote at the meeting.

Vote Required

        The affirmative vote of the holders of a majority of the outstanding shares of our existing common stock is required to adopt the recapitalization agreement and to approve our restated certificate of incorporation. An abstention or a broker non-vote will have the same effect as a vote against the proposals.

        Our directors, executive officers and affiliates have indicated that it is their intention to vote their shares of common stock in favor of the adoption of the recapitalization agreement and the approval of our restated certificate of incorporation. See "Special Factors—Interests of Certain Persons in the Recapitalization."

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Voting of Proxies

        Stockholders of record can give a proxy to be voted at the meeting by returning the enclosed proxy card to us before the special meeting, and we will vote your shares as you direct. Stockholders who hold their shares in "street name" must vote their shares in the manner prescribed by their brokers.

        If you do not specify on your proxy card how you want to vote your shares, we will vote them in favor of the adoption of the recapitalization agreement and the approval of our restated certificate of incorporation.

Revocation of Proxies

        You can revoke your proxy at any time before it is exercised at the special meeting in any of three ways:

    by submitting written notice to KinderCare's Secretary before the meeting that you have revoked your proxy;

    by submitting another proxy by mail that is later dated and properly signed; or

    by voting in person at the special meeting.

Expenses of Solicitation

        KinderCare has engaged MacKenzie Partners, Inc., a professional proxy solicitation and financial relations consulting firm, to solicit proxies, answer questions and distribute materials to stockholders, brokerage houses, banks, custodians and other nominee holders at an approximate cost of $                  . This cost will be borne by KinderCare.

Other Matters to Be Acted on at the Meeting

        Adoption of the recapitalization agreement and approval of KinderCare's restated certificate of incorporation are the only matters to be presented or acted upon at the special meeting. Under our By-Laws, stockholders may vote on any other matter as may properly come before the special meeting, and holders of proxies will vote in their discretion on such other matters.

        The actions proposed in this proxy statement/prospectus are not matters that can be voted on by brokers holding shares for beneficial owners without the owner's specific instructions. Accordingly, all beneficial owners of KinderCare stock are urged to return the enclosed proxy card marked to indicate their votes or to contact their brokers to determine how to vote.

How to Vote Your Proxy and Make an Election

        Stockholders should not send any stock certificates with their proxy cards. However, election and transmittal forms must be accompanied by stock certificates or by notices of guaranteed delivery.


        You should mail your signed proxy card in the enclosed small, white, prepaid, self-addressed return envelope marked "Proxy."



        The enclosed election and transmittal forms, which must be accompanied by either stock certificates or by notice of guaranteed delivery, should be returned to Registrar and Transfer Company in the enclosed large, prepaid return envelope. The address that you should send your form of election to will depend on the method of delivery that you choose. The available options and relevant addresses for Registrar and Transfer Company are listed on page 200 of this proxy statement/prospectus.

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How to Attend the Special Meeting

        Stockholders of Record.    When you provide your proxy, please let us know if you plan to attend the special meeting. If you plan to attend, the bottom half of your proxy card is a ticket that will admit the named stockholder(s) and one guest. If you lose your ticket, we can issue you a ticket at the door. (Please bring proof of ownership, such as a dividend check stub, book entry account statement or account number.)

        "Street Name" Holders.    Tell your broker that you are planning to attend the special meeting and would like a "legal proxy." Then simply bring that form to the special meeting, and we will give you a ticket at the door that will admit you and one guest. If you cannot get a legal proxy in time, we can still give you a ticket at the door if you bring a copy of your most recent brokerage account statement showing that you own KinderCare common stock.

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SPECIAL FACTORS

Background to the Recapitalization

        Over the past several years, our board of directors has carefully evaluated alternatives to maximize value to our stockholders. Alternatives considered included an initial public offering, recapitalization and possible strategic business combination opportunities.

        In December 2003, our board of directors and management discussed the benefits and risks of a recapitalization and a public offering. By February 2004, we requested our lawyers to begin preparing, together with management, the registration statements and other documents necessary to initiate the recapitalization and public offering. At the same time, our board of directors and management engaged in discussions with a potential acquiror of KinderCare. By early April 2004, we had concluded that discussions with this acquiror were unlikely to result in a transaction on terms satisfactory to our board of directors.

        During the weeks of April 5 and April 12, 2004, our board of directors reviewed the draft registration statements relating to the proposed recapitalization and public offering, as well as the potential benefits and risks of the recapitalization and public offering. Our board of directors concluded that a proposed recapitalization and refinancing transaction resulting in the issuance of IDSs in the public offering and the reclassification of our existing common stock should be pursued as it was likely to offer the greatest likelihood of maximizing long-term stockholder value. Our board of directors approved the filing of registration statements and other documents necessary to initiate the recapitalization. Our board of directors also affirmed its intention to meet again prior to the mailing of the definitive proxy statement/prospectus to consider the fairness of the recapitalization to holders of our existing common stock and to determine whether or not to approve the recapitalization.

Recommendation of the KinderCare Board of Directors

        The decision of our board of directors to pursue the recapitalization and the public offering was the result of careful consideration by our board of directors of numerous factors, including, without limitation, the following positive factors:

    providing significant value for the holders of our existing common stock in the form of cash, IDSs and, should holders elect, Class B common stock to be received in the recapitalization, which our board of directors believes will have an aggregate value in excess of the historical trading prices for our existing common stock;

    allowing the holders of our existing common stock to retain a continuing interest in our company by virtue of the receipt of IDSs and Class B common stock as a portion of the consideration in the recapitalization;

    at the same time, allowing all stockholders the opportunity to obtain substantial immediate liquidity through the distribution of cash in the merger;

    providing stockholders with the opportunity to receive IDSs, which are expected to offer continuing interest payments while permitting KinderCare to deduct the amount of those interest payments under U.S. federal and certain other tax laws;

    attracting greater institutional ownership of, and a broader and more liquid market for, our public IDS securities than is currently the case for our public equity securities; and

    providing all stockholders the same rights of election, subject to proration, between IDSs and Class B common stock.

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        The board of directors also identified and considered the following potentially negative factors and risks associated with the proposed recapitalization:

    the risk that one or more aspects of the recapitalization and related transactions will not be completed or that they will be completed on terms that are less favorable to us than anticipated;

    potential confusion due to the increased complexity in KinderCare's capital structure, which may diminish investor interest, analyst coverage and the size of KinderCare's investor base;

    given that the Class A common stock and the Class B common stock do not have a public trading history and there is only an emerging but not yet active market in the United States for securities similar to the IDSs to be issued in the recapitalization, the possibility that the pricing of the public offering and subsequent trading prices of the IDSs may be adversely affected by a lack of demand for securities of this kind or by a saturation of the market by other issuers seeking to market securities similar to the IDSs;

    the sensitivity of the pricing of the public offering and subsequent trading prices of the IDSs to prevailing interest rates;

    the market's perception of our ability to make distributions on the Class A common stock component of the IDSs and the Class B common stock;

    the likely absence of a public trading market for the Class B common stock;

    possible adverse changes to, or application or interpretation of, U.S. federal income and other tax laws applicable to issuers or holders of IDSs that could adversely affect our ability to deduct the amount of interest payments on the notes represented by the IDSs, our financial results and the trading price for the IDSs; and

    the significant management time and expense associated with completing the recapitalization and the related transactions, which could adversely affect our ability to pursue other strategies or opportunities.

        In reaching its decision to pursue the proposed recapitalization, our board of directors consulted with its legal and financial advisors, as well as our management, and considered other information relating to us and the proposed transaction, including, but not limited to:

    recent market prices for our existing common stock as well as market prices for the past several years; and

    the U.S. federal income tax consequences of the recapitalization under existing law.

        In considering our board of directors' decision to pursue the recapitalization, you should be aware that certain of our directors and executive officers have arrangements that may cause them to have interests in the recapitalization that are different from, or are in addition to, the interests of our stockholders generally. See "—Interests of Certain Persons in the Recapitalization."

        The recapitalization has been structured as a merger pursuant to which KLC Merger Sub, Inc. will merge into KinderCare, with KinderCare continuing as the surviving corporation. The recapitalization has been structured as a merger to facilitate the ability of KinderCare stockholders to elect from different consideration alternatives.

Effects of the Recapitalization

        Business and Operations; Officers and Directors.    KinderCare expects that the recapitalization will have no material impact on its operations. Following the recapitalization, KinderCare will continue its current businesses under the KinderCare name. The KinderCare board of directors and executive officers at the effective time of the recapitalization will remain in office following the recapitalization.

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We intend to nominate two independent directors within three months after the completion of the recapitalization and public offering, and one additional independent director prior to October 31, 2004, so that our board of directors will be composed of a majority of independent members. Pro forma consolidated financial statements are included elsewhere in this document to reflect the material changes in the consolidated financial statements following completion of the recapitalization.

        Number of Outstanding Shares.    After the recapitalization, KinderCare will have three series of common stock, all of which will be voting. As of April 20, 2004, approximately 19,721,646 shares of common stock were outstanding. Following the recapitalization and public offering, approximately            shares of Class A common stock, approximately            shares of Class B common stock and no shares of Class C common stock will be outstanding. Our existing common stock will no longer be quoted for trading on the OTC Bulletin Board and will be eligible for termination of registration under the Securities Exchange Act of 1934.

        Following the recapitalization, we do not expect that the Class B common stock will trade on any exchange, and we currently do not expect an active trading market for the Class B common stock to develop. Our shares of Class A common stock will not be listed for separate trading on                        until the minimum listing criteria on                        are satisfied by our outstanding shares of Class A common stock no longer represented by IDSs for a period of 30 consecutive trading days. The minimum listing criteria on                        includes                         . The notes and Class A common stock represented by the IDSs will be freely tradable without restriction or further registration under the Securities Act of 1933, unless they are purchased by affiliates as that term is defined in Rule 144 under the Securities Act. Shares of Class B common stock will not be transferable until the second anniversary following completion of the recapitalization. See "Description of Capital Stock."

        Effect on Share Prices.    No assurances can be given as to the market price of the IDSs, the Class A common stock underlying the IDSs and the Class B common stock after the recapitalization. It is expected that the market price of the Class A common stock and the Class B common stock after the recapitalization will reflect a greater number of shares of new common stock outstanding. The post-recapitalization price of the Class A common stock and the Class B common stock will not be correlated with, and may be lower than, the pre-recapitalization price of our existing common stock.

Conditions to Completion of the Recapitalization

        Completion of the recapitalization will be conditioned upon:

    the adoption of the recapitalization agreement by the KinderCare stockholders;

    the approval of our restated certificate of incorporation;

    the absence of any law, order or injunction prohibiting the completion of the recapitalization and the absence of any proceeding challenging the recapitalization agreement or seeking to prohibit or delay the recapitalization which KinderCare's board of directors determines would make the recapitalization no longer advisable;

    all waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 shall have expired or terminated and all other actions relating to governmental approvals of the recapitalization have been completed unless the failure to complete such actions would not reasonably be expected to have a material adverse effect on KinderCare;

    the completion of the public offering and the approval for listing by the                        of IDSs to be issued in the recapitalization, subject to official notice of issuance;

    the Securities and Exchange Commission having declared effective the registration statement, of which this proxy statement/prospectus forms a part; and

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    receipt by KinderCare of all material licenses, permits, consents, approvals, authorizations, qualifications and orders of third parties with contracts with KinderCare as are necessary for completion of the recapitalization, other than those which, if not obtained, would not have a material adverse effect on KinderCare.

Our Restated Certificate of Incorporation

        The recapitalization and the public offering will require us to amend and restate our certificate of incorporation to include the following amendments:

    increasing the number of authorized shares of common stock, $0.01 par value per share, from                to                , which will be divided into the following series:                will be shares of our existing common stock with one vote per share,                 will be shares of Class A common stock with one vote per share,                 will be shares of Class B common stock with one vote per share and                will be shares of Class C common stock with one vote per share;

    providing that shares of Class A common stock and Class B common stock vote together as a single class on all matters presented to the stockholders for a vote, except as required by law and except that Class A common stock and Class B common stock will be entitled to vote separately on any amendment to our restated certificate of incorporation that would disproportionately adversely affect the rights of such series of common stock;

    providing that the dividend rate on each share of Class B common stock will equal            multiplied by the dividend rate on each share of Class A common stock and that dividends cannot be declared on the Class A common stock unless a corresponding proportionate dividend is declared on the Class B common stock;

    providing that, after the second anniversary of the recapitalization and subject to certain conditions described in our restated certificate of incorporation, each share of Class B common stock will be convertible, at the holder's option, into either one IDS or, if the IDSs have automatically separated or are otherwise not outstanding prior to the time of such conversion,            share of Class A common stock and a note having a principal amount equal to the note which was represented by each IDS at the time of the public offering; and

    providing that at any time on and after the third anniversary of the recapitalization, KinderCare will have the option to force conversion of all of the then-outstanding shares of Class B common stock into IDSs on the terms and subject to the conditions described in our restated certificate of incorporation.

        A copy of the Form of Restated Certificate of Incorporation is attached as Annex II to the recapitalization agreement, which is included in this document as Appendix A.

Approval of Definitive Amendments by Our Board of Directors

        The recapitalization requires the approval of the holders of a majority of the outstanding shares of our existing common stock. In addition, approval of our restated certificate of incorporation is a condition to the completion of the recapitalization.

        The affiliates of KKR and Oaktree listed below, who own approximately 89.0% of our outstanding existing common stock, have advised us that they currently intend to vote in favor of adopting the recapitalization agreement and approving our restated certificate of incorporation.

        Accordingly, assuming that KKR and Oaktree stockholders continued to own a majority of the issued and outstanding shares of our common stock on the record date for the special meeting, the requisite vote of the stockholders to adopt the recapitalization agreement and to approve our restated

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certificate of incorporation would be assured. Approval of the recapitalization is not conditioned upon the favorable vote of a majority of our unaffiliated stockholders.

Our By-Laws

        Our by-laws contain provisions that could delay, defer or prevent a third party from acquiring us, despite the possible benefit to stockholders.

    Stockholders may only amend, alter, change or repeal provisions of our by-laws by the affirmative vote of the holders of at least 80% of the shares entitled to vote at an election of directors. This may make it more difficult for stockholders to alter our by-laws.

    A stockholder generally must notify us at least 90 but no more than 120 days prior to the anniversary date of the preceding annual meeting of stockholders if the stockholder intends to nominate a person for election as a director or properly bring other business before the annual meeting of stockholders. Our restated by-laws also specify requirements as to the form and content of a stockholder's notice. These provisions may impede stockholders' ability to bring matters before an annual meeting of stockholders or make nominations for directors an annual meeting of stockholders.

    Our by-laws do not allow stockholders to call a special meeting of stockholders. Special meetings of stockholders may be called only (1) by our board of directors or by our Chief Executive Officer for any purpose or (2) by our Chief Executive Officer or Secretary if directed by our board of directors.

Interests of Certain Persons in the Recapitalization

        As of April 20, 2004, our directors and executive officers together beneficially owned 411,428 shares of our existing common stock, or approximately 2.1% of our existing common stock. KKR, Oaktree and their affiliates beneficially owned 17,556,382 shares of our existing common stock, or approximately 89.0% of our existing common stock. Certain of our directors and executive officers also hold options to purchase our existing common stock. As of April 20, 2004, all of our directors and executive officers held options to purchase an aggregate of 1,583,200 shares of our existing common stock under our existing equity incentive plans with a weighted-average exercise price per share of $11.05. Immediately prior to the recapitalization, assuming the recapitalization and the public offering result in a change of control, all unvested options to purchase shares of our common stock held by all of our employees under our stock-based compensation plans will become fully vested. Outstanding options will cease to be exercisable and will be cancelled upon the recapitalization, but holders of cancelled options will be provided the same consideration as our existing stockholders in the recapitalization with respect to a number of shares having a fair market value equal to the "spread" of the relevant option (the excess of the fair market value of the underlying shares at the time of the recapitalization over the exercise price of the stock option). Under the recapitalization and based on their respective holdings as of                         , 2004, we estimate that:

    our directors and executive officers will receive:

    approximately $                  in cash (assuming that the public offering is priced at the midpoint in the range of prices for IDSs on the cover page of the prospectus relating to the public offering and including the cancellation of outstanding options);

    approximately            shares of Class B common stock and            IDSs (including            shares of Class A common stock represented by such IDSs and including the cancellation of outstanding options); and

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    KKR, Oaktree and their affiliates will receive:

    approximately $                  in cash (assuming that the public offering is priced at the midpoint in the range of prices for IDSs on the cover page of the prospectus relating to the public offering), and

    shares of Class B common stock and            IDSs (including            shares of Class A common stock represented by such IDSs),

in each case, assuming that any outstanding shares of Class B common stock in excess of    % of our outstanding voting power and    % of the overall value of KinderCare's equity (assuming the over-allotment option to purchase additional IDSs in the public offering is exercised in full) are exchanged into IDSs in the recapitalization. All holders of our existing common stock making a cash and IDS election will receive the same merger consideration per share, and all stockholders making a cash and Class B election will receive the same merger consideration per share.

        We have granted the underwriters of the public offering an option to purchase up to            additional IDSs at the offering price of the public offering to cover over-allotments in the public offering. Assuming that the underwriters' over-allotment option is fully exercised, we estimate that after the completion of the recapitalization, our directors and executive officers will beneficially own approximately            shares of Class B common stock and            IDSs (including            shares of Class A common stock represented by such IDSs), and KKR, Oaktree and their affiliates will beneficially own approximately            shares of Class B common stock and            IDSs (including            shares of Class A common stock represented by such IDSs).

        We, all our executive officers, KKR, Oaktree and their affiliates have agreed that, for a period of 180 days from the date of this proxy statement/prospectus, we and they will not dispose of or hedge any IDSs, our Class A common stock, our Class B common stock or the notes, including the separate notes, or any securities convertible into IDSs, our Class A common stock, our Class B common stock or the notes, including the separate notes, or securities exchangeable for IDSs, our Class A common stock, our Class B common stock or the notes. The representative of the underwriters in the public offering may release any of the securities subject to these lock-up agreements at any time without notice. For more information on the share ownership of our directors, officers and affiliates, please see "Principal Stockholders" on page 147.

        We are party to a registration rights agreement with KKR pursuant to which KKR:

    has unlimited demand registration rights relating to the IDSs (and shares of Class A common stock and the notes upon a separation of the IDSs) held by them; and

    has an unlimited number of piggyback registration rights relating to the IDSs (and shares of Class A common stock and the notes upon a separation of the IDSs) held by them.

        If KKR exercises its demand registration rights, we will file a registration statement and prospectus and undertake an offering in the United States, as requested by KKR. These registration rights will be transferable by KKR to certain permitted transferees. We have agreed to pay all costs and expenses in connection with the first six registrations of each class or series of registrable securities, except underwriting discounts and commissions and any transfer taxes applicable to the securities sold, and to indemnify the consenting stockholders and permitted transferees against certain liabilities, including liabilities under the Securities Act of 1933. All costs and expenses in connection with any registrations requested by KKR following the first six registrations for each class or series of registrable securities, except underwriting discounts and commissions and any transfer taxes applicable to the securities sold, will be paid proportionately by us and all other holders participating in such registration on the basis of the relative number of shares of common stock of each such holder whose registrable securities are included in such registration.

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        We are party to a stockholders' agreement with KKR and Oaktree. Subject to the terms of the stockholders' agreement, Oaktree is entitled to designate one director to our board of directors, who is currently Mr. Richard J. Goldstein. In addition, the stockholders' agreement provides that (1) Oaktree will have the right to participate proportionately in certain sales of our common stock by KKR or its affiliates and (2) KKR or its affiliates will have the right to require Oaktree to participate proportionately in certain sales by KKR or its affiliates. No transferee of shares of our common stock from Oaktree will acquire any rights under the stockholders' agreement. The stockholders' agreement will terminate no later than February 13, 2007, and may terminate earlier if (a) the number of shares of our common stock held in the aggregate by Oaktree falls below certain ownership levels through sales or other dilution events or (b) KKR and its affiliates, in the aggregate, own less than 15% of the outstanding shares of our common stock on a fully diluted basis.

        We are also party to management stockholders' agreements and sale participation agreements with certain of our executive officers, pursuant to which such executive officers have (1) piggyback registration rights relating to the shares of Class B common stock and IDSs (and shares of Class A common stock upon a separation of the IDSs) held by them and (2) rights to participate proportionately in certain sales of our common stock by KKR or its affiliates.

        For information on other arrangements with our affiliates, including KKR, please see "Related Party Transactions" on page 149.

Financing the Recapitalization

        We intend to finance the recapitalization with a portion of the proceeds of the public offering and from cash on hand.

        The following table illustrates the estimated sources of and uses for the funds for the recapitalization and related transactions, assuming the recapitalization occurred at                  , 2004, and the underwriters of the public offering do not exercise their over-allotment option. Actual amounts may differ.

Sources

  (In millions)
  Uses

  (In millions)
Cash and cash equivalents   $     Revolving credit facility   $  
Revolving credit facility         Purchase of 9.5% senior subordinated notes in tender offer and consent solicitation      
IDSs offered in the public offering         Pre-funding of CMBS loan amortization and interest payments      
Notes (not represented by IDSs) offered in the notes public offering         Purchase of existing stockholder common stock as part of the merger consideration      
          Transaction fees and expenses      
 
Total

 

 

 

 

Total

 

 

 

Additional IDSs offered in the public offering assuming exercise of the over-allotment option in full

 

 

 

 

Purchase of existing stockholder IDSs as part of the over-allotment option merger consideration

 

 

 
          Additional transaction fees and expenses related to the exercise of the over-allotment option      
  Total assuming exercise of the over-allotment option in full         Total assuming exercise of the over-allotment option      

        Our 9.5% senior subordinated notes bear interest at an annual rate of 9.5% and mature on February 15, 2009.

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Material U.S. Federal Income Tax Considerations

        The following discussion sets forth the material United States federal income tax consequences, as of the date hereof, associated with the receipt of cash, Class B common stock and/or IDSs in the recapitalization and the ownership and disposition of Class B common stock and IDSs following the recapitalization by U.S. holders (as defined below) and Non-U.S. Holders (as defined below) of existing common stock. This discussion does not address any tax consequences arising under the laws of any state, local or foreign jurisdiction. This discussion is based upon the Internal Revenue Code of 1986, as amended (the "Code"), the regulations of the U.S. Treasury Department and court and administrative rulings and decisions in effect on the date of this document. These laws may change, possibly retroactively, and any change could affect the continuing validity of this discussion.

        For purposes of this discussion, we use the term "U.S. holder" to mean:

    a citizen or resident of the United States;

    a corporation (or other entity taxable as a corporation) created or organized under the laws of the United States or any of its political subdivisions;

    a trust that (1) is subject to the supervision of a court within the United States and the control of one or more United States persons or (2) has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person; or

    an estate that is subject to United States federal income tax on its income regardless of its source.

        For purposes of this discussion, a "Non-U.S. Holder" is a holder, other than an entity or arrangement classified as a partnership for U.S. federal income tax purposes, that is not a U.S. Holder. Special rules may apply to certain Non-U.S. Holders, such as:

    U.S. expatriates,

    "controlled foreign corporations,"

    "passive foreign investment companies,"

    "foreign personal holding companies,"

    corporations that accumulate earnings to avoid U.S. federal income tax, and

    investors in pass-through entities that are subject to special treatment under the Code.

        Such Non-U.S. Holders should consult their own tax advisors to determine the U.S. federal, state, local and other tax consequences that may be relevant to them.

        If a partnership is a holder, the tax treatment of a partner will generally depend on the status of the partners and the activities of the partnership. If you are a partner of a partnership holding existing common stock, Class B common stock and IDSs, as the case may be, you should consult your tax advisors.

        This discussion assumes that you hold your shares of existing common stock, Class B common stock and IDSs, as the case may be, as a capital asset within the meaning of section 1221 of the Code. Further, this discussion does not address all aspects of U.S. federal income taxation that may be relevant to you in light of your particular circumstances or that may be applicable to you if you are subject to special treatment under the United States federal income tax laws, including if you are:

    a financial institution;

    a tax-exempt organization;

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    an S corporation or other pass-through entity;

    an insurance company;

    a mutual fund;

    a dealer in securities or foreign currencies;

    a trader in securities who elects the mark-to-market method of accounting for your securities;

    a stockholder subject to the alternative minimum tax provisions of the Code;

    a stockholder who received your existing common stock as compensation, including through the exercise of employee stock options or through a tax-qualified retirement plan;

    a U.S. Holder that has a functional currency other than the U.S. dollar;

    a holder of, or a holder who is related within the meaning of section 318 of the Code to a holder who owns, options granted under any benefit plan; or

    a stockholder who holds existing common stock as part of a hedge against currency risk, straddle or a constructive sale or conversion transaction.

        No statutory, administrative or judicial authority directly addresses the treatment of the recapitalization or IDSs or instruments similar to IDSs for U.S. federal income tax purposes. As a result, we cannot assure you that the Internal Revenue Service (the "IRS") or the courts will agree with the tax consequences described herein. A different treatment from that assumed below could adversely affect the amount, timing and character of income, gain or loss in respect of the recapitalization and an investment in the Class B common stock and the IDSs. In addition, a different treatment could result in the loss by us of all or part of the deduction for interest paid on the notes. We urge you to consult your tax advisor concerning the particular U.S. federal income tax consequences to you of the recapitalization and of owning and disposing of the Class B common stock and IDSs, as well as any consequences to you arising under the laws of any other taxing jurisdiction.

The Recapitalization

Consequences to U.S. Holders

General Treatment

        Based on representations contained in a representation letter provided by the Company and on certain customary factual assumptions, all of which must continue to be true and accurate in all material respects as of the effective time of the recapitalization, it is the opinion of Simpson Thacher & Bartlett LLP, our counsel, that the material United States federal income tax consequences of the recapitalization are as follows:

    the recapitalization will be treated as a reorganization within the meaning of Section 368(a)(1)(E) of the Code;

    subject to the discussion under "—Recharacterization of Gain as a Dividend" below, you will recognize gain (but not loss) if you exchange your existing common stock for (i) a combination of Class B common stock and cash, (ii) a combination of IDSs and cash, or (iii) a combination of Class B common stock, IDSs and cash, in an amount equal to the lesser of:

    the excess, if any, of:

    the sum of the cash (excluding any cash received in lieu of a fractional share of either Class B stock or Class A stock underlying an IDS), the fair market value of the Class B common stock (including any fractional share of Class B common stock that you are

63


          deemed to receive and exchange for cash) and the fair market value of the IDSs (including any fractional share of Class A common stock underlying an IDS that you are deemed to receive and exchange for cash) you receive in the recapitalization, as the case may be, over

        your tax basis in the existing common stock surrendered in the recapitalization, and

      the cash and the fair market value of the notes underlying the IDSs that you receive, if any, in the recapitalization.

    your aggregate tax basis in any Class B common stock and Class A common stock underlying the IDSs (and, in each case, including any fractional share interest you are deemed to receive and exchange for cash), that you receive in the recapitalization will equal your aggregate tax basis in the existing common stock you surrender, increased by the amount of taxable gain, if any, you recognize on the exchange and decreased by the fair market value of any non-stock consideration (i.e. cash and notes underlying the IDSs but excluding any cash received in lieu of a fractional share of Class B common stock or Class A common stock underlying an IDS) received by you in the recapitalization, and, if you receive both Class B common stock and IDSs in the recapitalization, this computed aggregate tax basis will be allocated among the Class B common stock and the Class A common stock underlying the IDSs in proportion to their relative fair market values immediately after the exchange. With respect to the notes underlying the IDSs, your tax basis in such notes will be equal to their fair market value (see "IDSs—Consequences to U.S. Holders—Ownership of IDSs" for initial fair market value of each $            principal amount of notes); and

    your holding period for the Class B common stock and the Class A common stock underlying the IDSs that you receive in the recapitalization will include your holding period for the shares of existing common stock that you surrender in the exchange, and the holding period for the notes underlying the IDSs that you receive in the recapitalization should generally begin on the date after the exchange.

        If you acquired different blocks of existing common stock at different times and at different prices, any gain will be determined separately with respect to each block of existing common stock, and the cash, Class B common stock and IDSs, as the case may be, that you receive will be allocated pro rata to each such block of stock. In addition, your tax basis and holding period in your Class B common stock and Class A common stock underlying the IDSs, as the case may be, may be determined with reference to each block of existing common stock.

Taxation of Capital Gain or Loss

        Gain or loss that you recognize in connection with the recapitalization will generally constitute capital gain or loss and will constitute long-term capital gain or loss if your holding period in your existing common stock is greater than one year as of the date of the recapitalization. If you are a non-corporate holder of existing common stock, this long-term capital gain generally will be taxed at a maximum United States federal income tax rate of 15%. The deductibility of capital losses is subject to limitation.

        Cash in Lieu of Fractional Shares.    You will generally recognize capital gain or loss on any cash received in lieu of a fractional share of Class B common stock or Class A common stock represented by an IDS equal to the difference between the amount of cash received and the tax basis allocated to any such fractional share.

        Dissenting Stockholders.    Holders of existing common stock who dissent with respect to the recapitalization as discussed in "The Recapitalization—Appraisal Rights" beginning on page 83, and who receive cash in respect of their shares of existing common stock will recognize capital gain or loss

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equal to the difference between the amount of cash received and their aggregate tax basis in their shares.

Recharacterization of Gain as a Dividend

        All or part of the gain you recognize could be treated as ordinary dividend income rather than capital gain. Such treatment could result if, taking into account your continuing ownership in the Company and the ownership in the Company of persons whose ownership would be attributed to you under certain constructive ownership rules, your percentage ownership in the Company after the recapitalization is not less than what your percentage ownership would have been if you had received Class B common stock or Class A common stock as part of the IDSs rather than cash in the recapitalization. Because the possibility of dividend treatment depends upon your particular circumstances, including the application of certain constructive ownership rules, you should consult your own tax advisor regarding the potential tax consequences of the recapitalization to you.

Backup Withholding

        If you are a non-corporate holder of existing common stock, you may be subject to information reporting and backup withholding on any cash payments you receive. You will not be subject to backup withholding, however, if you:

    furnish a correct taxpayer identification number and certify that you are not subject to backup withholding on the substitute Form W-9 or successor form included in the election form/letter of transmittal you will receive; or

    are otherwise exempt from backup withholding.

        Any amounts withheld under the backup withholding rules will be allowed as a refund or credit against your United States federal income tax liability, provided you furnish the required information to the Internal Revenue Service.

Consequences to Non-U.S. Holders

General Treatment

        Subject to the discussion below, relating to the "U.S. real property holding corporation" (or USRPHC) rules, to the extent that any gain you recognize in the recapitalization is treated as capital gain under the rules described above under "The Recapitalization—Consequences to U.S. Holders—General Treatment," you generally will not be subject to U.S. federal income tax with respect to such gain unless:

    the gain is effectively connected with your conduct of a trade or business in the United States, or, if certain tax treaties apply, is attributable to your U.S. permanent establishment; or

    you are an individual, you are present in the United States for 183 or more days in the taxable year of the sale or other disposition and certain other conditions are met.

        An individual non-U.S. holder described in the first bullet point immediately above will be subject to tax on the net gain derived from the sale under regular graduated United States federal income tax rates. An individual non-U.S. holder described in the second bullet point immediately above will be subject to a flat 30% tax on the gain derived from the sale, which may be offset by United States source capital losses, even though the individual is not considered a resident of the United States. If a non-U.S. holder that is a foreign corporation falls under the first bullet point immediately above, it will be subject to tax on its net gain in the same manner as if it were a United States person as defined under the Code and, in addition, may be subject to the branch profits tax equal to 30% of its

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effectively connected earnings and profits or at such lower rate as may be specified by an applicable income tax treaty.

        We believe that we are a USRPHC for U.S. federal income tax purposes. Because we believe that our existing common stock should be treated as regularly traded on an established securities market, only a non-U.S. holder who holds or held (at any time during the shorter of the five year period preceding the date of disposition or the holder's holding period) more than 5% of our existing common stock will be subject to United States federal income tax on the disposition of our existing common stock. However, the IRS could assert that our existing common stock should not be considered as having been regularly traded on an established securities market, in which case you would generally be subject to U.S. federal income tax with respect to any gain at the regular graduated U.S. federal income tax rates and in much the same manner as is applicable to U.S. persons. If you are a foreign corporation, an additional "branch profits tax" could also apply.

        We urge you to consult your tax advisor as to the particular consequences of the recapitalization that may be applicable to you, including the application of state, local and foreign tax laws.

IDSs

Consequences to U.S. Holders

Ownership of IDSs

        Your ownership of IDSs received in the recapitalization should, for U.S. federal income tax purposes, be treated as ownership of our Class A common stock and notes underlying the IDSs, and, by purchasing IDSs, you will agree to such treatment. The income tax treatment of IDSs is not free from doubt. See "—Notes—Consequences to U.S. Holders—Characterization As Debt." The remainder of this discussion assumes that the acquisition of IDSs will be treated as an acquisition of shares of our Class A common stock and notes.

        You will have a separate tax basis in the Class A common stock and the notes underlying the IDSs. You tax basis in the Class A common stock and notes underlying the IDSs should be as described above under "The Recapitalization—Consequences to U.S. Holders—General Treatment." With respect to the IDSs sold in the public offering, we will report the initial fair market value of each share of Class A common stock as $                  and the initial fair market value of each $                  principal amount of notes as $                  . It is expected that the notes underlying the IDSs issued in the recapitalization will have the same "issue price," for purposes of determining OID, as the notes underlying the IDSs issued in the public offering and by receiving IDSs, you will agree to such allocations and that you will not take a contrary position for any purpose, including tax reporting purposes. If our allocation made with respect to the IDSs sold in the public offering is not respected, the notes will be treated as having been issued with original issue discount (OID) (if the amount determined to be allocable to the notes is less than their face amount) or amortizable bond premium (if the amount determined to be allocable to the notes exceed their face amount). You generally would have to include any OID in income in advance of the receipt of cash attributable to that income, and would be able to elect to amortize bond premium over the remaining term of the notes. OID generally would increase our interest deductions, while bond premium would reduce our interest deductions. The remainder of this discussion assumes that these allocations of the fair market value of each IDS between Class A common stock and notes in the public offering will be respected.

Separation and Recombination

        If you separate IDSs into shares of Class A common stock and the notes represented thereby or recombine a share of Class A common stock and the applicable principal amount of notes to form an IDS, you generally will not recognize gain or loss for U.S. federal income tax purposes. You will

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continue to take into account items of income or deduction otherwise includible or deductible, respectively, with respect to your Class A common stock and notes, and your tax basis in your Class A common stock and notes will not be affected by the separation or recombination.

Notes

Consequences to U.S. Holders

Characterization As Debt

        Our counsel, Simpson Thacher & Bartlett LLP, is of the opinion that the notes should be treated as debt for U.S. federal income tax purposes. The lead underwriters in the public offering of IDSs have received an opinion from their counsel, Skadden, Arps, Slate, Meagher & Flom LLP, that the notes should be so treated. Such opinions are based in part on representations and determinations that are discussed in more detail in the following paragraphs, and are not binding on the IRS or the courts, which may not agree with the treatment of the notes included in IDSs as debt for U.S. federal income tax purposes. We and, by acquiring notes, in the form of an IDS, each holder agrees to treat the notes as our indebtedness for all purposes. Assuming such treatment is respected, stated interest on the notes will generally be taxable to you as ordinary income at the time it is paid or accrued in accordance with your method of accounting for U.S. federal income tax purposes.

        The determination of whether an instrument is treated as debt or equity for U.S. federal income tax purposes is based on the applicable facts and circumstances. There is no statutory definition of debt, and the analysis of whether a purported debt instrument will be respected as debt for U.S. federal income tax purposes therefore relies principally on case law, which applies numerous factors that are intended to identify the economic substance of the investor's interest in the corporation to each situation presented. Our determination that the notes should be treated as debt for U.S. federal income tax purposes, and the opinions of counsel to this effect referred to above, rely upon certain representations and determinations by us, the lead underwriters and an independent appraisal firm, including representations and determinations by us and/or the independent appraisal firm substantially to the effect that:

    the term, interest rate and other material provisions of the notes are commercially reasonable and are consistent with the terms to which an unrelated third party lender, bargaining at arm's length, would reasonably agree if such lender intended to purchase only the notes, and not IDSs;

    the aggregate principal amount of the notes and our other liabilities in relation to the aggregate amount of our capital is not excessive;

    we expect to make the scheduled debt service payments on the notes without deferring any payments; and

    the fair market value of our assets exceeds the fair market value of our liabilities, and the ratio of our total outstanding liabilities to the fair market value of our equity does not exceed              to 1.

        In light of the determinations described above and their relevance to several of the factors analyzed in case law, and taking into account the facts and circumstances relating to the issuance of the IDSs and the notes, we (and our counsel) are of the view that the notes should be treated as debt for U.S. federal income tax purposes. However, there is no authority that directly addresses the tax treatment of securities with terms substantially similar to the notes or the IDSs. In light of this absence of any authority directly on point, neither we nor our counsel can conclude with certainty that the notes will be treated as debt for U.S. federal income tax purposes.

        If the notes included in the IDSs were to be treated as equity rather than debt for U.S. federal income tax purposes, then interest paid to you on such notes would be treated as a dividend to the

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extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles), and we could not deduct such payments for U.S. federal income tax purposes. Our inability to deduct interest on the notes could materially increase our taxable income and, thus, our U.S. federal income tax liability. This would reduce our after-tax cash flow, and could materially and adversely impact our ability to make interest and principal payments on the notes and dividend payments on the common stock. In addition, as discussed below under "Class A Common Stock—Consequences to Non-U.S. Holders," Non-U.S. Holders could be subject to withholding and estate taxes with regard to the notes included in the IDSs in the same manner as they will be with regard to the common stock, and we could be liable for withholding taxes (plus interest) on interest payments previously made by us to Non-U.S. Holders of IDSs.

        Additionally, there can be no assurance that the IRS will not successfully challenge the determination that the interest rate on the notes represents an arm's length rate. In that event, any excess amount over an arm's length rate would not be deductible by us and could be recharacterized as a dividend payment instead of an interest payment for U.S. federal income tax purposes to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles), with similar adverse tax results.

        Unless otherwise indicated, the balance of this discussion assumes that the notes are respected as debt for tax purposes and that the interest rate thereon is not excessive.

Sale, Exchange or Retirement of Notes

        Upon the sale, exchange, retirement or other disposition of an IDS, you will be treated as having sold, exchanged, retired or disposed of the notes constituting the IDS. Upon the sale, exchange, retirement or other disposition of notes, you will recognize gain or loss equal to the difference between the portion of the proceeds allocable to your notes (less an amount equal to any accrued and unpaid interest, which will be treated as a payment of interest for U.S. federal income tax purposes) and your adjusted tax basis in the notes. Your tax basis in a note generally will be determined as described above under "The Recapitalization—Consequences to U.S. Holders—General Treatment" and will be reduced by any payments of principal on the notes. Your gain or loss will generally be capital gain or loss. Capital gains of non-corporate taxpayers derived in respect of capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations.

Deferral of Interest

        If we defer payments of interest on the notes, which we do not now anticipate doing, the notes will become OID instruments at such time. In such case, you will be subject to the special OID rules described below. Once the notes become OID instruments, they will be taxed as OID instruments for as long as they remain outstanding.

        Under the OID economic accrual rules, the following occur:

    regardless of your method of accounting, you would accrue an amount of interest income each year that approximates the stated interest payments called for under the terms of the notes using the constant-yield-to-maturity method of accrual described in section 1272 of the Code;

    the actual cash payments of stated interest you receive on the notes would not be reported separately as taxable income;

    any amount of OID included in your gross income (whether or not during a deferral period) with respect to the notes would increase your tax basis in such notes; and

    the amount of interest you receive on the notes in respect of such accrued OID would reduce your tax basis in such notes.

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        The United States Treasury regulations dealing with OID and the deferral of interest payments have not yet been addressed in any rulings or other interpretations by the IRS. It is possible that the IRS could assert that the notes were issued initially with OID. If the IRS were successful in this regard, you would be subject to the special OID rules described above, regardless of whether we defer payments of interest on such notes.

Additional Issuances

        Subsequently issued notes may be issued with OID. The U.S. federal income tax consequences to you of the subsequent issuance of notes with OID upon a subsequent offering by us of IDSs or notes are unclear. The indenture governing the notes will provide that, in the event there is a subsequent issuance of notes with a new CUSIP number having terms that are identical (other than issuance date) to the notes underlying the IDSs, each holder of notes or IDSs, as the case may be, agrees that a portion of such holder's notes will be exchanged for a portion of the notes acquired by the holders of such subsequently issued notes. Consequently, immediately following such subsequent issuance, each holder of subsequently issued notes held either as part of IDSs or separately, and each holder of existing notes held either as part of IDSs or separately, will own an inseparable unit composed of a proportionate percentage of both the old notes and the newly issued notes. We intend to take the position that any subsequent issuance of notes with a new CUSIP number, whether or not such notes are issued with OID, will not result in a taxable exchange of your notes for U.S. federal income tax purposes, but because of a lack of legal authority on point, (1) our counsel is unable to opine on the matter and (2) there can be no assurance that the IRS will not assert that such a subsequent issuance of notes should be treated as a taxable exchange of a portion of your notes, whether held separately or in the form of IDSs, for a portion of the notes subsequently issued. In such case, however, you would generally not be expected to realize any gain on the deemed exchange because your tax basis should exceed the value of the newly issues notes, and any loss realized by you on the deemed exchange would most likely be non-deductible. Your initial tax basis in the notes deemed to have been received in the exchange would be the fair market value of such notes on the date of the deemed exchange (increased to reflect any disallowed loss), and your holding period for such notes would begin on the day after the deemed exchange.

        Following any subsequent issuance of notes with OID, we (and our agents) will report any OID on the subsequently issued notes ratably among all holders of notes and IDSs, and each holder of notes and IDSs, by purchasing IDSs, agrees to report OID in a manner consistent with this approach. This will generally result in such holders having to report interest income in advance of receiving the related interest payments and in greater amounts over the term of the notes than they would have reported had no such subsequent issuance occurred. (See the discussion above under "Notes—Consequences to U.S. Holders—Deferral of Interest.") However, there can be no assurance that the IRS will not assert that any OID should be reported only by the persons that initially acquired such subsequently issued notes (and their transferees). In such case, the IRS might further assert that, unless a holder can establish that it is not such a person (or a transferee thereof), all of the notes held by such holder have OID. Any of these assertions by the IRS could create significant uncertainties in the pricing of IDSs and notes, and could adversely affect the market for IDSs and notes. You would be required to include any OID in income as ordinary income as it accrues, in advance of the receipt of cash attributable to such income.

        It is possible that notes we issue in a subsequent issuance will be issued with "significant OID" and thus be classified as "applicable high yield discount obligations" (AHYDOs). If any of our notes were so classified, a portion of the OID on such notes could be nondeductible by us and the remainder would be deductible only when paid. This treatment would have the effect of increasing our taxable income, which may adversely affect our cash flow available for interest payments and distributions to our stockholders.

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        Prospective investors are urged to consult their tax advisors regarding the applicable tax consequences to them of a subsequent issuance of notes with OID in light of their particular circumstances.

Consequences to Non-U.S. Holders

Characterization of Notes

        As discussed above under "Notes—Consequences to U.S. Holders—Characterization As Debt," we believe the notes should be treated as debt for U.S. federal income tax purposes. However, no ruling on this issue has been requested from the IRS and thus there can be no assurance that such a position would be sustained if challenged by the IRS. If the notes were treated as equity rather than debt for U.S. federal income tax purposes, then the notes would be treated in the same manner as shares of our Class A common stock as described below under "Class A Common Stock—Consequences to Non-U.S. Holders," and payments on the notes would be subject to U.S. federal withholding taxes. Payments to you would not be grossed-up on account of any such taxes, and we could be liable for withholding taxes (plus interest) on our prior interest payments to Non-U.S. Holders that are recharacterized as dividends. The remainder of this discussion assumes the characterization of the notes as debt for U.S. federal income tax purposes will be respected.

U.S. Federal Withholding Tax

        Subject to the discussion below concerning backup withholding, by virtue of the "portfolio interest" rule, no withholding of U.S. federal income tax should be required with respect to the payment of principal or interest on notes owned by you, provided that:

    interest paid on the notes is not effectively connected with your conduct of a trade or business in the United States;

    you do not actually or constructively own 10% or more of the total combined voting power of all classes of our stock entitled to vote within the meaning of section 871(h)(3) of the Code and the regulations thereunder;

    you are not a controlled foreign corporation that is related to us through stock ownership;

    you are not a bank whose receipt of interest on the notes is described in section 881(c)(3)(A) of the Code; and

    you satisfy the certification requirements (described generally below) set forth in section 871(h) and section 881(c) of the Code and the regulations thereunder.

        To satisfy the requirement referred to in the final bullet above, you, or a financial institution holding the notes on your behalf, must comply with applicable certification requirements. Currently, these requirements will be met if (1) you provide our paying agent with your name and address, and certify, under penalties of perjury, that you are not a U.S. person (which certification may be made on an IRS Form W-8BEN), or (2) a financial institution holding the notes on your behalf certifies, under penalties of perjury, that such statement has been received by it and furnishes our paying agent with a copy thereof. The statement requirement referred to in the final bullet above may also be satisfied with other documentary evidence with respect to a note held in an offshore account or through certain foreign intermediaries.

        If you cannot satisfy the requirements of the "portfolio interest" rule described in the bullets above, payments of interest (including OID) made to you will be subject to a 30% withholding tax unless you provide us or our paying agent, as the case may be, with a properly executed:

    IRS Form W-8BEN claiming an exemption from or reduction in withholding under the benefit of an applicable income tax treaty; or

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    IRS Form W-8ECI stating that interest paid on the notes is not subject to withholding tax because it is effectively connected with your conduct of a trade or business in the United States.

        Alternative documentation may be applicable to particular Non-U.S. Holders.

U.S. Federal Income Tax

        If you are engaged in a trade or business in the United States and interest on the notes is effectively connected with the conduct of such trade or business (or, where a tax treaty applies, is attributable to your U.S. permanent establishment), the withholding tax discussed above will not apply to you (provided the certification requirements described above are satisfied), but you will be subject to U.S. federal income tax on such interest on a net income basis in the same manner as if you were a U.S. Holder. In addition, if you are a foreign corporation, you may be subject to a branch profits tax equal to 30% (or lesser rate under an applicable income tax treaty) of such amount, subject to adjustments.

Sale, Exchange or Retirement of Notes

        Upon the sale, exchange, retirement or other disposition of an IDS, you will be treated as having sold, exchanged, retired or disposed of the related notes. Any gain realized upon the sale, exchange, retirement or other disposition of notes generally will not be subject to U.S. federal income tax unless:

    such gain is effectively connected with your conduct of a trade or business in the United States; or

    you are an individual, you are present in the United States for 183 days or more in the taxable year of such sale, exchange, retirement or other disposition, and certain other conditions are met.

        If you are an individual and are described in the first bullet above, you will be subject to tax on the net gain derived from the sale under regular graduated U.S. federal income tax rates. If you are an individual and are described in the second bullet above, you will be subject to a flat 30% tax on the gain derived from the sale, which may be offset by U.S. source capital losses (even though you are not considered a resident of the United States). If you are a foreign corporation and are described in the first bullet above, you will be subject to tax on your gain under regular graduated U.S. federal income tax rates and, in addition, may be subject to the branch profits tax equal to 30% of your effectively connected earnings and profits or at such lower rate as may be specified by an applicable income tax treaty.

U.S. Federal Estate Tax

        If you are an individual, you should not be subject to U.S. federal estate tax on the notes, provided that interest paid to you on the notes qualifies for exemption from the 30% U.S. federal withholding tax under the "portfolio interest" rule described above under "—Consequences to Non-U.S. Holders—Notes—U.S. Federal Withholding Tax" without regard to the certification requirement described in the final bullet point.

Class A Common Stock

Consequences to U.S. Holders

Dividends

        The gross amount of dividends paid to you on our Class A common stock will be treated as dividend income to you to the extent paid out of current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Such income will be includable in your gross

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income as ordinary income. The amount (if any) of dividends paid to you in excess of our current and accumulated earnings and profits will be treated as a tax-free return of your tax basis in your shares of Class A common stock and thereafter as capital gain. If you are a non-corporate taxpayer, dividends that we pay to you through 2008 will be subject to tax at long-term capital gain rates, provided certain holding period and other requirements are satisfied.

Sale or Exchange of Class A Common Stock

        Upon the sale, exchange, retirement or other disposition of IDSs, you will be treated as having sold, exchanged, retired or disposed of the shares of Class A common stock constituting the IDSs. Upon the sale, exchange, retirement or other disposition of shares of our common stock, you will recognize capital gain or loss in an amount equal to the difference between the portion of the proceeds allocable to your shares of common stock and your tax basis in the shares of Class A common stock. Your tax basis in the shares of Class A common stock generally will be as described above under "The Recapitalization—Consequences to U.S. Holders—General Treatment." As discussed above, capital gains of non-corporate taxpayers derived with respect to capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations.

Consequences to Non-U.S. Holders

Dividends

        Dividends paid to you generally will be subject to withholding of U.S. federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. However, dividends that are effectively connected with your conduct of a trade or business within the United States or, where a tax treaty applies, are attributable to your U.S. permanent establishment, are not subject to the withholding tax, but instead are subject to U.S. federal income tax on a net income basis at applicable graduated individual or corporate rates. Certain certification and disclosure requirements must be satisfied for effectively connected income to be exempt from withholding. If you are a foreign corporation, any such effectively connected dividends received by you may be subject to an additional branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.

        If you wish to claim the benefit of an applicable treaty rate (and avoid backup withholding as discussed below) for dividends, you will be required to:

    complete IRS Form W-8BEN (or other applicable form) and certify, under penalties of perjury, that you are not a U.S. person and you qualify for treaty benefits; or

    if the shares of our common stock are held through certain foreign intermediaries, satisfy the relevant certification requirements of applicable U.S. Treasury regulations.

        Special certification and other requirements apply to certain Non-U.S. Holders that are entities rather than individuals.

        If you are eligible for a reduced rate of U.S. withholding tax pursuant to an income tax treaty, you may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS.

Sale or Exchange of Class A Common Stock

        Subject to the discussion below, relating the USRPHC rules, upon the sale, exchange, retirement or other disposition of an IDS, you will be treated as having sold, exchanged, retired or disposed of the

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related share of Class A common stock. You generally will not be subject to U.S. federal income tax with respect to gain recognized on a sale or other disposition of shares of our common stock unless:

    such gain is effectively connected with your conduct of a trade or business in the United States, and, where a tax treaty applies, is attributable to your U.S. permanent establishment; or

    you are an individual and hold shares of our common stock as a capital asset, you are present in the United States for 183 days or more in the taxable year of such sale or other disposition, and certain other conditions are met.

        If you are an individual and are described in the first bullet above, you will be subject to tax on the net gain derived from the sale under regular graduated U.S. federal income tax rates. If you are an individual and are described in the second bullet above, you will be subject to a flat 30% tax on the gain derived from the sale, which may be offset by U.S. source capital losses (even though you are not considered a resident of the United States). If you are a foreign corporation and are described in the first bullet above, you will be subject to tax on your gain under regular graduated U.S. federal income tax rates and, in addition, may be subject to the branch profits tax equal to 30% of your effectively connected earnings and profits or at such lower rate as may be specified by an applicable income tax treaty.

        We have determined that we are a USRPHC for U.S. federal income tax purposes. So long as the IDSs continue to be regularly traded on an established securities market, we believe that a Non-U.S. Holder could take the position that only a Non-U.S. Holder who holds or held (at any time during the shorter of the five year period preceding the date of disposition or the holder's holding period) Class A common stock which, on the date it was acquired by such holder, had a fair market value greater than the fair market value on that date of 5% of the Class A common stock underlying the IDSs should be subject to U.S. federal income tax on the disposition of the IDSs or Class A common stock. However, there is no direct legal authority covering the appropriate treatment of a disposition of an interest in a USRPHC that has only units similar to the IDSs (and not shares of a class of its stock) which are regularly traded on an established securities market. Therefore, there can be no assurance that the IRS will not assert that the 5% rule discussed above is inapplicable and that all Non-U.S. Holders will be subject to U.S. federal income tax on the disposition of IDSs or Class A common stock as if they were U.S. Holders. Prospective investors should consult their tax advisors regarding the consequences of disposing of an interest in a USRPHC.

U.S. Federal Estate Tax

        Shares of our Class A common stock held by an individual Non-U.S. Holder at the time of death will be included in such holder's gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.

Class B Common Stock

Consequences to U.S. Holders

Dividends

        The gross amount of dividends paid to you on our Class B common stock will be treated as dividend income to you to the extent paid out of current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Such income will be includable in your gross income as ordinary income. The amount (if any) of dividends paid to you in excess of our current and accumulated earnings and profits will be treated as a tax-free return of your tax basis in your shares of Class B common stock and thereafter as capital gain. If you are a non-corporate taxpayer, dividends that we pay to you through 2008 will be subject to tax at long-term capital gain rates, provided certain holding period and other requirements are satisfied.

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Sale or Exchange of Class B Common Stock

        Upon the sale, exchange, retirement or other disposition of shares of Class B common stock, you will recognize capital gain or loss in an amount equal to the difference between the amount realized and your tax basis in the shares of Class B common stock. Your tax basis in the shares of Class B common stock generally will be as described above under "The Recapitalization—Consequences to U.S. Holders—General Treatment." As discussed above, capital gains of non-corporate taxpayers derived with respect to capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations.

Information Reporting and Backup Withholding

        In general, information reporting requirements will apply to U.S. Holders other than certain exempt recipients (such as corporations), upon the receipt of nonstock consideration in the recapitalization, and on the payments of principal, interest and dividends on the notes and our common stock and on the proceeds of sale of Class B common stock, IDSs, notes and Class A common stock. A backup withholding tax will apply to such payments if you fail to provide a taxpayer identification number or certification of other exempt status or fail to report any dividend and interest income.

        Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your U.S. federal income tax liability provided the required information is furnished by you to the IRS.

Consequences to Non-U.S. Holders

Dividends

        Dividends paid to you generally will be subject to withholding of U.S. federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. However, dividends that are effectively connected with your conduct of a trade or business within the United States or, where a tax treaty applies, are attributable to your U.S. permanent establishment, are not subject to the withholding tax, but instead are subject to U.S. federal income tax on a net income basis at applicable graduated individual or corporate rates. Certain certification and disclosure requirements must be satisfied for effectively connected income to be exempt from withholding. If you are a foreign corporation, any such effectively connected dividends received by you may be subject to an additional branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.

        If you wish to claim the benefit of an applicable treaty rate (and avoid backup withholding as discussed below) for dividends, you will be required to:

    complete IRS Form W-8BEN (or other applicable form) and certify, under penalties of perjury, that you are not a U.S. person and you qualify for treaty benefits; or

    if the shares of our common stock are held through certain foreign intermediaries, satisfy the relevant certification requirements of applicable U.S. Treasury regulations.

        Special certification and other requirements apply to certain Non-U.S. Holders that are entities rather than individuals.

        If you are eligible for a reduced rate of U.S. withholding tax pursuant to an income tax treaty, you may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS.

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Sale or Exchange of Class B Common Stock

        Subject to the discussion below, relating to the USRPHC rules, you generally will not be subject to U.S. federal income tax with respect to gain recognized on a sale or other disposition of shares of our Class B common stock unless:

    such gain is effectively connected with your conduct of a trade or business in the United States, and, where a tax treaty applies, is attributable to your U.S. permanent establishment; or

    you are an individual and hold shares of our common stock as a capital asset, you are present in the United States for 183 days or more in the taxable year of such sale or other disposition, and certain other conditions are met.

        If you are an individual and are described in the first bullet above, you will be subject to tax on the net gain derived from the sale under regular graduated U.S. federal income tax rates. If you are an individual and are described in the second bullet above, you will be subject to a flat 30% tax on the gain derived from the sale, which may be offset by U.S. source capital losses (even though you are not considered a resident of the United States). If you are a foreign corporation and are described in the first bullet above, you will be subject to tax on your gain under regular graduated U.S. federal income tax rates and, in addition, may be subject to the branch profits tax equal to 30% of your effectively connected earnings and profits or at such lower rate as may be specified by an applicable income tax treaty.

        We have determined that we are a USRPHC, for U.S. federal income tax purposes. So long as the IDSs continue to be regularly traded on an established securities market, we believe that a Non-U.S. Holder could take the position that only a Non-U.S. Holder who holds or held (at any time during the shorter of the five year period preceding the date of disposition or the holder's holding period) Class B common stock which on the date it was acquired by such holder, had a fair market value greater than the fair market value on that date of 5% of the Class A common stock underlying the IDS should be subject to U.S. federal income tax on the disposition of the Class B common stock. However, there is no direct legal authority covering the appropriate treatment of a disposition of an interest in a USRPHC that has only units similar to the IDSs (and not shares of a class of its stock) which are regularly traded on an established securities market. Therefore, there can be no assurance that the IRS will not assert that the 5% rule discussed above is inapplicable and that all Non-U.S. Holders will be subject to U.S. federal income tax on the disposition of Class B common stock.

U.S. Federal Estate Tax

        Shares of our Class B common stock held by an individual Non-U.S. Holder at the time of death will be included in such holder's gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.

Information Reporting and Backup Withholding

        The amount of interest payments and dividends paid to you and the amount of tax, if any, withheld with respect to such payments will be reported annually to the IRS. Copies of the information returns reporting such interest payments, dividends and withholding may also be made available to the tax authorities in the country in which you reside under the provisions of an applicable income tax treaty.

        In general, backup withholding will be required with respect to payments made by us or any paying agent to you, unless you comply with the certification requirements described under "Notes—Consequences to Non-U.S. Holders—U.S. Federal Withholding Tax" (and we or the paying agent do not have actual knowledge or reason to know that you are a U.S. person).

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        Information reporting and, depending on the circumstances, backup withholding generally will apply to your receipt of non-stock consideration in the recapitalization and the Class B exchange, and on the payments of principal, interest and dividends and on the proceeds of a sale of shares of Class B common stock, IDSs, notes or shares of Class A common stock within the United States or conducted through U.S.-related financial intermediaries unless you comply with the certification requirements referred to in the fifth bullet under "Consequences to Non-U.S. Holders—Notes—U.S. Federal Withholding Tax" (and we or the paying agent do not have actual knowledge or reason to know that you are a U.S. person).

        Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your U.S. federal income tax liability provided the required information is furnished by you to the IRS.

Class B Exchange

Consequences to U.S. Holders

        All of your Class B common stock will be convertible into IDSs on the second anniversary of the public offering, provided no default or event of default under any indebtedness of the Company or any of its subsidiaries is then in effect. In the event that a default or event of default under any indebtedness of the Company or any of its subsidiaries is in effect on the second anniversary of the public offering, a Class B exchange may occur only at the time such default is cured or otherwise ceases to exist.

        In such case, you should recognize gain (but not loss) in an amount equal to the difference, if any, between (i) the fair market value of the IDSs you receive in the Class B exchange and (ii) your tax basis in your Class B common stock exchanged for the IDSs, but only to the extent of the fair market value of the notes underlying the IDSs that you receive in the Class B exchange. Any loss you realize as a result of the Class B exchange generally would not be recognized for U.S. federal income tax purposes.

        Your tax basis in the Class A common stock underlying the IDSs should be equal to your tax basis in your Class B common stock converted into IDSs, increased by the amount of any gain that you recognize and decreased by the fair market value of the notes underlying the IDSs that you receive in the Class B exchange. Your tax basis in the notes underlying the IDSs will be equal to their fair market value (determined as of the date of the Class B exchange).

        As described above under "The Recapitalization—Recharacterization of Gain as a Dividend," the character of any gain you recognize as a result of the Class B exchange will depend upon whether your receipt of the notes underlying the IDSs in the Class B exchange has the effect of a distribution of a dividend, in which case your recognized gain would be treated as a dividend to the extent paid out of your ratable share of the Company's accumulated earnings and profits, or is instead treated as a sale or exchange of your Class B common stock to the Company, in which case your recognized gain should be treated as capital gain.

        The preceding discussion assumes that your ownership of IDSs received in the Class B exchange will be treated as ownership of shares of Class A common stock and the notes underlying the IDSs, and that such notes are properly characterized as debt for U.S. federal income tax purposes, as described above. See "IDSs—Consequences to U.S. Holders—Ownership of IDSs" and "Notes—Consequences to U.S. Holders—Characterization as Debt." If the IDSs are not so treated, then the U.S. federal income tax consequences may differ significantly from the treatment described herein.

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Consequences to Non-U.S. Holders

        As discussed above under "Class B Exchange—Consequences to U.S. Holders," all of your Class B common stock will be convertible into IDSs on the second anniversary of the public offering.

        To the extent that any gain you recognize in the Class B exchange is treated as capital gain under the rules described above under "The Recapitalization—Consequences to U.S. Holders—General Treatment" and subject to the discussion below, relating to the USRPHC rules, you generally will not be subject to U.S. federal income tax with respect to such gain unless:

    such gain is effectively connected with your conduct of a trade or business in the United States, and, where a tax treaty applies, is attributable to your U.S. permanent establishment; or

    you are an individual and hold shares of our Class B common stock as a capital asset, you are present in the United States for 183 days or more in the taxable year of such sale or other disposition, and certain other conditions are met.

        As discussed previously, we believe that we are a USRPHC for United States federal income tax purposes. So long as the IDSs continue to be regularly traded on an established securities market, we believe that a Non-U.S. Holder could take the position that only a Non-U.S. Holder who holds or held (at any time during the shorter of the five year period preceding the date disposition or the holder's holding period) Class B common stock which, on the date it was acquired by such holder, had a fair market value greater than the fair market value on that date of 5% of the Class A common stock underlying the IDSs should be subject to U.S. federal income tax on the disposition of the Class B common stock. However, there is no direct legal authority covering the appropriate treatment of a disposition of an interest in a USRPHC that has only units similar to the IDSs (and not shares of a class of its stock) that are regularly traded on an established securities market. Therefore, there can be no assurance that the IRS will not assert that the 5% rule discussed above is inapplicable and that all Non-U.S. Holders will be subject to U.S. federal income tax on the disposition of Class B common stock.

        To the extent that any gain you recognize in the final Class B exchange is treated as a dividend under the rules described above under "Class B Exchange—Consequences to U.S. Holders," such amounts generally would be subject to withholding as described above under "The Recapitalization—Consequences to Non-U.S. Holders—General Treatment."

Cancellation of Stock Options

        In general, for U.S. federal income tax purposes, the option holder will recognize ordinary income in an amount equal to the fair market value of the consideration paid to the holder at the time the option is cancelled, and the option holder will be subject to withholding on that amount. The tax basis of any Class B common stock or IDSs received by the holder as consideration will be the fair market value of those securities at the time the option is cancelled in exchange for those securities, including a separate tax basis in the Class A common stock and notes underlying the IDSs if the holder elects to receive IDSs. The applicable holding period for the securities so received also will commence at the time the option is cancelled in exchange for those securities.

        We urge you to consult with your tax advisor as to the particular consequences to you of the recapitalization and the different elections, including the applicable state, local and foreign laws.

        The preceding discussion is general in nature and does not consider any particular stockholder's or option holder's individual facts and circumstances. The tax consequences of the recapitalization to any particular stockholder or option holder will depend on his or her individual facts and circumstances. Thus, you are strongly urged to consult your own tax advisor as to the tax consequences to you of the recapitalization and the different elections.

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THE RECAPITALIZATION

Transactions Related to the Recapitalization

        The recapitalization described in this proxy statement/prospectus is part of our overall plan to recapitalize and to refinance a portion of our existing debt. The recapitalization and refinancing will consist of the following transactions:

Concurrent Public Offerings

        We are currently engaged in a public offering of our IDSs and separate notes (not represented by IDSs), which we refer to together as the public offering in this document. We will use a portion of the proceeds of the public offering to make the cash payment to our existing equity investors in connection with the recapitalization. The price at which the IDSs will be initially offered to the public in the public offering, and the principal amount and interest rate of the notes, have not yet been determined, but will be determined at the pricing date of the public offering and will be the result of negotiations between KinderCare and the underwriters for the public offering. The cash amount and the number of shares of Class B common stock issued in the recapitalization will be determined at the pricing date of the public offering. We expect that the recapitalization will occur concurrently with the closing of the public offering; however, closing of the public offering is a condition to the recapitalization.

Revolving Credit Facility

        Concurrently with the closing of the recapitalization and the public offering, we will enter into an amendment to our existing senior secured credit facility with a syndicate of financial institutions. In this proxy statement/prospectus, we refer to this credit facility as the "revolving credit facility." Our existing revolving credit facility allows us to borrow up to $125.0 million until July 9, 2008 and is secured by first mortgages or deeds of trusts on 119 of our owned centers and certain other collateral. It includes borrowing capacity of up to $75.0 million for letters of credit and up to $10.0 million for selected short-term borrowings. See "Description of Certain Indebtedness—Revolving Credit Facility."

Tender Offer and Consent Solicitation

        Concurrently with the recapitalization and the public offering, we will commence a tender offer and consent solicitation with respect to all of our $179.4 million outstanding 9.5% senior subordinated notes due 2009 for an expected total consideration of $         million. The closing of the recapitalization and the public offering is conditioned upon the receipt of the tender and consent of at least a majority in aggregate principal amount of our outstanding senior subordinated notes due 2009. Holders of our senior subordinated notes due 2009 that provide consents are obligated to tender their notes in the offer, and holders of our senior subordinated notes due 2009 that tender their notes are obligated to provide consents. Upon obtaining the minimum required consents in the tender offer and consent solicitation, we will enter into a supplemental indenture with the trustee of the senior subordinated notes due 2009 that will eliminate all of the material restrictive covenants contained in the indenture governing the senior subordinated notes due 2009. The consummation of the tender offer and consent solicitation is conditioned upon the closing of this offering. We intend to redeem any senior subordinated notes due 2009 not tendered after the completion of this offering. We will use a portion of the net proceeds from this offering to pay for the senior subordinated notes due 2009 accepted for purchase in the tender offer and consent solicitation or redeemed by us after this offering. See "Description of Certain Indebtedness—Senior Subordinated Notes."

CMBS Mortgage Loan

        In July 2003, one of our subsidiaries entered into a loan agreement with various lenders to refinance our existing borrowings, referred to as the CMBS loan. The loan is secured by mortgages or

78



deeds of trust on 475 child care centers owned by our subsidiary borrower, with a net book value of $326.1 million at March 5, 2004. Because these mortgaged centers, referred to as the CMBS centers, are owned by our subsidiary borrower and subject to the CMBS loan, recourse to the CMBS centers by our creditors, including holders of notes, will be effectively subordinated to recourse by holders of the CMBS loan. The subsidiary borrower under the CMBS loan will not guarantee the notes. We will use a portion of the net proceeds from this offering to pre-fund some CMBS loan amortization and interest payments. See "Description of Certain Indebtedness—Mortgage Loan."

Merger Consideration

        Elections.    At the effective time of the merger, each outstanding share of existing common stock will, at the election of the holder, be converted into the right to receive one of the following:

    at least $            in cash, without interest, plus    IDS; or

    at least $            in cash, without interest, plus    share of Class B common stock.

        Option holders will be provided with the same elections in connection with the cancellation of outstanding options with respect to a number of shares having a fair market value equal to the excess of the fair market value of the underlying shares at the time of the recapitalization over the exercise price of the stock option.

        Non-Electing Stockholders.    Stockholders and option holders who do not make an election (i.e., stockholders and option holders who do not return a properly completed form of election) will be treated as if they made a cash and IDS election.

        Proration.    The number of shares of Class B common stock to be distributed in the recapitalization cannot exceed                         shares, which represents        % of the outstanding voting power of KinderCare and        % of the overall value of KinderCare's equity after giving effect to the public offering, or    % of the outstanding voting power and        % of the overall value of KinderCare's equity if the over-allotment option to purchase additional IDSs is exercised in full. KKR and Oaktree have stated that they intend to elect to receive the full number of shares of Class B common stock that is available. Therefore, if any other stockholders make a cash and Class B election, then the cash and Class B common stock will be distributed in the manner described below. These proration provisions will not reduce the amount of cash that would otherwise be distributed to stockholders making either election (including non-electing stockholders), nor will it reduce the amount of cash or the number of IDSs distributed to stockholders making the cash and IDS election. The foregoing calculation will take into account the elections of option holders.

        The portion of the merger consideration to be received in the form of Class B common stock will depend, among other things, on the elections made by other stockholders and option holders. Thus, it will not be possible for a person making a cash and Class B election to know, at the time of making the election, the precise mix of consideration to be received.

        If the aggregate number of shares of Class B common stock elected to be received by stockholders under the cash and Class B election exceeds                        , then the number of shares of existing common stock owned by a stockholder that elects to receive Class B common stock will be converted into the right to receive:

    $            multiplied by the number of shares of existing common stock owned by such stockholder; plus

    the number of shares of Class B common stock determined by dividing                        by the aggregate number of shares of Class B common stock elected under the cash and Class B election (which quotient we refer to as the Class B proration factor); plus

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    the number of IDSs equal to the difference between one and the Class B proration factor.

        The foregoing calculation will take into account the elections of option holders in connection with the cancellation of outstanding options.

        Escrow of IDSs.    At the effective time of the merger, KinderCare will cause to be deposited with                        , for the benefit of the holders of the IDSs received as merger consideration, up to            IDSs to cover the underwriters' over-allotment option under the public offering or, alternatively, distributable to our existing stockholders. To the extent that the underwriters exercise their over-allotment option within the 30-day period, the purchased IDSs will be released from the escrow account to the underwriters pursuant to the escrow agreement, and the purchase price received by us from the underwriters will be kept in an escrow account, for the benefit of the holders of the IDSs received as merger consideration, until the end of the 30-day period. Upon termination of the escrow, any cash remaining in the escrow account after compensation of the escrow agent and any other obligations under the escrow agreement and any IDSs (without interest) remaining in the escrow account will be distributed to KinderCare stockholders in proportion to the number of their IDSs that were held in escrow as part of the merger consideration. The escrow account will be governed by an escrow agreement between KinderCare and                        , as escrow agent, a copy of which is attached as Annex III to the recapitalization agreement. The recapitalization agreement is included in this document as Appendix A.

 
  If over-allotment option is not exercised

  If over-allotment option is exercised in full

Example 1:
Holder A owns 100 shares and makes a cash and Class B election
  Holder A will receive:
  •  $            in cash;
  •               shares of Class B common stock; and
  •               IDSs.
  Holder A will receive:
  •  $            in cash;
  •               shares of Class B common stock; and
  •               IDSs.

Example 2:
Holder B owns 100 shares and makes a cash and IDS election

 

Holder B will receive:
  •  $            in cash; and
  •               IDSs.

 

Holder B will receive:
  •  $            in cash; and
  •               IDSs.

        You are urged to refer to the recapitalization agreement for details of the recapitalization and the terms and conditions of the recapitalization agreement. We have attached a copy of the recapitalization agreement to this document as Appendix A. See also "The Recapitalization Agreement" for a discussion of certain provisions not summarized above. The actual formulae to be used in proration calculations are described in Appendix C to which the foregoing discussion is subject.

Announcement of Final Terms of the Recapitalization; Announcement Date

        On the business day following the pricing date of the offerings, we will:

    issue a press release setting forth certain information (described below) relating to the recapitalization; and

    post this information on our website, www.kindercare.com.

        The press release and web posting described in the previous paragraph will include:

    the amount of the cash proceeds to be received by us from the sale of the IDSs and separate notes if the public offering is completed;

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    a statement of the interest rates and any material terms of the notes sold as part of the IDSs and as the separate notes; and

    a statement of the maximum number of shares of Class B common stock and the cash amount per share to be received by existing equity investors in the recapitalization.

        We call the date that we issue the press release the announcement date. On or promptly following the announcement date, we will also file with the SEC a post-effective amendment to our Registration Statement on Form S-4 of which this proxy statement/prospectus forms a part to reflect the final pricing information of the offerings and the definitive terms of the recapitalization.

Option Plans; Restricted Stock; Other KinderCare Stock Plans

        Stock Option Plans.    We currently have in place two stock-based compensation plans. The 1997 Stock Purchase and Option Plan for Key Employees of KinderCare Learning Centers, Inc. and Subsidiaries and the 2002 Stock Purchase and Option Plan for Key California Employees of KinderCare Learning Centers, Inc. and Subsidiaries. Assuming that the recapitalization and the public offering result in a change of control of KinderCare, immediately prior to the recapitalization, all unvested options to purchase shares of our common stock held by our employees under our stock-based compensation plans will become fully vested. Outstanding options will cease to be exercisable and will be cancelled upon the recapitalization, but holders of cancelled options will be provided the same consideration as our existing stockholders in the recapitalization with respect to a number of shares having a fair market value equal to the "spread" of the relevant option (the excess of the fair market value of the underlying shares at the time of the recapitalization over the exercise price of the stock option).

        Management holders of restricted shares will be offered the same consideration as our existing stockholders in the recapitalization.

        Directors' Deferred Compensation Plan.    Under the KinderCare Learning Centers, Inc. Directors' Deferred Compensation Plan, non-employee members of our board of directors may elect to defer receipt and income taxation of all or a portion of their annual retainer. Any amounts deferred are credited to a phantom stock account. The number of shares of phantom stock credited to a director's account under the plan is determined based on the amount of deferred compensation divided by the then fair value per share, as defined in the plan, of our common stock.

        Distributions from the plan are made in cash and reflect the value per share of the common stock at the time of distribution, multiplied by the number of phantom shares credited to the director's account. Distributions from the plan occur upon the earlier of (1) the first day of the year following the director's retirement or separation from our board of directors or (2) termination of the plan.

        In connection with the recapitalization and public offering, we are evaluating an amendment or replacement of the plan to reflect our post-recapitalization capital structure.

        Long Term Incentive Plan.    Members of our management team will be identified by our compensation committee to participate in our new long term incentive plan, or LTIP. The purpose of the LTIP is to provide eligible participants with compensation opportunities that will enhance our ability to attract, retain and motivate key personnel and reward key senior management for significant performance. The LTIP will be administered by our compensation committee, which shall have the power to, among other things, determine:

    those individuals who will participate in the LTIP;

    the level of participation of each participant;

    the maximum contribution to the LTIP in any given year;

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    the conditions that must be satisfied in order for the participants to vest and receive any amounts under the LTIP (including establishing specified performance targets that must be achieved in order for payment to occur); and

    other conditions that the participants must satisfy in order to receive amounts under the LTIP.

        We intend to engage an outside compensation consulting firm to make recommendations to the compensation committee of our board of directors regarding the LTIP structure.

Effective Time of the Recapitalization

        The recapitalization will become effective upon the date that the certificate of merger is filed with the Secretary of State of the State of Delaware. This is expected to occur on                        , 2004, following the special meeting.

Listing

        We are in the process of obtaining the necessary approval from                        in order to list the IDSs under the symbol "            ." KinderCare's common stock is currently listed for quotation on the OTC Bulletin Board maintained by the Nasdaq Stock Market, Inc. and in the "pink sheets" under the symbol "KDCR." We do not expect that the Class A common stock or the Class B common stock will trade on an exchange and we currently do not expect an active trading market for the Class A common stock or the Class B common stock to develop. However, we will use reasonable efforts to list the Class A common stock for separate trading on                        if a sufficient number of shares of Class A common stock are held separately to meet the minimum distribution requirements for separate trading of                        for at least 30 consecutive trading days. The Class A common stock and the Class B common stock will be freely transferable without restriction or further registration under the Securities Act, unless purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act.

Regulatory Approvals

        To complete the recapitalization:

    KinderCare must file a certificate of merger and our restated certificate of incorporation with the Secretary of State of Delaware;

    KinderCare may need to obtain approval from child care licensing authorities in certain states to complete the recapitalization, other than those which, if not obtained, would not have a material adverse effect on KinderCare; and

    if a filing becomes necessary under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, all waiting periods under that act must have expired or terminated.

        KinderCare does not need to comply with any other federal or state regulatory requirements or obtain any other regulatory approvals to complete the recapitalization.

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Estimated Fees and Expenses

        The following table sets forth the estimated expenses incurred and to be incurred by us in connection with the reclassification. These fees will be paid by us. All amounts shown are estimates, except the Securities and Exchange Commission registration fee and listing fees.

Filing/registration fees   $ 26,808
Listing fees     *
Printing and engraving costs     *
Legal fees and expenses     *
Accounting fees and expenses     *
Financial advisory fees and expenses     *
Exchange agent fees and expenses     *
Information agent fees and expenses     *
Miscellaneous     *
   
  Total   $ *
   

*
To be completed by amendment.

Appraisal Rights

        If the recapitalization is completed, you will be entitled to seek an appraisal of, and be paid in cash the "fair value" of, your shares instead of receiving the merger consideration that you would otherwise be entitled to under the recapitalization agreement. These rights are commonly referred to as "appraisal rights." Section 262 of the Delaware General Corporation Law sets forth the requirements that must be satisfied and the procedures that must be followed to exercise appraisal rights. Section 262 is reproduced in Appendix B to this proxy statement/prospectus. You should read Appendix B in its entirety for a more complete description of your appraisal rights under Delaware law. The following discussion is not a complete statement of the law pertaining to appraisal rights under the Delaware General Corporation Law and is qualified in its entirety by the full terms of Section 262.

        Any stockholders who are entitled to appraisal rights must, in order to exercise such rights, demand and perfect such rights in accordance with Section 262. Failure to satisfy the requirements and follow the procedures set forth in Section 262 may result in a loss of appraisal rights. If you demand appraisal but are determined not to be entitled to such rights or otherwise lose such rights, you will be entitled to receive the merger consideration (without interest) that you would have been entitled to under the terms of the recapitalization agreement if you had not sought to exercise appraisal rights.

        Appraisal rights are available only to record holders of shares. If you are not a record holder and you wish to exercise appraisal rights in respect of shares in which you have a beneficial interest and which are held of record by or in the name of another person, such as a broker or nominee, you should act promptly to cause the record holder to follow the procedures set forth in Section 262 to perfect your appraisal rights.

        Section 262 requires us to notify you, at least 20 days before the special meeting, as to the availability of appraisal rights and to provide you with a copy of Section 262. This proxy statement/prospectus, including Appendix B, serves as the required notice.

        To exercise your appraisal rights, you must:

    deliver to us before the vote on the recapitalization agreement a written demand for an appraisal of your shares;

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    continuously hold your shares from the date you deliver a written demand for an appraisal through the effective date of the recapitalization; and

    not vote in favor of the recapitalization agreement.

        In addition, if neither any stockholder who has demanded appraisal rights nor KinderCare has filed a petition in the Delaware Court of Chancery demanding a determination of the fair value of the shares seeking appraisal within 120 days after the effective date of the recapitalization, then all stockholders' appraisal rights will be lost. We have no obligation and do not intend to file such an appraisal petition. Accordingly, it is the obligation of the stockholders seeking appraisal to file an appropriate appraisal petition with the Court of Chancery within the 120 day time period prescribed by Section 262.

        Any demand for an appraisal must be in writing, signed and mailed or delivered to:

      KinderCare Learning Centers, Inc.
      650 N.E. Holladay Street, Suite 1400
      Portland, Oregon 97232
      Attn: Eva M. Kripalani,
                 Senior Vice President, General
                 Counsel and Secretary

        A written demand must reasonably inform us of the identity of the stockholder and of the stockholder's intent to demand appraisal of his, her or its shares of our stock. Voting against the recapitalization or otherwise failing to vote for the recapitalization will not by itself constitute a demand for an appraisal or sufficient notice of an election to exercise appraisal rights. If you sell or otherwise transfer or dispose of your shares before the effective time of the recapitalization, you will lose your appraisal rights with respect to those shares.

        A demand for appraisal should be signed by or on behalf of the stockholder exactly as the stockholder's name appears on the stockholder's stock certificates. If the shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, the demand should be executed in that capacity, and if the shares are owned of record by more than one person, as in a joint tenancy or tenancy in common, the demand should be executed by or on behalf of all joint owners. An authorized agent, including one or more joint owners, may execute a demand for appraisal on behalf of a record holder; however, in the demand the agent must identify the record owner or owners and expressly disclose that the agent is executing the demand as an agent for the record owner or owners. A record holder such as a broker who holds shares as nominee for several beneficial owners may exercise appraisal rights for the shares held for one or more beneficial owners and not exercise appraisal rights for the shares held for other beneficial owners. In this case, the written demand should state the number of shares for which appraisal rights are being sought. When no number of shares is stated, the demand will be presumed to cover all shares held of record by the broker or nominee.

        If the recapitalization is completed, we will send, within 10 days after the effective date of the recapitalization, notice of the effective date of the recapitalization to each stockholder who has properly demanded appraisal rights under Section 262 and has not voted in favor of the recapitalization agreement. If your shares are held in brokerage accounts or other nominee forms and you wish to exercise appraisal rights, you are urged to consult with your broker to determine the appropriate procedures for the making of a demand for appraisal by such nominee.

        If you have complied with the requirements for exercising appraisal rights, then during the 120 days following the effective date of the recapitalization, you may request from us a statement as to the aggregate number of shares not voted in favor of the recapitalization agreement and with respect to which demands for appraisal have been timely received and the number of former holders of those

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shares. Upon receiving any such request, which must be made in writing, we will mail a statement of that information to you within 10 days.

        If a petition for an appraisal is filed within the 120-day period prescribed by Section 262 and a copy thereof is served upon KinderCare, we will then be obligated within 20 days of service to file with the Delaware Register in Chancery a duly certified list containing the names and addresses of all stockholders who have demanded appraisal of their shares of KinderCare common stock and with whom agreements as to the value of their shares have not been reached. After notice to such holders as required by the Delaware Court of Chancery, the Delaware Court of Chancery may hold a hearing on the petition to determine the stockholders who have complied with Section 262 of the Delaware General Corporation Law and who have become entitled to appraisal rights thereunder. The Court of Chancery may require the former stockholders who demanded appraisal of their shares of KinderCare common stock to submit their stock certificate to the Delaware Register in Chancery for notation thereon of the pendency of the appraisal proceeding. If any former stockholder fails to comply with such direction, the Court of Chancery may dismiss the proceedings as to such former stockholder. After determining the former stockholders entitled to appraisal, the Delaware Court of Chancery will appraise the "fair value" of their shares of KinderCare common stock. The determination of fair value will not include any element of value arising from the accomplishment or expectation of the recapitalization. The court will also determine a fair rate of interest, if any, to be paid upon the amount determined to be the fair value of the shares. The court may determine that the fair value of the shares is more than, the same as or less than the value of the consideration that you otherwise would have been entitled to receive under the recapitalization agreement. The Delaware Supreme Court has stated that "proof of value by any techniques or methods that are generally considered acceptable in the financial community and otherwise admissible in court" should be considered in the appraisal proceedings. In addition, Delaware courts have decided that a stockholder's statutory appraisal remedy may or may not be a dissenter's exclusive remedy, depending on the factual circumstances.

        The costs of the action may be determined by the Delaware Court of Chancery and taxed upon the parties as the court deems equitable in the circumstances. Upon application of a stockholder, the court may order that all or a portion of the expenses incurred by any stockholder in an appraisal proceeding, including, without limitation, reasonable attorneys' fees and the fees and expenses of experts utilized in the appraisal proceeding, be charged pro rata against the value of all of the shares entitled to appraisal.

        If you have duly demanded an appraisal of your shares in compliance with Section 262 and have not effectively withdrawn such demand for appraisal, you will not, after the effective date of the merger, be entitled to vote those shares for any purpose, nor will you be entitled to the payment of dividends or other distributions on those shares, except for dividends or other distributions payable to stockholders as of a record date before the effective date of the merger.

        You may withdraw your demand for appraisal of your shares within 60 days after the effective date of the recapitalization. Any attempt to withdraw your demand more than 60 days after the effective date of the recapitalization will require our written approval. Once a petition for appraisal is filed with the Delaware Court of Chancery, the appraisal proceeding may not be dismissed without court approval. If your demand for appraisal rights has been effectively withdrawn, you will receive the consideration in the recapitalization which you would otherwise be entitled to (without interest), based on the elections, if any, you made and the treatment of other stockholders who made or did not make any such elections.

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CAPITALIZATION

        The following table sets forth our cash and cash equivalents and capitalization at March 5, 2004:

    on an actual basis; and

    on a pro forma as adjusted basis as if the public offering, including the use of proceeds from the public offering and our recapitalization, had occurred on that date and we had amended the revolving credit facility on that date.

 
  At March 5, 2004
 
  Actual
  Adjustments
  Pro Forma
As Adjusted
Assuming No
Exercise of
the Over-
Allotment
Option

  Adjustments
  Pro Forma
As Adjusted
Assuming
Full Exercise
of the Over-
Allotment
Option

 
  (in thousands)

Cash and cash equivalents   $ 34,557   $     $     $     $  
   
 
 
 
 
Long-term obligations, including current portion:                              
  Current maturities of long-term debt   $ 7,580   $     $     $     $  
  Revolving credit facility     11,000                        
  Mortgage loan     294,588                        
  Industrial revenue bonds     8,500                        
        senior subordinated notes                            
  9.5% senior subordinated notes due 2009 (1)     194,423                        
  8.0% notes due 2008     979                        
  Capital lease obligations     15,333                        
   
 
 
 
 
      Total long-term debt     532,403                        
   
 
 
 
 
Redeemable portion of Class B common stock                            
   
 
 
 
 
Stockholders' equity                              
  Common stock, $0.01 par value per share (2)     197                        
  Class A common stock, $0.01 par value per share (3)                            
  Class B common stock, $0.01 par value per share (4)                            
  Additional paid-in capital     26,800                        
  Notes receivable from stockholders     (1,933 )                      
  Retained earnings     116,686                        
  Accumulated other comprehensive income (loss)     429                        
   
 
 
 
 
  Total stockholders' equity     142,179                        
   
 
 
 
 
      Total capitalization   $ 674,582   $     $     $     $  
   
 
 
 
 

(1)
On March 29, 2004, we redeemed approximately $15.0 million in aggregate principal amount of our 9.5% senior subordinated notes due 2009.

(2)
100.0 million shares authorized actual and as adjusted (no exercise and full exercise); issued and outstanding: 19,721,646. After completion of our recapitalization, this class of common stock will no longer exist.

(3)
After our recapitalization, 100.0 million shares authorized; issued and outstanding:                        shares as adjusted (no exercise),            shares as adjusted (full exercise).

(4)
After our recapitalization, 20.0 million shares authorized; issued and outstanding:            shares.

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COMPARATIVE PER SHARE DATA

        The following table shows the book value per share, earnings (loss) per share and dividends declared per share on a historical and pro forma basis for our existing common stock, the new Class A common stock represented by the IDSs and the new Class B common stock. KinderCare derived the pro forma per share information from the unaudited pro forma consolidated financial statements presented elsewhere in this document. The table should be read in conjunction with the selected historical consolidated financial data and historical consolidated financial statements, and related schedules and notes thereto, included in this document.

 
  Fiscal Year Ended May 30, 2003
 
  Existing Common Stock
  Class A Common Stock
  Class B Common Stock
Book value per share                  
  Reported   $     $     $  
  Pro forma   $     $     $  
Cash dividends declared per share                  
  Reported   $     $     $  
  Pro forma   $     $     $  
Earnings per share—basic                  
  Reported   $     $     $  
  Pro forma   $     $     $  
Earnings per share—diluted                  
  Reported   $     $     $  
  Pro forma   $     $     $  

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MARKET PRICE OF EXISTING COMMON STOCK AND DIVIDEND INFORMATION

        Our existing common stock is quoted on the OTC Bulletin Board under the symbol "KDCR." The following table shows the range of the high and low sale prices of shares of our existing common stock, as reported on the OTC Bulletin Board for each quarterly period during the last three years. KinderCare's fiscal year ends on the Friday closest to May 31. The information presented refers to the 52 weeks ended May 30, 2003 as "fiscal 2003" and the 52 weeks ended May 31, 2002 as "fiscal 2002." The 12 weeks ended December 13, 2003 is the second quarter of fiscal 2004 and the 12 weeks ended December 13, 2002 is the second quarter of fiscal 2003. Our first fiscal quarter is comprised of 16 weeks, while the remaining quarters are each comprised of 12 weeks.

        During the past two fiscal years and the forty weeks ended March 5, 2004, we have not declared or paid any cash dividends or distributions on our capital stock.

 
  High
  Low
Fiscal 2002            
  First Quarter   $ 13.00   $ 12.75
  Second Quarter     15.00     12.75
  Third Quarter     15.00     8.00
  Fourth Quarter     11.50     8.50
Fiscal 2003            
  First Quarter   $ 11.50   $ 11.25
  Second Quarter     11.25     11.01
  Third Quarter(a)     11.01     11.01
  Fourth Quarter     15.00     11.01
Fiscal 2004            
  First Quarter   $ 16.00   $ 13.25
  Second Quarter     13.00     10.00
  Third Quarter     11.50     9.00
  Fourth Quarter (through April 20, 2004)     10.00     8.00

(a)
No sales reported in this quarter.

        Recent Share Prices.    On April 20, 2004, the last trading day before the public announcement of the recapitalization, the last sale price of the existing common stock quoted on the OTC Bulletin Board was $9.40. On                        , 2004, the last trading day before the effectiveness of the registration statement on Form S-4 containing this proxy statement/prospectus, the last sale price of existing common stock quoted on the OTC Bulletin Board was $            . We cannot assure you as to the market price of the existing common stock at any time before the recapitalization or as to the market price of the IDSs or the new Class A and Class B common stock after the recapitalization.

        The market price of the IDSs or the Class A common stock represented thereby will not be correlated to the historical market price of our existing common stock. For more information, see "Risk Factors—Risks Relating to the IDSs, the Shares of Class A Common Stock, the Shares of Class B Common Stock and the Notes—Before the recapitalization and the public offering, there was no public market for our IDSs, notes, Class A common stock or Class B common stock and an inactive public market for shares of our then-outstanding common stock. The price of the IDSs or notes may fluctuate substantially, which could negatively affect holders of IDSs."

88



DIVIDEND POLICIES

        Upon the closing of the recapitalization and the public offering, our board of directors is expected to adopt a dividend policy pursuant to which, in the event and to the extent we have lawfully available funds for distribution to the holders of shares of our Class A and Class B common stock as of each            ,             ,             and            , and subject to applicable law, as described below, and the terms of the revolving credit facility, the indenture governing our notes and any other then-outstanding indebtedness of ours, our board of directors will declare cash dividends on our Class A and Class B common stock. Pursuant to our restated certificate of incorporation, the dividend rate on the Class B common stock will equal    multiplied by the dividend rate on each share of Class A common stock. The initial dividend rates on the Class A and Class B common stock are expected to be equal to $                      and $                      , respectively, per share per annum, subject to adjustment. We expect to pay dividends on or about each            ,            ,             and  .

        Dividends on the Class A and Class B common stock will be pari passu with one another based on their relative dividend rates. We cannot declare dividends on our Class A common stock unless at such time the corresponding proportionate dividend is declared on our Class B common stock.

        If we have any remaining cash after the payment of dividends as contemplated above, our board of directors may, in its sole discretion, decide to use that cash to fund capital expenditures or acquisitions, repay indebtedness, pay additional dividends or for general corporate purposes.

        The indenture governing our notes restricts our ability to declare and pay dividends on our common stock as follows:

    we may not pay dividends if such payment will exceed certain amounts to be specified in "Description of Notes;"

    we may not pay dividends while interest on the notes is being deferred or, after the end of any interest deferral, so long as any deferred interest has not been paid in full; and

    we may not pay any dividends if a default or event of default under the indenture has occurred and is continuing.

        We expect that our amended revolving credit facility will contain restrictions on our ability to declare and pay dividends on our common stock. In addition, we may enter into other borrowing agreements that impose restrictions on our ability to declare dividends with respect to our common stock.

        Our board of directors may, in its discretion, amend or repeal these dividend policies. Our board of directors may decrease the level of dividends provided for in these dividend policies or discontinue entirely the payment of dividends.

        Future dividends with respect to shares of our capital stock, if any, will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions, provisions of applicable law and other factors that our board of directors may deem relevant. Under Delaware law, our board of directors may declare dividends only to the extent of our "surplus" (which is defined as total assets at fair market value minus total liabilities, minus statutory capital), or if there is no surplus, out of our net profits for the then current and/or immediately preceding fiscal years.

        During the past two fiscal years and the first forty weeks of fiscal year 2004, we have not declared or paid any cash dividends or distributions on our capital stock.

89



SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

        The following table sets forth selected historical consolidated financial and other data. Our fiscal year ends on the Friday closest to May 31. The fiscal years are typically comprised of 52 weeks. However, fiscal year 2000 included 53 weeks. The first quarter is comprised of 16 weeks, while the second, third and fourth quarters are each comprised of 12 weeks.

        The information in the following table should be read together with our audited consolidated financial statements for fiscal years 1999 and 2000, which are not included herein, fiscal years 2001, 2002 and 2003 and the related notes, our unaudited consolidated financial statements for the forty weeks ended March 7, 2003 and March 5, 2004 and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations," all as included elsewhere in this proxy statement/prospectus. The figures for interim periods shown below are not necessarily indicative of results for the applicable full fiscal year.

 
  Fiscal Year Ended
  Forty Weeks Ended
 
 
  May 28,
1999

  June 2,
2000
(53 Weeks)

  June 1,
2001

  May 31,
2002

  May 30,
2003

  March 7,
2003

  March 5,
2004

 
 
  (in thousands, except per share amounts and child care center data and ratios)

 
Statement of Operations Data:                                            
Revenues, net   $ 610,667   $ 673,798   $ 721,076   $ 806,746   $ 838,584   $ 635,097   $ 649,105  
Operating expenses     549,977     598,939     646,562     732,583     766,170     585,299     599,913  
Operating income     60,690     74,859     74,514     74,163     72,414     49,798     49,192  
Interest expense, net (a)     (41,349 )   (44,979 )   (48,233 )   (43,512 )   (40,612 )   (31,576 )   (36,060 )
Loss on minority investment (b)                 (2,265 )   (6,700 )        
Income tax expense     (7,576 )   (11,298 )   (10,095 )   (11,213 )   (9,940 )   (7,215 )   (5,605 )
Income from continuing operations     11,765     18,582     16,186     17,173     15,162     11,007     7,527  
Net income     13,526     19,963     15,671     16,543     13,415     10,055     6,389  

Per Share Data (c):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic net income per share   $ 0.71   $ 1.05   $ 0.82   $ 0.83   $ 0.68   $ 0.51   $ 0.32  
  Diluted net income per share     0.70     1.04     0.81     0.82     0.67     0.51     0.32  
Balance Sheet Data (at end of period):                                            
Property and equipment, net   $ 560,367   $ 607,032   $ 660,112   $ 697,638   $ 660,939   $ 673,842   $ 716,887  
Total assets     638,797     695,570     805,367     845,451     811,093     819,929     905,590  
Total long-term obligations, including current portion     441,371     475,175     540,602     549,240     470,976     536,325     532,403  
Stockholders' equity     51,790     76,673     106,731     123,269     135,159     126,536     142,179  
Other Financial Data:                                            
Net cash provided by operating activities     61,810     61,197     69,671     87,466     78,359     48,461     59,220  
EBITDA (d)     100,974     117,132     120,807     130,155     123,386     93,212     94,634  
Rent     27,773     28,207     37,296     46,910     51,770     39,514     41,709  
Ratio of earnings to fixed
charges (e)
    1.35 x   1.53 x   1.42 x   1.45 x   1.42 x   1.39 x   1.25 x
Comparable center net revenue growth (f)     5.1 %   8.4 %   3.1 %   1.1 %   1.4 %   1.3 %   0.0 %
Capital expenditures (g)   $ 92,139   $ 82,473   $ 94,269   $ 95,843   $ 83,114   $ 69,731   $ 41,345  
Child Care Center Data:                                            
Number of centers at end of period     1,160     1,169     1,242     1,264     1,264     1,264     1,245  
Center licensed capacity at end of period     146,000     150,000     162,000     166,000     167,000     167,000     166,000  
Average weekly tuition rate (h)   $ 113.45   $ 120.75   $ 129.34   $ 137.72   $ 144.45   $ 143.85   $ 152.04  
Occupancy (i)     69.9 %   69.8 %   68.3 %   65.6 %   63.3 %   62.5 %   59.3 %

90



Notes to Selected Historical Consolidated Financial and Other Data

(a)
Interest expense, net was comprised of the following, in thousands:

 
  Fiscal Year Ended
  Forty Weeks Ended
 
 
  May 28,
1999

  June 2,
2000
(53 Weeks)

  June 1,
2001

  May 31,
2002

  May 30,
2003

  March 7,
2003

  March 5,
2004

 
Interest income   $ 490   $ 386   $ 582   $ 560   $ 420   $ 215   $ 712  
Interest expense     (41,839 )   (45,365 )   (48,815 )   (44,072 )   (41,032 )   (31,791 )   (31,563 )
Loss on the early
extinguishment of debt
                            (5,209 )
   
 
 
 
 
 
 
 
    $ (41,349 ) $ (44,979 ) $ (48,233 ) $ (43,512 ) $ (40,612 ) $ (31,576 ) $ (36,060 )
(b)
Investments, wherein we do not exert significant influence or own over 20% of the investee's stock, are accounted for under the cost method. During fiscal years 2002 and 2003, we wrote down a minority investment by $2.3 million and $6.7 million, respectively.

(c)
The per share amounts have been adjusted to reflect the 2-for-1 stock split, which was effective August 19, 2002.

(d)
EBITDA was calculated as follows, in thousands:

 
  Fiscal Year Ended
  Forty Weeks Ended
 
 
  May 28,
1999

  June 2,
2000
(53 Weeks)

  June 1,
2001

  May 31,
2002

  May 30,
2003

  March 7,
2003

  March 5,
2004

 
Net income   $ 13,526   $ 19,963   $ 15,671   $ 16,543   $ 13,415   $ 10,055   $ 6,389  
Interest expense, net     41,349     44,979     48,233     43,512     40,612     31,576     36,060  
Income tax expense     7,576     11,298     10,095     11,213     9,940     7,215     5,605  
Depreciation and amortization     36,464     38,951     45,315     57,533     57,284     42,997     46,153  
Discontinued operations:                                            
  Interest expense     3     10     5     6     1     1      
  Income taxes     1,136     840     171     (412 )   (1,145 )   (623 )   (848 )
  Depreciation     920     1,091     1,317     1,760     3,279     1,991     1,275  
   
 
 
 
 
 
 
 
    EBITDA   $ 100,974   $ 117,132   $ 120,807   $ 130,155   $ 123,386   $ 93,212   $ 94,634  
   
 
 
 
 
 
 
 

        EBITDA is a non-GAAP financial measure of our liquidity. We believe EBITDA is a useful tool for certain investors and creditors for measuring our ability to meet debt service requirements. Additionally, management uses EBITDA for purposes of reviewing our results of operations on a more comparable basis. EBITDA does not represent cash flow from operations as defined by GAAP, is not necessarily indicative of cash available to fund all cash flow needs and should not be considered an

91



alternative to net income under GAAP for purposes of evaluating our results of operations. A reconciliation of EBITDA to net cash provided by operating activities was as follows, in thousands:

 
  Fiscal Year Ended
  Forty Weeks Ended
 
 
  May 28,
1999

  June 2,
2000
(53 Weeks)

  June 1,
2001

  May 31,
2002

  May 30,
2003

  March 7,
2003

  March 5,
2004

 
Net cash provided by operating activities   $ 61,810   $ 61,197   $ 69,671   $ 87,466   $ 78,359   $ 48,461   $ 59,220  
Income tax expense     7,576     11,298     10,095     11,213     9,940     7,215     5,605  
Deferred income taxes     (6,703 )   (4,271 )   116     (6,431 )   10,968     (5,624 )   9,103  
Interest expense, net     41,349     44,979     48,233     43,512     40,612     31,576     36,060  
Effect of discontinued operations on interest and taxes     1,139     850     176     (406 )   (1,144 )   (622 )   (848 )
Change in operating assets and liabilities     (3,567 )   3,279     (6,997 )   (4,769 )   (16,332 )   12,052     (16,937 )
Other non-cash items     (630 )   (200 )   (486 )   (429 )   983     154     2,431  
   
 
 
 
 
 
 
 
EBITDA   $ 100,974   $ 117,132   $ 120,807   $ 130,155   $ 123,386   $ 93,212   $ 94,634  
   
 
 
 
 
 
 
 
(e)
For purposes of determining the ratio of earnings to fixed charges, earnings are defined as income before income taxes, discontinued operations and a cumulative effect of a change in accounting principle, plus fixed charges. Fixed charges consist of interest expense, including capitalized interest, on all indebtedness, amortization of deferred financing costs and one-third of rental expense on operating leases representing that portion of rental expense that we deemed to be attributable to interest.

(f)
Comparable center net revenues include those centers that have been open and operated by us at least one year. Therefore, a center is considered comparable during the first four-week period it has prior year net revenues. Non-comparable net revenues include those generated from centers that have been closed and our revenues from distance learning services. The fiscal year ended June 2, 2000 included 53 weeks of operations. If fiscal year 2000 were adjusted to a 52 week basis, the comparable center net revenue growth would have been 5.2% in fiscal year 2001 and 6.2% in fiscal year 2000.

(g)
Capital expenditures included the following, in thousands:

 
  Fiscal Years Ended
  Forty Weeks Ended
 
  May 28,
1999

  June 2,
2000
(53 weeks)

  June 1,
2001

  May 31,
2002

  May 30,
2003

  March 7,
2003

  March 5,
2004

New center development   $ 57,633   $ 36,631   $ 44,254   $ 63,990   $ 50,651   $ 44,274   $ 21,379
Maintenance capital expenditures     34,506     45,842     50,015     31,853     32,463     25,457     19,966
   
 
 
 
 
 
 
    $ 92,139   $ 82,473   $ 94,269   $ 95,843   $ 83,114   $ 69,731   $ 41,345
   
 
 
 
 
 
 
(h)
We calculate the average weekly tuition rate as the actual tuition charged, net of discounts, for a specified time period, divided by "full-time equivalent," or FTE, attendance for the related time period. FTE attendance is not a strict head count. Rather, the methodology determines an approximate number of full-time children based on weighted averages. For example, an enrolled full-time child equates to one FTE, while a part-time child enrolled for five half-days equates to 0.5 FTE. The FTE measurement of center capacity utilization does not necessarily reflect the actual number of full- and part-time children enrolled.

(i)
Occupancy is a measure of the utilization of center capacity. We calculate occupancy as the FTE attendance divided by the sum of the centers' licensed capacity during the related time period.

92



UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA

        The following unaudited pro forma condensed consolidated financial statements have been derived by the application of pro forma adjustments to our historical consolidated financial statements included elsewhere in this prospectus. We are providing the following unaudited pro forma condensed consolidated financial information because the effect of the public offering and recapitalization on our financial information is material.

        The unaudited pro forma condensed consolidated balance sheet assumes that each of the following had occurred on March 5, 2004, and the unaudited pro forma condensed consolidated statements of operations for the fiscal year ended May 30, 2003 and the forty weeks ended March 5, 2004 assume that each of the following had occurred on June 1, 2002:

    the public offering of IDSs (assuming the underwriters do not exercise their over-allotment option) and notes sold separately (not represented by IDSs);

    the conversion of shares of our existing common stock into cash, IDSs and shares of our Class B common stock in the recapitalization (in amounts assuming the underwriters do not exercise their over-allotment option);

    the amendment of our existing revolving credit facility;

    the repurchase in the tender offer or redemption of all of our 9.5% senior subordinated notes due 2009; and

    the pre-funding of CMBS loan amortization and interest payments.

        We anticipate having to pay call premiums of approximately $             million in order to repurchase or redeem our existing $194.4 million of 9.5% senior subordinated notes due 2009 outstanding at March 5, 2004. We also anticipate taking a write-off of deferred financing costs of $             million associated with the early extinguishment of our $194.4 million of 9.5% senior subordinated notes due 2009 outstanding at March 5, 2004. These call premiums and write-offs of deferred financing costs, which total $             million, are not reflected in the unaudited pro forma condensed consolidated statements of operations for the year ended May 30, 2003 or the forty weeks ended March 5, 2004.

        The unaudited pro forma condensed consolidated financial information is for informational purposes only and is not necessarily indicative of either the financial position or the results of operations that would have been achieved had the public offering and recapitalization for which we are giving pro forma effect actually occurred on the dates or for the periods indicated described in the accompanying notes, nor is such unaudited pro forma condensed consolidated financial information necessarily indicative of the results to be expected for the full year or any future period. A number of factors may affect our results. See "Cautionary Statement Regarding Forward-Looking Statements" and "Risk Factors."

        The pro forma adjustments are based on preliminary estimates and currently available information and assumptions that management believes are reasonable. The notes to the unaudited pro forma condensed consolidated statements of operations and balance sheet provide a detailed discussion of how such adjustments were derived and presented in the unaudited pro forma condensed consolidated financial information. You should read the unaudited pro forma condensed consolidated financial information in conjunction with "Summary—Transactions Related to the Recapitalization," "Selected Historical Consolidated Financial and Other Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes appearing elsewhere in this proxy statement/prospectus.

93



KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Balance Sheet
At March 5, 2004

 
  Historical
Consolidated

  Pro Forma Adjustments
  Pro Forma
Consolidated

Assets                  
Current assets:                  
  Cash and cash equivalents   $ 34,557   $              (a)(b)(c)(d)(e) $  
  Receivables, net     30,091            
  Prepaid expenses and supplies     8,175            
  Deferred income taxes     11,063            
  Assets held for sale     4,238            
   
 
 
    Total current assets     88,124            
Property and equipment, net     716,887            
Deferred income taxes     15,771            
Goodwill     42,565            
Deferred financing costs     19,982                  (c)(d)(e)    
Other assets     22,261            
   
 
 
        $ 905,590   $     $  
   
 
 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 
Current liabilities:                  
  Bank overdrafts   $ 6,644   $              (d)(e) $  
  Accounts payable     7,496            
  Current portion of long-term debt     7,580            
  Accrued expenses and other liabilities     109,441                  (d)(e)    
   
 
 
    Total current liabilities     131,161            
Long-term debt     509,490                  (a)(b)(d)(e)    
Noncurrent self-insurance liabilities     32,417            
Deferred income taxes     5,059            
Other noncurrent liabilities     85,284            
   
 
 
    Total liabilities     763,411            
   
 
 
Redeemable portion of Class B common stock                      (b)    
   
 
 
Stockholders' equity:                  
  Preferred stock                
  Common stock     197                  (a)(b)    
  Class A common stock                      (a)(b)    
  Class B common stock                      (a)(b)    
  Additional paid-in capital     26,800            
  Notes receivable from stockholders     (1,933 )          
  Retained earnings     116,686                  (d)(e)    
  Accumulated other comprehensive income     429            
   
 
 
    Total stockholders' equity     142,179            
   
 
 
          $ 905,590   $     $  
   
 
 

The notes to this unaudited pro forma condensed consolidated balance sheet are an integral part of the pro forma financial information presented.

94



KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Statement of Operations
Fiscal Year Ended May 30, 2003
(in thousands)

 
  Historical
Consolidated

  Pro Forma
Transactions
Adjustments

  Pro Forma
Consolidated

Revenues, net   $ 838,584   $     $  
   
 
 
Operating expenses:                  
  Salaries, wages and benefits     462,361                   
  Depreciation and amortization     57,284            
  Rent     51,770            
  Provision for doubtful accounts     4,954            
  Other     189,801            
   
 
 
    Total operating expenses     766,170            
   
 
 
  Operating income     72,414            
Investment income     420            
Interest expense     (41,032 )                (f)(g)    
Loss on the early extinguishment of debt                
Loss on minority investment     (6,700 )          
   
 
 
  Income from continuing operations before income taxes     25,102            
Income tax expense     (9,940 )          
   
 
 
  Income from continuing operations   $ 15,162   $     $  
   
 
 

The notes to this unaudited pro forma condensed consolidated statement of operations are an integral part of the pro forma financial information presented.

95



KINDERCARE LEARNING CENTERS, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Statement of Operations
Forty Weeks Ended March 5, 2004
(in thousands)

 
  Historical
Consolidated

  Pro Forma
Transactions
Adjustments

  Pro Forma
Consolidated

Revenues, net   $ 649,105   $     $  
   
 
 
Operating expenses:                  
  Salaries, wages and benefits     358,880                   
  Depreciation and amortization     46,153            
  Rent     41,709            
  Provision for doubtful accounts     4,639            
  Other     148,532            
   
 
 
    Total operating expenses     599,913            
   
 
 
  Operating income     49,192            
Investment income     712            
Interest expense     (31,563 )                (h)(i)    
Loss on the early extinguishment of debt     (5,209 )          
Loss on minority investment                
   
 
 
  Income from continuing operations before income taxes     13,132            
Income tax expense     (5,605 )          
   
 
 
  Income from continuing operations   $ 7,527   $     $  
   
 
 

The notes to this unaudited pro forma condensed consolidated statement of operations are an integral part of the pro forma financial information presented.

96



Notes to the Unaudited Pro Forma Condensed
Consolidated Financial Information

1.    Basis of Presentation

        The unaudited pro forma condensed consolidated balance sheet at March 5, 2004 presents our consolidated financial position assuming the public offering of IDSs (assuming the underwriters do not exercise their over-allotment option) and separate notes, the exchange of shares of our existing common stock for cash, IDSs and shares of our Class B common stock in the recapitalization (in amounts assuming the underwriters do not exercise their over-allotment option), the amendment of our existing revolving credit facility, the repurchase in the tender offer or redemption of all of our 9.5% senior subordinated notes due 2009, and the pre-funding of CMBS loan amortization and interest payments, had been completed on that date. Our unaudited pro forma condensed consolidated statements of operations for the fiscal year ended May 30, 2003 and the forty weeks ended March 5, 2004 present our consolidated results of operations assuming that the recapitalization and public offering had been completed on June 1, 2002. In our opinion, these statements include all material adjustments necessary to reflect, on a pro forma basis, the impact of the public offering and the recapitalization on our historical financial information. The pro forma adjustments set forth in the Unaudited Pro Forma Condensed Consolidated Balance Sheet and Unaudited Pro Forma Condensed Consolidated Statements of Operations are described more fully in Note 2, "Pro Forma Assumptions and Adjustments," below.

        You should read this unaudited pro forma condensed consolidated financial information in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes included elsewhere in this proxy statement/prospectus. Our unaudited pro forma condensed consolidated financial information has been presented for informational purposes only and does not necessarily reflect our results of operations or financial position that would have existed had we operated with the public offering and the recapitalization for the periods presented and should not be relied upon as being indicative of our future results after the public offering and the recapitalization.

2.    Pro Forma Assumptions and Adjustments

Unaudited Pro Forma Condensed Consolidated Balance Sheet at March 5, 2004

        The unaudited pro forma condensed consolidated balance sheet has been prepared to reflect the following transactions as if they had occurred on March 5, 2004. Actual amounts could vary from these pro forma adjustments.

(a)
The public offering of IDSs and separate notes.

We expect to offer for sale            IDSs and $            aggregate principal amount of separate notes for gross proceeds of $            and net proceeds of $            , after deducting underwriters' fees and transaction expenses which are currently estimated at $            . These IDSs will represent            shares of our Class A common stock and $            of notes, bearing interest at            %, assuming the underwriters do not exercise their over-allotment option for the IDSs.

(b)
The conversion of shares of our existing common stock into cash, IDSs and shares of our Class B common stock in the recapitalization.

We expect to exchange all of our outstanding shares of common stock for $            of cash, using proceeds from the public offering, plus IDSs and shares of Class B common stock.

After the second anniversary of the recapitalization and subject to satisfaction of certain conditions, each share of Class B common stock may be converted at the option of the holder into

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    either one IDS or, if the IDSs have automatically separated or are otherwise not outstanding at the time of such conversion, one share of Class A common stock and a note having a principal amount equal to the note which was represented by each IDS. In addition, at any time on or after the third anniversary of the recapitalization, we will have the option to force conversion of all of the shares of Class B common stock into IDSs on the same terms and subject to the same conditions referred to above. Accordingly, the portion of the Class B common stock exchangeable into senior subordinated debt may be classified as either long-term debt or mezzanine equity. Currently we are presenting this Class B common stock as mezzanine equity.

(c)
The amendment of our existing revolving credit facility.

We expect to amend our existing revolving credit facility of $            and to incur debt issuance costs of $            in securing the amendment, which we intend to pay with proceeds from the public offering and cash on hand. The new revolving credit facility is expected to have a term of    years. The undrawn revolving line of credit, if used, is expected to bear interest at            . To the extent the revolving line of credit remains undrawn, we expect to incur a commitment fee of            % per year.

(d)
The repurchase in full of all outstanding 9.5% senior subordinated notes due 2009.

We intend to use $            of the expected net proceeds from the public offering to repay and retire in full the $            outstanding under our 9.5% senior subordinated notes due 2009 together with $            of accrued interest at March 5, 2004 and a call premium of $            through the tender offer and, if required, redemption. We also expect to write-off the deferred financing costs associated with the early extinguishment of the existing senior subordinated notes due 2009, which were $            , respectively, at March 5, 2004.

(e)
The pre-funding of CMBS loan amortization and interest payments.

We intend to use $            of the expected net proceeds from the public offering to pre-fund $            in amortization payments and $            interest payments under the CMBS loan.

Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Fiscal Year Ended May 30, 2003

        The unaudited pro forma condensed consolidated statement of operations for the fiscal year ended May 30, 2003 has been prepared to reflect the following adjustments as if the public offering and the recapitalization had occurred on June 1, 2002. Only results from continuing operations are depicted. Actual amounts could vary from these pro forma adjustments.

(f)
Represents the elimination of historical interest costs associated with debt to be extinguished as a result of the transactions described in Note (d) and Note (e), or extinguished in previous financing transactions completed during fiscal year 2003.

(g)
Represents the addition of the interest costs associated with the amended revolving credit facility as discussed in Note (c) and the interest costs associated with the notes forming part of the IDSs and the separate notes as discussed in Note (a) and Note (b).

        The unaudited pro forma condensed consolidated statement of operations has not been adjusted to reflect the following because they are non-recurring:

    the write-off of deferred financing costs associated with the debt to be extinguished early, as described in Note (d), which totaled $            at March 5, 2004;

    the estimated premiums associated with the repayment of our 9.5% senior subordinated notes due 2009 as described in Note (d) which we estimate will total $            .

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Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Forty Weeks Ended March 5, 2004

        The unaudited pro forma condensed consolidated statement of operations for the forty weeks ended March 5, 2004 has been prepared to reflect the following adjustments as if the public offering and the recapitalization had occurred on June 1, 2003. Only results from continuing operations are depicted. Actual amounts could vary from these pro forma adjustments.

(h)
Represents the elimination of historical interest costs associated with debt to be extinguished as a result of the transactions described in Note (d), or extinguished in previous financing transactions completed during fiscal year 2003 and the forty weeks ended March 5, 2004.

(i)
Represents the addition of the interest costs associated with the amended revolving credit facility as discussed in Note (c) and the interest costs associated with the notes forming part of the IDSs and the separate notes as discussed in Note (a) and Note (b).

        The unaudited pro forma condensed consolidated statement of operations has not been adjusted to reflect the following because they are non-recurring:

    the write-off of deferred financing costs associated with the debt to be extinguished early, as described in Note (d), which totaled $            at March 5, 2004;

    the estimated premiums associated with the repayment of our 9.5% senior subordinated notes due 2009 as described in Note (d) which we estimate will total $            .

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

        You should read the following discussion in conjunction with "Selected Historical Consolidated Financial and Other Data" and the consolidated financial statements and the related notes presented beginning on Page F-1 of this proxy statement/prospectus. We utilize a financial reporting schedule comprised of 13 four-week periods and our fiscal year ends on the Friday closest to May 31. The information presented refers to the 52 weeks ended June 1, 2001 as "fiscal year 2001," the 52 weeks ended May 31, 2002 as "fiscal year 2002" and the 52 weeks ended May 30, 2003 as "fiscal year 2003." Our first fiscal quarter is comprised of 16 weeks, while the remaining quarters are each comprised of 12 weeks.

Overview

        We are the nation's leading for-profit provider of early childhood education and care services based on number of centers and licensed capacity. We provide services to infants and children up to 12 years of age, with a majority of the children from the ages of six weeks to five years old. At March 5, 2004, licensed capacity at our centers was approximately 166,000, and we served approximately 126,000 children and their families at 1,245 child care centers. We distinguish ourselves by providing high quality educational programs, a professional, and well-trained staff and clean, safe and attractive facilities. We focus on the development of the whole child: physically, socially, emotionally, cognitively and linguistically. In addition to our primary business of center-based child care, we also own and operate a distance learning company serving teenagers and young adults through our subsidiary, KC Distance Learning, Inc.

Net Revenues

        We derive our net revenues primarily from the tuition we charge for attendance by children at our centers. Our tuition rates and net revenues can be significantly impacted by enrollment levels and factors affecting the enrollment mix at our centers. These factors include (i) enrollment levels by geographic location because we can command higher tuition rates in certain geographic areas like the northeast; (ii) the age mix of children enrolled because our tuition rates depend on the age of the child and are generally higher for younger children; (iii) the mix between full- and part-time attendance because we charge a premium rate for part-time enrollment and (iv) the level of participation in discount programs. Recently, net revenue growth has primarily resulted from the addition of new centers through internal development and acquisitions, and to a lesser extent due to increased tuition charges and expanded programs at existing centers.

        Tuition charges from our child care centers represent the majority of our net revenues. We collect tuition on a weekly basis in advance. The majority of our tuition is paid by individual families. Approximately 20% is paid at varying levels of subsidy by government agencies. In our employer-sponsored centers, tuition may be partly subsidized by the employers. We provide certain discounts to families, government agencies and employees. These include discounts with respect to government agency reimbursed rates, staff discounts, family discounts for multiple enrollments, marketing discounts for referrals or trial periods and employer-based discounts.

        Over the past several years, we have pursued a strategy of increasing our net revenues through enhanced center yield management. We have done so by balancing an increase in tuition rates against the gradual decline in occupancy at our centers and by expanding our fee-based service offerings. Our comparable center net revenues have grown moderately from fiscal year 2001 to fiscal year 2003 and were relatively flat during the forty weeks ended March 5, 2004. A center is included in comparable center net revenues when it has been open and operated by us for at least one year. Therefore, a center is considered comparable during the first four-week period it has prior year net revenues.

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Non-comparable net revenues include those generated from centers that have been closed and from our distance learning services.

        We determine tuition rates based upon a number of factors, including the age of the child, full- or part-time attendance, enrollment levels, location and competition. Tuition rates are typically adjusted company-wide each year to coincide with the back-to-school periods. However, we may adjust individual classroom rates within a specific center at any time based on competitive position, occupancy levels and demand. In order to maximize enrollment, center directors may also adjust the rates at their center or offer discounts at their discretion, within limits. These rate discounts and adjustments are closely monitored by our field and corporate management. Our focus on pricing at the classroom level within our centers has enabled us to improve comparable center net revenue growth throughout the year without losing occupancy in centers where the quality of our services, demand and other market conditions support such increases. We believe that our reputation, brand awareness, educational offerings and focus on developing centers in growing and comparatively more affluent regions of the United States are some of the primary reasons we have been able to charge premium tuition rates.

        We calculate an average weekly tuition rate as the actual tuition charged, net of discounts, for a specified time period, divided by "full-time equivalent," or FTE, attendance for the related time period. FTE attendance is not a strict head count. Rather, the methodology determines an approximate number of full-time children based on weighted averages. For example, an enrolled full-time child equates to one FTE, while a part-time child enrolled for five half-days equates to 0.5 FTE. The FTE measurement of center capacity utilization does not necessarily reflect the actual number of full- and part-time children enrolled.

        The average weekly tuition rate has risen primarily due to the annual tuition rate increases we have instituted as well as the classroom specific tiered rates we have implemented. Although we have increased rates, in most cases our families experience lower tuition charges over time. This is due to the fact that within a specific center, the highest pricing levels exist in the infant program and the lowest pricing is charged in our school age offerings, as a result of the higher care requirements of younger children. The average weekly tuition rate is also impacted by shifts in enrollment within various geographic markets, enrollment mix between age segments, enrollment mix between full- and part-time attendance, participation levels within discount programs and the opening of new centers in markets that support rates at levels higher than our company average. Average tuition is also affected by regional concentrations, which may represent markets with significantly different tuition levels.

        Occupancy is a measure of the utilization of center capacity. We calculate occupancy as the FTE attendance divided by the sum of the center's licensed capacity during the related time period. We have experienced declines in our occupancy levels in recent years. We believe the factors contributing to these declines include reduced or flat government funding for child care assistance programs, increased unemployment rates and job losses and the general economic downturn. Our licensed capacity has increased from 162,000 at the end of fiscal year 2001 to 166,000 at March 5, 2004 due to new center openings and acquisitions. Typically, our new centers open with lower occupancy than our pre-existing center base.

        In addition to our tuition charges, we record revenues from fees and other income. We charge a reservation fee, typically at half of the normal tuition charge, for any full week that an enrolled child is absent from our centers. We also collect registration fees and fees to cover educational supplies at the time of enrollment and annually thereafter. We offer tutorial programs on a supplemental fee basis in the majority of our centers in the areas of literacy and reading, foreign language and mathematics. We also offer field trips, predominantly during the summer months, for an additional charge. Our child care centers earn other income from various sources, including management fees related to certain employer-sponsored contracts. In addition to our child care operations, our subsidiary, KC Distance

101



Learning, sells high school level courses via online and correspondence formats and provides related instructional services directly to private students, as well as to schools and school districts.

Seasonality

        New enrollments are generally highest during the traditional fall "back to school" period and after the calendar year-end holidays. Therefore, we attempt to focus our marketing efforts to support these periods of high re-enrollments. Enrollment generally decreases 5% to 10% during the summer months and calendar year-end holidays.

New Center Openings, Acquisitions and Center Closures

        We intend to continue to open 15 to 30 new centers each year. In addition, we will make selective acquisitions of existing high quality centers. We also continually evaluate our centers and close those, typically older, centers that are not generating positive cash flow. During the periods indicated, we opened, acquired and closed centers as follows:

 
  Fiscal Year Ended
  Forty Weeks Ended
 
 
  June 1, 2001
  May 31, 2002
  May 30, 2003
  March 7, 2003
  March 5, 2004
 
Number of centers at the beginning of the period   1,169   1,242   1,264   1,264   1,264  
Openings   44   35   28   24   12  
Acquisitions   75         1  
Closures   (46 ) (13 ) (28 ) (24 ) (32 )
   
 
 
 
 
 
  Number of centers at the end of the period   1,242   1,264   1,264   1,264   1,245  
   
 
 
 
 
 
Total center licensed capacity at the end of the period   162,000   166,000   167,000   167,000   166,000  

Operating Expenses

        Our operating expenses include the direct costs related to the operations of our centers, as well as the costs associated with the field and corporate oversight of such centers. Our large, nationwide customer base gives us the ability to spread the costs of programs and services, such as curriculum development, training programs and other management processes over a large number of centers.

        Labor related costs are the largest component of operating expenses. We have been successful in managing our labor productivity without impacting the quality of services within our centers. Other costs incurred at the center level include insurance, janitorial, maintenance, utilities, transportation, provision for doubtful accounts, food and marketing. While we generally have seen gradual rises in our expenses, our largest increase in expense has come from the recent renewals of our insurance policies due to the higher premiums that resulted from the terrorist attacks on September 11, 2001 and the subsequent expiration of a set of three-year fixed premium policies. We anticipate that these costs will remain at their current levels or may increase further.

        Other significant components of our cost structure include depreciation and rent. We have experienced increases in our rent expense primarily due to an active sale-leaseback program in which we sell our centers to unaffiliated third parties and lease them back. We then redeploy the proceeds to buy and develop additional sites for our child care centers, or to reduce debt levels. We have an active inventory of our properties available for sale and plan to continue our sale-leaseback program for as long as there is investor interest.

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Application of Critical Accounting Policies

        Critical Accounting Estimates.    The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that management make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Predicting future events is inherently an imprecise activity and as such requires the use of judgment. Actual results may vary from estimates in amounts that may be material to the financial statements.

        For a description of our significant accounting policies, see note 2 to the audited consolidated financial statements included with this proxy statement/prospectus. The following accounting estimates and related policies are considered critical to the preparation of our financial statements due to the business judgment and estimation processes involved in their application. Management has reviewed the development and selection of these estimates and their related disclosure with the Audit Committee of the Board of Directors.

        Revenue recognition.    The recognition of our net revenues meets the following criteria: the existence of an arrangement, the rendering of services, a determinable fee and probable collection. Tuition revenues, net of discounts, and other revenues are recognized as services are performed. Payments may be received in advance of services being rendered, in which case the revenue is deferred and recognized during the appropriate time period, typically a week. Our non-refundable registration and education fees are amortized over the average enrollment period, not to exceed one year.

        Accounts receivable.    Our accounts receivable are comprised primarily of tuition due from governmental agencies, parents and employers. Accounts receivable are presented at estimated net realizable value. We use estimates in determining the collectibility of our accounts receivable and must rely on our evaluation of historical experience, governmental funding levels, specific customer issues and current economic trends to arrive at appropriate allowance. Material differences may result in the amount and timing of bad debt expense if actual experience differs significantly from management estimates.

        Long-lived and intangible assets.    We assess the potential impairment of property and equipment and finite-lived intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An asset's value is impaired if our estimate of the aggregate future cash flows, undiscounted and without interest charges, to be generated by the asset is less than the carrying value of the asset. Such cash flows consider factors such as expected future operating income and historical trends, as well as the effects of demand and competition. To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount of the asset over its fair value. Such estimates require the use of judgment and numerous subjective assumptions, which, if actual experience varies, could result in material differences in the requirements for impairment charges. Impairment charges, which were included as a component of depreciation expense, were as follows, in thousands:

 
  Fiscal Year Ended
  Forty Weeks Ended
 
  June 1,
2001

  May 31,
2002

  May 30,
2003

  March 7,
2003

  March 5,
2004

Impairment charges included in depreciation expense   $ 1,026   $ 2,968   $ 1,395   $ 280   $ 1,137
Impairment charges included in discontinued operations     23     597     1,951     999     145
   
 
 
 
 
Total impairment charges   $ 1,049   $ 3,565   $ 3,346   $ 1,279   $ 1,282
   
 
 
 
 

        Investments.    Investments, wherein we do not exert significant influence or own over 20% of the investee's stock, are accounted for under the cost method. We measure the fair values of these investments annually, or more frequently if there is an indication of impairment, using multiples of comparable companies and discounted cash flow analysis. During fiscal years 2002 and 2003, we wrote

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down a minority investment by $2.3 million and $6.7 million, respectively, due to a reduced valuation on the subject company and dilution of our minority interest. During the forty weeks ended March 5, 2004, we received a $0.7 million dividend payment from a minority investment accounted for under the cost method. We recognized investment income of $0.5 million for our proportionate share of accumulated earnings since the date of the initial investment and $0.2 million was recorded as a return of investment in the subject company.

        Self-insurance obligations.    We self-insure a portion of our general liability, workers' compensation, auto, property and employee medical insurance programs. We purchase stop loss coverage at varying levels in order to mitigate our potential future losses. The nature of these liabilities, which may not fully manifest themselves for several years, requires significant judgment. We estimate the obligations for liabilities incurred but not yet reported or paid based on available claims data and historical trends and experience, as well as future projections of ultimate losses, expenses, premiums and administrative costs. The accrued obligations for these self-insurance programs were $45.1 million and $53.7 million at May 30, 2003 and March 5, 2004, respectively. Our internal estimates are reviewed throughout the fiscal year 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 adverse effect on our consolidated financial statements.

        Accounting Treatment for IDSs and Class B Common Stock.    Our IDS units include Class A common stock, the notes representing senior subordinated debt and three embedded derivative features that may require bifurcation under Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted. The embedded derivative features include a call option, a change of control put option, and a term-extending option on the notes. Upon completion of this offering, proceeds from the issuance of the IDSs will be allocated, based upon relative fair value, to Class A common stock and the notes. If it is determined at the time of issuance that any of the embedded derivatives are required to be bifurcated and separately accounted for, a portion of the proceeds from the original issuance will also be allocated to these derivatives equal to the combined fair value of the embedded derivatives that require bifurcation. If a portion of the initial proceeds is allocated to any of the derivatives, the notes will initially be recorded at a premium or discount and accreted or amortized to their redemption value using the effective interest method. Any such allocation will not affect the tax treatment of the IDSs.

        The Class A common stock portion of the IDS unit will be included in stockholders' equity, net of related transaction costs, and dividends paid on the Class A common stock will be recorded as a reduction to retained earnings when declared by us. The note portion of the IDS unit will be included in long-term debt, and the related transaction costs will be capitalized as deferred financing costs and amortized to interest expense using the effective interest method. Interest on the notes will be charged to expense as accrued by us. The bifurcated derivatives will be recorded as an asset or a liability and will be marked to market with changes in fair value being recorded in earnings. We intend to determine the fair value of the Class A common stock, the notes and embedded derivatives through the sale of the separate notes with the same terms that are part of this offering.

        In connection with the merger and recapitalization, we will issue shares of Class B common stock to some current stockholders, which shares may, subject to certain conditions and after two years, be exchanged for IDSs. The dividend rate on each share of Class B common stock will equal    multiplied by the dividend rate on each share of Class A common stock. We cannot declare dividends on our Class A common stock unless at such time the corresponding proportionate dividend is declared on our Class B common stock.

        After the second anniversary of this offering and subject to satisfaction of certain conditions, each share of Class B common stock may be converted at the option of the holder into either one IDS or, if the IDSs have automatically separated or are otherwise not outstanding at the time of such conversion, one share of Class A common stock and a note having a principal amount equal to the note which was

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represented by each IDS. Accordingly, at the date of issuance of the Class B common stock, based on relative fair values, a pro rata portion of the Class B common stock convertible into notes will be classified as mezzanine equity and the pro rata portion convertible into Class A common stock will be classified as permanent equity. If it is determined at the time of issuance that the embedded conversion option is required to be bifurcated and separately accounted for, a portion of the fair market value of the Class B common stock will also be allocated to this derivative. If a portion of the fair value at the time of issuance is allocated to the derivative, the amount recorded as mezzanine equity will initially be recorded at a discount or premium and accreted or amortized to the redemption value using the effective interest method. The bifurcated derivative will be recorded as an asset or a liability and will be marked to market with changes in fair value being recorded in the statement of operations.

        At the time the holder exercises its conversion right, the portion of the Class B common stock included as mezzanine equity will be reclassified to debt and the associated interest payments will be included in interest expense on the statement of operations.

        In connection with the merger and recapitalization, management will receive a combination of cash and IDSs or Class B common stock in exchange for certain of their outstanding shares and stock options. The resulting compensation expense will be based upon the fair value of the IDSs or Class B common stock received by management at the date of exchange.

        Income taxes.    Accounting for income taxes requires us to estimate our future tax liabilities. Due to timing differences in the recognition of items included in income for accounting and tax purposes, deferred tax assets or liabilities are recorded to reflect the impact arising from these differences on future tax payments. With respect to recorded tax assets, we assess the likelihood that the asset will be realized. If realization is in doubt because of uncertainty regarding future profitability or enacted tax rates, we provide a valuation allowance related to the asset. Should any significant changes in the tax law or our estimate of the necessary valuation allowance occur, we would be required to record the impact of the change. This could have a material effect on our financial position or results of operations. In the third quarter of fiscal year 2004, our effective tax rate increased to 43.5% compared to 39.6% for the same period in fiscal year 2003 due, in part, to the expiration of the Work Opportunity Tax Credit as of December 31, 2003.

        Income taxes payable with respect to any fiscal year are subject to adjustment at any time until the tax returns are audited or the statute of limitations for the fiscal year closes. We maintain contingency accruals for potential adjustments that may arise after our tax returns have been filed. We believe that an appropriate liability has been established for potential tax exposure; however, actual results may differ materially from these potential contingency accruals. At March 5, 2004, we were subject to income tax audits for fiscal years 1998, 1999, and 2000. To the extent the adjustments arising from this audit, or other potential events, result in a material adjustment to the accrued estimates, the effect would be recognized in income tax expense (benefit) in the consolidated statement of operations in the period of the event.

        We intend to account for our issuance of the IDS units in this offering as representing shares of Class A common stock and notes by allocating the proceeds for each IDS unit to the underlying Class A common stock or note based upon the relative fair values of each. Accordingly, we will account for the portion of the aggregate IDSs outstanding that represents notes as long-term debt bearing a stated interest rate of      % maturing on            , 2014. We have concluded that it is appropriate, and we intend to annually deduct interest expense of approximately $                              on the notes from taxable income for U.S. federal and state income tax purposes. We cannot assure you that the IRS or the courts will not seek to challenge the treatment of these notes as debt or the amount of interest expense deducted, although to date we have not been notified that the notes should be treated as equity rather than debt for U.S. federal and state income tax purposes. If the cumulative interest expense associated with the notes were determined to be not deductible, in whole or in part, from taxable income, we would be required to recognize additional tax expense and establish a related

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income tax liability. In addition, we could be subject to interest and penalties in relation to any disallowance of the interest expense deduction. The additional tax and interest due to the federal and state authorities would be based on our taxable income or loss for each of the years that we take the interest expense deduction and would materially reduce our after tax cash flow and materially affect our ability to make interest or dividend payments on the IDS units. We do not currently intend to record a liability for a potential disallowance of this interest expense deduction. In addition, characterization by the IRS of the disallowed interest as a dividend could subject non-U.S. holders to incremental withholding taxes to the extent that the U.S. withholding tax on dividends exceeds the withholding tax on interest. The incremental withholding taxes could subject us to additional liability since we would not be able to collect the incremental tax from the non-U.S. holders.

        The determination of whether the portion of the IDS represented by the notes is appropriately classified as debt or equity for U.S. federal income tax purposes is based on all of the facts and circumstances. There is no statutory definition of indebtedness for U.S. federal and state income tax purposes and its characterization is governed by principles developed in case law, which analyzes numerous factors that are intended to identify the economic substance of an investor's interest in the company. While the IRS has not published an exhaustive list of relevant items, principal factors often cited include the intent of the parties, whether the instrument in question is an unconditional obligation to pay a sum certain at a maturity date that is not unduly far in the future and whether the instrument has significant equity-like characteristics, such as convertibility into our stock, participation rights, voting power, subordination to other creditors and proportionate ownership by equity holders.

        See "Special Factors—Material U.S. Federal Income Tax Considerations—Consequences to U.S. Holders—Notes" for further details.

Initial Adoption of Accounting Policies

        SFAS No. 149, Amendments of Statement 133 on Derivative Instruments and Hedging Activities, amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149 was adopted for contracts entered into or modified and for hedging relationships designated after June 30, 2003. This adoption did not have a material impact on our consolidated financial statements.

        SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The statement requires that an issuer classify a financial instrument that is within its scope as a liability, or an asset in some circumstances. SFAS No. 150 was effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective in the second quarter of our fiscal year 2004. This statement did not have a material impact on our consolidated financial statements. While SFAS No. 150 did not have a material impact on our existing financial instruments, it is reasonably possible that certain equity instruments issued in future periods will include features that require those instruments, or portions of those instruments, to be treated as debt in our consolidated financial statements.

Recently Issued Accounting Pronouncements

        Financial Accounting Standards Board Interpretation, or FIN, 46, Consolidation of Variable Interest Entities, as amended by FIN 46R, requires consolidation where there is a controlling financial interest in a variable interest entity, previously referred to as a special-purpose entity, and certain other entities. The implementation of FIN 46R has been delayed and will be effective during the fourth quarter of our fiscal year 2004. We do not anticipate an impact to our consolidated financial statements.

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Results of Operations

Forty Weeks ended March 7, 2003 compared to Forty Weeks ended March 5, 2004

        The following table shows the comparative operating results of KinderCare, in thousands, except the average weekly tuition rate:

 
  Forty Weeks Ended March 7, 2003
  Percent of Revenues
  Forty Weeks Ended March 5, 2004
  Percent of Revenues
  Change Amount Increase/
(Decrease)

 
Revenues, net   $ 635,097   100.0 % $ 649,105   100.0 % $ 14,008  
   
 
 
 
 
 
Operating expenses:                            
  Salaries, wages and benefits:                            
    Center expense     329,232   51.9     330,893   51.0     1,661  
    Field and corporate expense     26,114   4.1     27,987   4.3     1,873  
   
 
 
 
 
 
      Total salaries, wages and benefits     355,346   56.0     358,880   55.3     3,534  
  Depreciation and amortization     42,997   6.8     46,153   7.1     3,156  
  Rent     39,514   6.2     41,709   6.4     2,195  
  Other     147,442   23.2     153,171   23.6     5,729  
   
 
 
 
 
 
      Total operating expenses     585,299   92.2     599,913   92.4     14,614  
   
 
 
 
 
 
    Operating income   $ 49,798   7.8 % $ 49,192   7.6 % $ (606 )
   
 
 
 
 
 

Average weekly tuition rate

 

$

143.85

 

 

 

$

152.04

 

 

 

$

8.19

 
Occupancy     62.5 %       59.3 %       (3.2 )
Comparable center net revenue growth     1.3 %       0.0 %       (1.3 )

        Revenues, net.    Net revenues increased $14.0 million, or 2.2%, from the same period last year to $649.1 million in the forty weeks ended March 5, 2004. The increase was due to higher average weekly tuition rates, offset by reduced occupancy, as well as additional net revenues generated by the newly opened centers. Comparable center net revenues decreased $0.2 million.

        The average weekly tuition rate increased $8.19 or 5.7%, from the same period last year to $152.04 in the forty weeks ended March 5, 2004 due primarily to tuition increases. Occupancy declined to 59.3% from 62.5% for the same period last year due primarily to reduced full-time equivalent attendance within the population of older centers. We believe the factors contributing to this decline include reduced or flat government funding for child care assistance programs, increased unemployment rates and job losses and the general economic downturn.

        During the periods indicated, we opened, acquired and closed centers as follows:

 
  Forty Weeks Ended
 
 
  March 7, 2003
  March 5, 2004
 
Number of centers at the beginning of the period   1,264   1,264  
Openings   24   12  
Acquisitions     1  
Closures   (24 ) (32 )
   
 
 
  Number of centers at the end of the period   1,264   1,245  
   
 
 
Total center licensed capacity at the end of the period   167,000   166,000  

        Salaries, wages and benefits.    Expenses for salaries, wages and benefits increased $3.5 million, from the same period last year to $358.9 million. Total salaries, wages and benefits expense as a percentage

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of net revenues was 56.0% and 55.3% for the forty weeks ended March 7, 2003 and March 5, 2004, respectively.

        Expenses for salaries, wages and benefits directly associated with the centers was $330.9 million, an increase of $1.7 million from the same period last year. The increase was primarily due to costs from newly opened centers and overall higher wage rates, offset by control over labor hours and a reduction in medical insurance costs. See "—Wage Increases." At the center level, salaries, wages and benefits expense as a percentage of net revenues declined to 51.0% from 51.9% for the same period last year due primarily to improved labor productivity and a reduction in medical insurance costs. Expense for salaries, wages and benefits associated with field and corporate employees increased $1.9 million, due primarily to $1.5 million additional management bonus expense, which was the result of recognizing the expense earlier this fiscal year compared to the prior year. This earlier recognition was due to the timing of our financial performance to date compared to the same period last year. Our annual management bonus expense is not expected to be materially higher than the prior year.

        Depreciation and amortization.    Depreciation and amortization expense increased $3.2 million from the same period last year to $46.2 million. Significant changes in depreciation expense included the impact of purchasing centers previously included in our synthetic lease facility, our sale-leaseback program, whereby centers are classified as operating leases when they are sold and leased back and impairment charges. These changes were as follows, in thousands:

Depreciation for centers previously included in the synthetic lease facility   $ 2,929  
Change in impairment charges     857  
Impact of the centers sold in the sale-leaseback program     (1,585 )
Other     955  
   
 
  Increase in depreciation and amortization expense   $ 3,156  
   
 

        Impairment charges of $0.3 million and $1.1 million in the forty weeks ended March 7, 2003 and March 5, 2004, respectively, related to underperforming centers and certain undeveloped properties.

        Rent.    Rent expense increased $2.2 million from the same period last year to $41.7 million. The most significant changes in the rent expense included the impact of our sale-leaseback program and centers previously included in our synthetic lease facility. In addition, the rental rates experienced on new and renewed center leases are higher than those experienced in previous fiscal periods. The changes were as follows, in thousands:

Impact of centers leased under the sale-leaseback program   $ 5,095  
Amortization of deferred gains on sale-leaseback transactions     (1,638 )
Rent expense for centers previously included in the synthetic lease facility     (2,449 )
Other     1,187  
   
 
  Increase in rent expense   $ 2,195  
   
 

        Other operating expenses.    Other operating expenses include costs directly associated with the centers, such as food, insurance, transportation, janitorial, maintenance, utilities, property taxes and licenses and marketing costs, and expenses related to field management and corporate administration. Other operating expenses increased $5.7 million, or 3.9%, from the same period last year to $153.2 million. The increase was due primarily to $4.4 million of increased insurance costs and additional center level costs for newly opened centers. Other operating expenses as a percentage of net revenues increased to 23.6% from 23.2% for the same period last year primarily as a result of the higher insurance costs.

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        Operating income.    Operating income was $49.2 million, a decrease of $0.6 million, or 1.2%, from the same period last year. Operating income decreased due to $1.6 million of higher insurance costs, which included a reduction in medical insurance of $2.8 million, and $3.5 million of increased rent expense from sale-leasebacks, offset by higher tuition rates and control over labor productivity. Operating income as a percentage of net revenues was 7.6% compared to 7.8% for the same period last year.

        Investment income.    During the forty weeks ended March 5, 2004, we received a dividend payment of $0.7 million from a minority investment accounted for under the cost method. Investment income of $0.5 million was recognized to the extent of our proportionate share of accumulated earnings since the date of the initial investment. In accordance with APB No. 18, The Equity Method of Accounting for Investments in Common Stock, the remaining $0.2 million was recorded as a return of investment in the subject company.

        Interest expense.    Interest expense was $31.6 million for the forty weeks ended March 5, 2004, a decrease of $0.2 million from the same period last year. Our weighted average interest rate on our long-term debt, including amortization of deferred financing costs, but excluding the write-off discussed below, was 7.8% and 7.0% for the forty weeks ended March 7, 2003 and March 5, 2004 respectively.

        Loss on the early extinguishment of debt.    As a result of our debt refinancing in July 2003 and the acquisition and redemption of a portion of our 9.5% senior subordinated notes, we recognized a loss on the early extinguishment of debt of $5.2 million in the forty weeks ended March 5, 2004. These costs included the write-off of deferred financing costs of $3.6 million associated with the debt that was repaid and the incurrence of premium costs of $1.6 million in connection with the acquisition and redemption of a portion of our 9.5% senior subordinated notes. In the forty weeks ended March 5, 2004, we purchased $56.3 million and redeemed $39.3 million aggregate principal amount of our 9.5% senior subordinated notes.

        Income tax expense.    Income tax expense was $7.2 million, or 39.6% of pretax income, and $5.6 million, or 42.7% of pretax income, in the forty weeks ended March 7, 2003 and March 5, 2004, respectively. Income tax expense was computed by applying estimated effective income tax rates to the income or loss before income taxes. Income tax expense varies from the statutory federal income tax rate due primarily to state income taxes and non-tax deductible expenses, offset by tax credits. The increase in the effective tax rate for the forty weeks ended March 5, 2004 was due, in part, to the expiration of the Work Opportunity Tax Credit as of December 31, 2003.

        Discontinued operations.    We recognized losses of $1.0 million and $1.1 million on discontinued operations in the forty weeks ended March 7, 2003 and March 5, 2004, respectively, which represents the operating results, net of tax, for all periods presented of the 60 centers closed during fiscal year

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2003 and the forty weeks ended March 5, 2004. Discontinued operations included the following, in thousands:

 
  Forty Weeks Ended
 
 
  March 7, 2003
  March 5, 2004
 
Revenues, net   $ 13,010   $ 3,684  
   
 
 
Operating expenses:              
  Salaries, wages and benefits     8,506     2,853  
  Depreciation     1,991     1,275  
  Rent     1,323     322  
  Provision for doubtful accounts     280     118  
  Other     2,484     1,102  
   
 
 
Total operating expenses     14,584     5,670  
   
 
 
  Operating loss     (1,574 )   (1,986 )
Interest expense     (1 )    
Income tax benefit     623     848  
   
 
 
  Discontinued operations, net of tax   $ (952 ) $ (1,138 )
   
 
 

        Depreciation expense for the forty weeks ended March 7, 2003 and March 5, 2004 included $1.0 million and $0.1 million of impairment charges, respectively. Other operating expenses included gains on closed center sales of $1.2 million and $0.6 million in the forty weeks ended March 7, 2003 and March 5, 2004, respectively.

Fiscal Year 2002 compared to Fiscal Year 2003

        The following table shows the comparative operating results of KinderCare, in thousands, except the average weekly tuition rate:

 
  Fiscal Year Ended
   
 
 
  May 31, 2002
  Percent of Revenues
  May 30, 2003
  Percent of Revenues
  Change Amount Increases/
(Decrease)

 
Revenues, net   $ 806,746   100.0 % $ 838,584   100.0 % $ 31,838  
   
 
 
 
 
 
Operating expenses:                            
  Salaries, wages and benefits:                            
    Center expense     414,605   51.4     427,600   51.0     12,995  
    Field and corporate expense     31,943   4.0     34,761   4.1     2,818  
   
 
 
 
 
 
      Total salaries, wages and benefits     446,548   55.4     462,361   55.1     15,813  
   
 
 
 
 
 
  Depreciation and amortization     57,533   7.1     57,284   6.9     (249 )
  Rent     46,910   5.8     51,770   6.2     4,860  
  Other     181,592   22.5     194,755   23.2     13,163  
   
 
 
 
 
 
      Total operating expenses     732,583   90.8     766,170   91.4     33,587  
   
 
 
 
 
 
Operating income   $ 74,163   9.2 % $ 72,414   8.6 % $ (1,749 )
   
 
 
 
 
 
Average weekly tuition rate   $ 137.72       $ 144.45       $ 6.73  
Occupancy     65.6 %       63.3 %       (2.3 )
Comparable center net revenue growth     1.1 %       1.4 %       0.3  

        Revenues, net.    Net revenues increased $31.8 million, or 3.9%, in fiscal year 2003 compared to fiscal year 2002 to $838.6 million. The increase was due to higher average weekly tuition rates as well

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as additional net revenues generated by newly opened centers. Comparable center net revenues increased $11.4 million, or 1.4%.

        The average weekly tuition rate increased $6.73, or 4.9%, to $144.45 in fiscal year 2003, due primarily to tuition increases. Occupancy declined to 63.3% from 65.6% in fiscal year 2002 primarily due to reduced full-time equivalent attendance within the population of older centers.

        During fiscal years 2002 and 2003, we opened and closed centers as follows:

 
  Fiscal Year Ended
 
 
  May 31, 2002
  May 30, 2003
 
Number of centers at the beginning of the fiscal year   1,242   1,264  
Openings   35   28  
Closures   (13 ) (28 )
   
 
 
  Number of centers at the end of the fiscal year   1,264   1,264  
   
 
 
Total center licensed capacity at the end of the fiscal year   166,000   167,000  

        Salaries, wages and benefits.    Expenses for salaries, wages and benefits increased $15.8 million, or 3.5%, in fiscal year 2003 compared to fiscal year 2002 to $462.4 million. Total salaries, wages and benefits expense as a percentage of net revenues was 55.4% and 55.1% for fiscal years 2002 and 2003, respectively.

        Expenses for salaries, wages and benefits expense directly associated with the centers was $427.6 million, an increase of $13.0 million in fiscal year 2003 compared to fiscal year 2002. The increase was primarily due to overall higher wage rates and higher medical insurance costs. See "—Wage Increases." At the center level, salaries, wages and benefits expense as a percentage of net revenues improved from 51.4% for fiscal year 2002 to 51.0% for fiscal year 2003. This improvement was due primarily to strong controls over the management of labor hours.

        Depreciation and amortization.    Depreciation and amortization expense decreased $0.2 million in fiscal year 2003 compared to fiscal year 2002 to $57.3 million. Significant changes in depreciation included the impact of the cessation of goodwill amortization for all of fiscal year 2003, our sale-leaseback program, whereby centers are classified as operating leases when they are sold and leased back, impairment charges and newly opened centers. These changes were as follows, in thousands:

Cessation of goodwill amortization   $ (2,934 )
Change in impairment charges     (1,573 )
Impact of the centers sold in the sale-leaseback program     (1,239 )
Impact of newly opened centers     4,503  
Other     994  
   
 
  Decrease in depreciation and amortization expense   $ (249 )
   
 

        Impairment charges of $3.0 million and $1.4 million in fiscal year 2002 and fiscal year 2003, respectively, related to underperforming centers and certain undeveloped properties.

        Rent.    Rent expense increased $4.9 million in fiscal year 2003 compared to fiscal year 2002 to $51.8 million. The most significant change in the rent expense was the impact of our sale-leaseback. In

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addition, the rental rates experienced on new and renewed center leases are higher than those experienced in previous fiscal years. The changes were as follows, in thousands:

Impact of centers leased under the sale-leaseback program   $ 4,415  
Amortization of deferred gains on sale-leaseback transactions     (1,116 )
Other     1,561  
   
 
  Increase in rent expense   $ 4,860  
   
 

        Other operating expenses.    Other operating expenses include costs directly associated with the centers, such as insurance, janitorial, maintenance, utilities, transportation, provision for doubtful accounts, food and marketing costs, and expenses relating to field management and corporate administration. Other operating expenses increased $13.2 million, or 7.2%, from fiscal year 2002 to $194.8 million in fiscal year 2003. Other operating expenses as a percentage of net revenues were 22.5% and 23.2% for fiscal years 2002 and 2003, respectively. The increase was due primarily to insurance costs that were $12.7 million higher in fiscal year 2003 compared to fiscal year 2002. The provision for doubtful accounts declined $2.3 million in fiscal year 2003 compared to fiscal year 2002. The reduction in our provision for doubtful accounts was due to the implementation of automated programming that allows us to have stronger controls over our receivables.

        Operating income.    Operating income was $72.4 million, a decrease of $1.7 million, or 2.4%, in fiscal year 2003 compared to fiscal year 2002. Operating income decreased primarily due to $13.9 million of higher insurance costs, which included an increase in medical insurance of $1.2 million, and $3.3 million of increased rent expense from sale-leasebacks, offset in part by the impact of higher tuition rates. Operating income as a percentage of net revenues was 8.6% compared to 9.2% for the same period last year.

        Interest expense.    Interest expense was $44.1 million in fiscal year 2002 compared to $41.0 million in fiscal year 2003. The decrease was substantially attributable to lower interest rates and a decrease in the principal balance on our revolving credit facility. The weighted average interest rate on our long-term debt, including amortization of deferred financing costs, was 7.8% and 8.0% for fiscal year 2002 and 2003, respectively. A larger portion of our debt was comprised of 9.5% senior subordinated notes during fiscal year 2003, which resulted in an increase in the weighted average interest rate from fiscal year 2002 compared to fiscal year 2003. See note 8 to our consolidated financial statements included elsewhere in this proxy statement/prospectus.

        Loss on minority investment.    During fiscal year 2002, we recorded a write down of $2.3 million to the net book value of a minority investment due to a reduced valuation of the subject company and the dilution of our minority interest in that investment. During fiscal year 2003, we wrote down the net book value of the same investment by $6.7 million due to a further reduced valuation. The minority investment was accounted for under the cost method. See note 2 to our consolidated financial statements included elsewhere in this proxy statement/prospectus.

        Income tax expense.    Income tax expense was $11.2 million, or 39.5% of pretax income, in fiscal year 2002 and $9.9 million, or 39.6% of pretax income, in fiscal year 2003. The slight increase in the effective tax rate was due to the relative impact of tax credits at different levels of taxable income, the impact of the cessation of goodwill amortization and an increase in expenses that were disallowed for income tax purposes. Income tax expense was computed by applying estimated effective income tax rates to income before income taxes. Income tax expense varies from the statutory federal income tax rate due primarily to state and foreign income taxes, offset by tax credits.

        Discontinued operations.    Discontinued operations resulted in losses of $0.6 million and $1.7 million in fiscal years 2002 and 2003, respectively. Discontinued operations represents the

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operating results for all periods presented of the 60 centers closed during fiscal year 2003 and the forty weeks ended March 5, 2004. Discontinued operations included the following, in thousands:

 
  Fiscal Year Ended
 
 
  May 31, 2002
  May 30, 2003
 
Revenues, net   $ 22,688   $ 15,964  
   
 
 
Operating expenses:              
  Salaries, wages and benefits     14,243     10,314  
  Depreciation     1,760     3,279  
  Rent     2,210     1,557  
  Provision for doubtful accounts     269     302  
  Other     5,242     3,403  
   
 
 
    Total operating expenses     23,724     18,855  
   
 
 
  Operating loss     (1,036 )   (2,891 )
Interest expense     (6 )   (1 )
Income tax benefit     412     1,145  
   
 
 
Discontinued operations, net of tax   $ (630 ) $ (1,747 )
   
 
 

        Depreciation expense related to discontinued operations included impairment charges of $0.6 million and $2.0 million for fiscal years 2002 and 2003, respectively. Other operating expenses related to discontinued operations included gains on closed center sales of $1.2 million in fiscal year 2003.

Fiscal Year 2001 compared to Fiscal Year 2002

        The following table shows the comparative operating results of KinderCare, in thousands, except the average weekly tuition rate:

 
  Fiscal Year Ended
   
 
 
  June 1, 2001
  Percent of Revenues
  May 31, 2002
  Percent of Revenues
  Change Amount Increases/
(Decrease)

 
Revenues, net   $ 721,076   100.0 % $ 806,746   100.0 % $ 85,670  
   
 
 
 
 
 
Operating expenses:                            
Salaries, wages and benefits:                            
  Center expense     366,301   50.8     414,605   51.4     48,304  
  Field and corporate expense     28,638   4.0     31,943   4.0     3,305  
   
 
 
 
 
 
    Total salaries, wages and benefits     394,939   54.8     446,548   55.4     51,609  
Depreciation and amortization     45,315   6.3     57,533   7.1     12,218  
Rent     37,296   5.2     46,910   5.8     9,614  
Other     169,112   23.4     181,592   22.5     12,480  
Restructuring charges (reversals)     (100 ) 0.0           100  
   
 
 
 
 
 
  Total operating expenses     646,562   89.7     732,583   90.8     86,021  
   
 
 
 
 
 
Operating income   $ 74,514   10.3 % $ 74,163   9.2 % $ (351 )
   
 
 
 
 
 
Average weekly tuition rate   $ 129.34       $ 137.72       $ 8.38  
Occupancy     68.3 %       65.6 %       (2.7 )
Comparable center net revenue growth     3.1 %       1.1 %       (2.0 )

        Revenues, net.    Net revenues increased $85.7 million, or 11.9%, to $806.7 million in fiscal year 2002. The increase was primarily due to the acquisition of the Mulberry centers in the fourth quarter of fiscal year 2001 and the additional net revenues generated by the newly opened centers. Comparable center net revenues increased $7.7 million, or 1.1%.

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        The average weekly tuition rate increased $8.38, or 6.5%, to $137.72 in fiscal year 2002 due primarily to tuition increases. Occupancy declined from 68.3% in fiscal year 2001 to 65.6% in fiscal year 2002 primarily due to reduced full-time equivalent attendance within the older center population.

        During fiscal years 2001 and 2002, we opened, acquired and closed centers as follows:

 
  Fiscal Year Ended
 
 
  June 1, 2001
  May 31, 2002
 
Number of centers at the beginning of the fiscal year   1,169   1,242  
Openings   44   35  
Acquisitions   75    
Closures   (46 ) (13 )
   
 
 
  Number of centers at the end of the fiscal year   1,242   1,242  
   
 
 
Total center licensed capacity at the end of the fiscal year   162,000   166,000  

        Salaries, wages and benefits.    Expenses for salaries, wages and benefits increased $51.6 million, or 13.1%, from fiscal year 2001 to $446.5 million. Total salaries, wages and benefits expense as a percentage of net revenues was 54.8% for fiscal year 2001 compared to 55.4% for fiscal year 2002.

        Expenses for salaries, wages and benefits expense directly associated with the centers increased $48.3 million to $414.6 million in fiscal year 2002 compared to fiscal year 2001. The increase was primarily due to costs from the acquired and newly opened centers and overall higher wage rates. At the center level, salaries, wages and benefits expense as a percentage of net revenues increased from 50.8% in fiscal year 2001 to 51.4% in fiscal year 2002 due primarily to higher medical insurance costs.

        The expense related to field management and corporate administration was $31.9 million, an increase of $3.3 million from fiscal year 2001. The increase was primarily due to the acquisition of Mulberry during the fourth quarter of fiscal year 2001. In addition, we expanded the field operations team that oversees the KinderCare centers. We reorganized the field management structure again in fiscal year 2003.

        Depreciation and amortization.    Depreciation and amortization expense increased $12.2 million from fiscal year 2001 to $57.5 million in fiscal year 2002. Significant changes in depreciation included the impact of acquisition of the Mulberry centers in the fourth quarter of fiscal year 2001, newly opened centers and impairment charges. In addition, capital spending was increased, particularly for new center development. These changes were as follows, in thousands:

Acquisition of the Mulberry centers   $ 3,406
Impact of newly opened centers     2,883
Change in impairment charges     1,942
Other     3,987
   
  Increase in depreciation and amortization expense   $ 12,218
   

        Impairment charges of $1.0 million and $3.0 million in fiscal year 2001 and fiscal year 2002, respectively, related to underperforming centers and certain undeveloped properties.

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        Rent.    Rent expense increased $9.6 million in fiscal year 2002 compared to fiscal year 2001 to $46.9 million. The most significant changes in the rent expense included the impact of the acquisition of the Mulberry centers and the impact of centers included in our synthetic lease facility. In addition, the rental rates experienced on new and renewed center leases are higher than those experienced in previous fiscal years. The changes were as follows, in thousands:

Acquisition of the Mulberry centers   $ 8,368  
Rent expense for centers previously included in the synthetic lease facility     1,868  
Other     (622 )
   
 
  Increase in rent expense   $ 9,614  
   
 

        Other operating expenses.    Other operating expenses increased $12.5 million, or 7.4%, in fiscal year 2002 compared to fiscal year 2001, to $181.6 million. The increase was due primarily to additional center level costs from the acquired and newly opened centers. Other operating expenses as a percentage of net revenues declined to 22.5% in fiscal year 2002 from 23.4% in fiscal year 2001 as a result of cost controls over variable center level and corporate expenditures.

        Operating income.    Operating income was $74.2 million, a decrease of $0.4 million, or 0.5%, in fiscal year 2002 compared to fiscal year 2001. The decreased operating income was primarily due to the $3.0 million impairment charge included in depreciation expense, higher insurance costs and rent expense. Operating income was positively impacted by the control of variable center level and corporate expenditures. Operating income as a percentage of net revenues was 10.3% in fiscal year 2001 compared to 9.2% in fiscal year 2002.

        Interest expense.    Interest expense was $48.8 million in fiscal year 2001 compared to $44.1 million in fiscal year 2002. The decrease was substantially attributable to lower interest rates, offset partially by additional borrowings. Our weighted average interest rate on our long-term debt, including amortization of deferred financing costs, was 9.7% and 7.8% for fiscal years 2001 and 2002, respectively.

        Loss on minority investment.    During the fourth quarter of fiscal year 2002, we wrote down the net book value of a minority investment. The $2.3 million write-down was due to a reduced valuation of the subject company and dilution of our minority investment. See note 2 to our consolidated financial statements included elsewhere in this proxy statement/prospectus.

        Income tax expense.    Income tax expense was $10.1 million, or 38.4% of pretax income, in fiscal year 2001 and $11.2 million, or 39.5% of pretax income, in fiscal year 2002. The increase in the effective tax rate was due to additional goodwill amortization, which is not deductible for tax purposes. Income tax expense was computed by applying estimated effective income tax rates to income before income taxes. Income tax expense varies from the statutory federal income tax rate due primarily to state and foreign income taxes, offset by tax credits.

        Discontinued operations.    Discontinued operations resulted in income of $0.3 million and a loss of $0.6 million in fiscal years 2001 and 2002, respectively. Discontinued operations represents the

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operating results for all periods presented of the 60 centers closed during fiscal year 2003 and through the forty weeks ended March 5, 2004. Discontinued operations included the following, in thousands:

 
  Fiscal Year Ended
 
 
  June 1, 2001
  May 31, 2002
 
Revenues, net   $ 22,321   $ 22,688  
   
 
 
Operating expenses:              
  Salaries, wages and benefits     13,051     14,243  
  Depreciation     1,317     1,760  
  Rent     1,944     2,210  
  Provision for doubtful accounts     272     269  
  Other     5,286     5,242  
   
 
 
    Total operating expenses     21,870     23,724  
   
 
 
  Operating income (loss)     451     (1,036 )
Interest expense     (5 )   (6 )
   
 
 
  Discontinued operations before income taxes     446     (1,042 )
Income tax (expense) benefit     (171 )   412  
   
 
 
  Discontinued operations, net of tax   $ 275   $ (630 )
   
 
 

        There was less than $0.1 million impairment charges related to discontinued operations in fiscal year 2001. Depreciation expense related to discontinued operations included impairment charges of $0.6 million for fiscal year 2002.

        We implemented Securities and Exchange Commission Staff Accounting Bulletin No. 101 with respect to non-refundable fee revenues in the first quarter of fiscal year 2001. This resulted in a one-time charge of $0.8 million, net of taxes, which was recorded as a cumulative effect of a change in accounting principle.

Liquidity and Capital Resources

Financing Activities

        In July 2003 we refinanced $279.9 million of our debt. We obtained a $125.0 million revolving credit facility, and, as described below in greater detail, one of our subsidiaries obtained a $300.0 million mortgage loan. Proceeds from the mortgage loan were used to pay off the $98.0 million balance of the then existing revolving credit facility, $47.0 million of the term loan facility and $97.9 million under the synthetic lease facility. We also used a portion of the remaining proceeds to purchase $37.0 million aggregate principal amount of our 9.5% senior subordinated notes.

        The $300.0 million mortgage loan is secured by first mortgages or deeds of trust on 475 of our owned centers located in 33 states. We refer to the mortgage loan as the CMBS loan and the 475 mortgaged centers as the CMBS centers. In connection with the CMBS loan, the CMBS centers were transferred to a newly formed wholly owned subsidiary of ours, which is the borrower under the CMBS loan and is referred to as the CMBS borrower. Because the CMBS centers are owned by the CMBS borrower and subject to the CMBS loan, recourse to the CMBS centers by our creditors will be effectively subordinated to recourse by holders of the CMBS loan.

        The CMBS loan is nonrecourse to the CMBS borrower and us, subject to customary recourse provisions, and has a maturity date of July 9, 2008, which may be extended to July 9, 2009, subject to certain conditions. The CMBS loan bears interest at a per annum rate equal to LIBOR plus 2.25% and requires monthly payments of principal and interest. For more information on the CMBS loan, see "Description of Certain Indebtedness—Mortgage Loan."

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        Our $125.0 million revolving credit facility is secured by first mortgages or deeds of trusts on 119 of our owned centers and certain other collateral and has a maturity date of July 9, 2008. The revolving credit facility includes borrowing capacity of up to $75.0 million for letters of credit and up to $10.0 million for selected short-term borrowings.

        During the forty weeks ended March 5, 2004, we repurchased and redeemed our 9.5% senior subordinated notes as follows, in thousands:

 
  Principal
  Aggregate Price
  Premium Costs
  Write-off of
Deferred
Financing Costs

  Total Loss
Notes repurchased   $ 56,300   $ 59,424   $ 925   $ 949   $ 1,874
Notes redeemed     39,277     39,931     622     741     1,363
   
 
 
 
 
  Total   $ 95,577   $ 99,355   $ 1,547   $ 1,690   $ 3,237
   
 
 
 
 

        We completed the repurchase of $11.0 million aggregate principal amount of our 9.5% senior subordinated notes at an aggregate price of $11.4 million in the first quarter of fiscal year 2004, which is included above. The premium costs and associated write-off of deferred financing costs related to this repurchase were recognized in the fourth quarter of fiscal year 2003 and were excluded from the costs above. We redeemed an additional $15.0 million aggregate principal amount of our 9.5% senior subordinated notes on March 29, 2004 at an aggregate price of $15.4 million. The redemption was funded by cash flow from operations and proceeds received from sale-leaseback transactions.

        In fiscal year 2000, we entered into a $100.0 million synthetic lease facility under which a syndicate of lenders financed the construction of new centers for lease to us for a three to five year period. A total of 44 centers were constructed at a cost of $97.9 million. The synthetic lease facility was terminated in July 2003 as part of our refinancing. The 44 centers are now owned by us and the assets are reflected in our fiscal year 2004 consolidated financial statements.

Cash Flows and Liquidity Sources

        Historically, our principal liquidity requirements were for debt service and new center development. We expect to fund our liquidity needs primarily from cash flow generated from operations, with proceeds received from our sale-leaseback program and, to the extent necessary, through borrowings under our revolving credit facility. At March 5, 2004, we had $11.0 million of borrowings outstanding under our revolving credit facility and had outstanding letters of credit totaling $55.1 million. Our availability under our revolving credit facility was $58.9 million.

        Following the completion of the transactions contemplated by this offering, our short-term and long-term liquidity needs will arise primarily from: (1) interest payments primarily related to our notes and revolving credit facility; (2) new center development expenditures, which are expected to be approximately $29.4 million in fiscal year 2004; (3) maintenance capital expenditures, which are expected to be approximately $31.4 million in fiscal year 2004; (4) working capital requirements as may be needed to support the growth of our business; (5) dividend payments on our capital stock; and (6) potential strategic acquisitions.

        Our consolidated net cash provided by operating activities for the forty weeks ended March 7, 2003 was $48.5 million compared to $59.2 million in the forty weeks ended March 5, 2004. Our consolidated net cash provided by operating activities was $87.5 million in fiscal year 2002 compared to $78.4 million in fiscal year 2003. The changes in both periods were due primarily to changes in working capital. Cash and cash equivalents totaled $34.6 million at March 5, 2004, compared to $18.1 million at May 30, 2003.

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        Our current sale-leaseback program began during the fourth quarter of fiscal year 2002. Under this initiative, we began selling centers to individual real estate investors and concurrently signing long term leases to continue operating the centers. The resulting leases have been classified as operating leases with an average lease term of 15 years, with three to four five-year renewal options. The sales were summarized as follows, in thousands:

 
  Fiscal Year Ended
   
 
  May 31, 2002
  May 30, 2003
  Forty Weeks Ended
March 5, 2004

Number of centers     5     41     29
Net proceeds from completed sales   $ 9,177   $ 88,704   $ 58,079
Deferred gains     2,599     32,507     19,786

        Our sale-leaseback program has the effect of increasing rent expense while typically reducing the depreciation and interest expense incurred to support the previously owned centers. In addition, deferred gains have generally been recognized on our sale-leaseback transactions. The deferred gains are amortized on a straight-line basis, typically over a period of 15 years, and are offset against the related rent expense. At May 30, 2003 and March 5, 2004, other noncurrent liabilities on the consolidated balance sheet included deferred gains on sale-leaseback transactions of $38.6 million and $56.5 million, respectively. Subsequent to March 5, 2004, we closed $15.2 million in sales, which included six centers, and we are currently in the process of negotiating another $69.9 million of sales related to 27 centers. We expect our sale-leaseback efforts to continue, assuming the market for such transactions remains favorable. In addition to the transactions relating to the 27 centers referred to above, we estimate that we have additional marketable inventory at April 16, 2004 of 74 centers with a market value of approximately $168.0 million.

        We believe that cash flow generated from operations, proceeds from our sale-leaseback program and borrowings under our revolving credit facility will be sufficient to fund our interest and principal payment obligations, expected capital expenditures, working capital requirements and anticipated dividend payments for the foreseeable future. Any future acquisitions, joint ventures or similar transactions may require additional capital, which may be financed through borrowings under our revolving credit facility, issuances of additional IDSs, notes or other securities of ours, net cash provided by operating activities, other third party financing or a combination of these alternatives, and such capital may not be available to us on acceptable terms or at all. Although we cannot assure you that such sources of capital will be sufficient, the capital expenditure program has substantial flexibility and is subject to revision based on various factors, including but not limited to, business conditions, cash flow requirements, debt covenants, competitive factors and seasonality of openings. If we experience a lack of working capital, it may reduce our future capital expenditures. If these expenditures were substantially reduced, our operations and cash flow would be adversely impacted.

Capital Expenditures

        During the forty weeks ended March 7, 2003 and March 5, 2004, we opened 24 and 12 new centers, respectively. In addition, we completed the acquisition of one center in the forty weeks ended March 5, 2004. We expect to open 17 new centers in fiscal year 2004 and to continue our practice of closing centers that are identified as not meeting performance expectations. In addition, we may acquire existing centers from local or regional early childhood education and care providers. We may not be able to successfully negotiate and acquire sites and/or previously constructed centers, meet our targets for new center additions or meet targeted deadlines for the development of new centers.

        New centers are located based upon detailed site analyses that include feasibility and demographic studies and financial modeling. The length of time from site selection to construction and, finally, the opening of a community center ranges from 16 to 24 months. Frequently, new site negotiations are delayed or canceled or construction is delayed for a variety of reasons, many of which are outside our

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control. The average total cost for land, building and equipment per community center typically ranges from $1.9 million to $2.8 million depending on the size and location of the center. However, the actual costs of a particular center may vary from such range.

        Our new centers typically have a licensed capacity ranging from 145 to 180, while the centers constructed during fiscal 1997 and earlier have an average licensed capacity of 125. When mature, these new, larger centers are designed to generate higher revenues, operating income and margins than our older centers. These new centers also have higher average costs of construction and typically take three to four years to reach maturity. On average, our new centers should begin to produce positive EBITDA during the first year of operation and begin to produce positive net income by the end of the second year of operation. Accordingly, as more new centers are developed and opened, profitability will be negatively impacted in the short-term but is expected to be enhanced in the long-term once these new centers achieve anticipated levels of occupancy.

        Capital expenditures included the following, in thousands:

 
  Fiscal Years Ended
  Forty Weeks Ended
 
  June 1, 2001
  May 31, 2002
  May 30, 2003
  March 7, 2003
  March 5, 2004
New center development   $ 44,254   $ 63,990   $ 50,651   $ 44,274   $ 21,379
Refurbishment of existing facilities     37,829     18,979     18,945     14,648     12,610
Equipment purchases     7,993     9,508     11,731     9,516     6,652
Information systems purchases     4,193     3,366     1,787     1,293     704
   
 
 
 
 
    $ 94,269   $ 95,843   $ 83,114   $ 69,731   $ 41,345
   
 
 
 
 

        We refer to the costs associated with the refurbishment of existing facilities and equipment and information systems purchases as maintenance capital expenditures.

        Capital expenditures for the forty weeks ended March 5, 2004 do not include $97.9 million spent to purchase the 44 centers previously included in the synthetic lease facility, or $0.9 million for the acquisition of a previously constructed center.

        Capital expenditure limits under our credit facility for fiscal year 2004 are $110.0 million. We have some ability to incur additional indebtedness, including through mortgages or sale-leaseback transactions, subject to the limitations imposed by the indenture under which our notes are issued and our revolving credit facility.

Contractual Commitments

        We have certain contractual obligations and commercial commitments. Contractual obligations are those that will require cash payments in accordance with the terms of a contract, such as a loan or lease agreement. Commercial commitments represent potential obligations for performance in the event of demands by third parties or other contingent events, such as lines of credit. Our contractual obligations and commercial commitments at March 5, 2004 were as follows, in thousands:

 
   
   
  Fiscal Year
 
   
  Remainder of
Fiscal Year
2004

 
  Total
  2005
  2006
  2007
  2008
  Thereafter
Long-term debt   $ 517,070   $ 1,116   $ 7,572   $ 4,136   $ 4,314   $ 4,447   $ 495,485
Capital lease obligations     27,958     407     2,240     2,279     2,396     2,415     18,221
Operating lease     457,948     8,391     48,263     45,056     41,180     37,824     277,234
Standby letters of credit     55,139         55,139                
Other commitments     4,892     4,892                    
   
 
 
 
 
 
 
    $ 1,063,007   $ 14,806   $ 113,214   $ 51,471   $ 47,890   $ 44,686   $ 790,940
   
 
 
 
 
 
 

        Other commitments include those related to center development and purchase orders.

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Wage Increases

        Expenses for salaries, wages and benefits represented approximately 55.2% and 55.3% of net revenues for fiscal year 2003 and the forty weeks ended March 5, 2004, respectively. We believe that, through increases in our tuition rates, we can mitigate any future increase in expenses caused by adjustments to the federal or state minimum wage rates or other market adjustments. However, we may not be able to increase our rates sufficiently to offset such increased costs. We continually evaluate our wage structure and may implement changes at targeted local levels.

Quantitative And Qualitative Disclosures About Market Risk

        Market risk represents the risk of loss that may impact our consolidated financial position, results of operations or cash flows. We are exposed to market risk in the areas of interest rates and foreign currency exchange rates.

Interest Rates

        Our exposure to market risk for changes in interest rates relates primarily to debt obligations. We have no cash flow exposure due to rate changes on our 9.5% senior subordinated notes aggregating $194.4 million at March 5, 2004. We also have no cash flow exposure on certain industrial revenue bonds, mortgages and notes payable aggregating $5.1 million at March 5, 2004. However, we have cash flow exposure on our revolving credit facility and certain industrial revenue bonds subject to variable LIBOR or adjusted base rate pricing. We had borrowings of $11.0 million outstanding under our credit facility at March 5, 2004. Accordingly, a 1% (100 basis points) change in the LIBOR rate would have resulted in interest expense changing by less than $0.1 million in the forty weeks ended March 5, 2004. A 1% (100 basis points) change in the variable LIBOR or adjusted base rate pricing on our industrial revenue bonds, aggregating $8.5 million at March 5, 2004, would have resulted in interest expense changing by $0.1 million in the forty weeks ended March 7, 2003 and March 5, 2004, respectively.

        We have cash flow exposure on the CMBS loan entered into in July 2003, which bears interest at a rate equal to LIBOR plus 2.25%. A 1% (100 basis points) change in the LIBOR rate would have resulted in interest expense changing by approximately $2.1 million in the forty weeks ended March 5, 2004. We have purchased an interest rate cap agreement to protect us from significant movements in LIBOR during the initial three years of the CMBS loan. The LIBOR strike price is 6.50% under the interest rate cap agreement, which terminates July 9, 2006, at which time we are required to purchase an additional interest rate cap agreement for the duration of the loan term.

        We also have cash flow exposure on our vehicle leases with variable interest rates. A 1% (100 basis points) change in the interest rate defined in our vehicle lease agreement would have resulted in rent expense changing by approximately $0.1 million in the forty weeks ended March 7, 2003 and March 5, 2004, respectively.

Foreign Exchange Risk

        We are exposed to foreign exchange risk to the extent of fluctuations in the United Kingdom pound sterling. Based upon the relative size of our operations in the United Kingdom, we do not believe that the reasonably possible near-term change in the related exchange rate would have a material effect on our financial position, results of operations or cash flows.

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BUSINESS

Overview

        KinderCare is the nation's leading for-profit provider of early childhood education and care services based on number of centers and licensed capacity. We provide services to infants and children up to 12 years of age, with a majority of the children from the ages of six weeks to five years old. At March 5, 2004, licensed capacity at our centers was approximately 166,000, and we served approximately 126,000 children and their families at 1,245 child care centers. We distinguish ourselves by providing high quality educational programs, a professional and well-trained staff and clean, safe and attractive facilities. We focus on the development of the whole child: physically, socially, emotionally, cognitively and linguistically. In addition to our primary business of center-based child care, we also own and operate a distance learning company serving teenagers and young adults through our subsidiary, KC Distance Learning, Inc.

        Education is core to our mission. We have developed a series of educational programs, including five separate proprietary age-specific curricula, tailored for (1) infants and toddlers, (2) two-year olds, (3) preschool, (4) kindergarten and (5) school ages between six and 12. We also offer tutorial programs in the areas of literacy, reading, foreign languages and mathematics. Our educational programs recognize the importance of using high quality, research-based curriculum materials designed to create a rich and nurturing learning environment for children. Our programs are revised on a rotating basis to take advantage of the latest research in child development. In furtherance of our focus on quality educational programming, we pursue accreditation by various accrediting bodies that have been approved by states as meeting quality improvement initiatives.

        At March 5, 2004, we operated 1,245 centers across 39 states, 1,176 of which were branded with the KinderCare name and 69 of which were branded with the Mulberry name. We operate two types of centers: community centers and employer-sponsored centers. The vast majority of our centers are community centers which are designed to meet the general needs of families within a given area. Our employer-sponsored centers partner with companies to provide on-site or near-site education and child care for their employees. All of our centers are open year round. Tuition is generally collected on a weekly basis, in advance, and tuition rates vary for children of different ages and by location.

        We hold minority investments in Voyager Expanded Learning, Inc., a developer of educational curricula for elementary and middle schools and a provider of a public school teacher retraining program, and Chancellor Beacon Academies, Inc., an education management company.

Our Corporate Information

        We are a Delaware corporation organized on November 14, 1986. Our principal executive offices are located at 650 N.E. Holladay Street, Suite 1400, Portland, Oregon 97232. Our telephone number is (503) 872-1300. Our website addresses include kindercare.com, kindercareatwork.com, mulberrychildcare.com, kcdistancelearning.com, keystonehighschool.com, creditmakeup.com, iqacademies.com and go2iq.com. The information on our websites is not incorporated by reference in this proxy statement/prospectus.

Our Business Strengths

        Our objective is to continue to build on our position as the nation's leading for-profit provider of quality early childhood education and care services by further enhancing our competitive operating strengths, which include the following:

        Leading Market Position.    We are the nation's leading for-profit provider of early childhood education and care services in the highly fragmented child care industry. Our current licensed capacity

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represented more than 25% of the aggregate licensed capacity of the top 40 for-profit child care service providers at January 1, 2004. Our position as the industry leader with a large, nationwide customer base gives us both the ability to spread the costs of programs and services, such as curriculum development, training programs and other management processes, over a large number of centers and a valuable distribution network for new products and services. Our national presence, with centers located throughout 39 states, allows us to continue to serve customers who relocate to other communities where we have centers, enhances brand awareness and mitigates any potential negative impact of changing local or regional economic trends, demographic trends or regulatory factors.

        Strong Brand Identity and Reputation.    With more than 30 years of experience in the industry, we believe that we enjoy strong brand recognition and a reputation for quality. Established in 1969, our KinderCare brand provides a valuable asset in an industry where personal trust and parent referrals play an important role in retaining existing customers and attracting new customers. We strive to reinforce our positive image through our many quality initiatives and our targeted marketing to current and potential customers.

        High Quality Educational Programs.    Early childhood education is a crucial part of child development and we believe that educational content is becoming increasingly important as a distinguishing factor in our industry. We have developed high quality proprietary curricula targeted to children in each of the various age and development levels we serve. Our programs are updated and enhanced as new research becomes available. We also pursue accreditation of our centers by various accrediting bodies, including NAEYC. Accreditation strengthens the quality of our centers by motivating the teaching staff and enhancing their understanding of developmentally appropriate early childhood practices. In certain states, these quality initiatives are tied to financial incentives such as higher child care assistance reimbursement rates and property tax incentives. At March 5, 2004, we had 483 centers accredited by NAEYC and approximately 360 centers actively pursuing NAEYC accreditation. We believe that our high quality educational programs allow us to attract new students, retain our existing students and distinguish ourselves from our competitors.

        Stable and Predictable Financial Model.    We believe KinderCare benefits from an attractive financial model with stable revenues, cash flows and margins. Our net revenues from child care centers increased from approximately $610.7 million during fiscal year 1999 to $838.6 million during fiscal year 2003. Our EBITDA increased from $101.0 million to $123.4 million during the same period, despite the effect of an increase in rent expense from $27.8 million to $51.8 million for the same period as a result of our previous synthetic lease facility, leased center acquisitions and our sale-leaseback program. Our net cash flows provided by operating activities have shown moderate growth with an increase from $61.8 million for fiscal year 1999 to $78.4 million for fiscal year 2003.

        Over the past several years, we have pursued a strategy of increasing our net revenues through enhanced center yield management. We have done so by balancing an increase in tuition rates against the gradual decline in occupancy at our centers and by expanding our fee-based service offerings. Our average weekly tuition rate increased from $113.45 to $144.45 from fiscal year 1999 to fiscal year 2003 accompanied by a decline in our occupancy rate from 69.9% to 63.3% during the same period. In fiscal years 2001, 2002 and 2003, comparable center net revenues grew 3.1%, 1.1% and 1.4%, respectively.

        At March 5, 2004, we owned 738 centers, which had an approximate net book value of $567.6 million. Of our 738 owned centers, 594 centers, which had an approximate net book value of $395.6 million at March 5, 2004, were encumbered through first mortgages or deeds of trust pursuant to the CMBS loan and our revolving credit facility. During the fourth quarter of fiscal year 2002, we embarked on a program of selling centers to individual real estate investors and concurrently signing long term leases to continue operating the centers. We are currently in the negotiation process with respect to $69.9 million of sales related to 27 centers. In addition to these pending transactions, we estimate that we had additional marketable inventory at April 16, 2004 of 74 centers with a market

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value of approximately $168.0 million. Historically, we believe this has been an efficient way to finance growth and reduce leverage. Assuming the market for such transactions remains favorable, we expect this effort to continue with our remaining owned centers and our new centers as we develop them. We will continue using the proceeds of these sales to fund our growth by developing and opening new centers. In addition to developing new centers, we routinely analyze the profitability of our existing centers. If a center is identified as underperforming, we will evaluate the center for closure to minimize the resulting financial liability.

        Ability to Attract and Retain a Qualified Workforce.    We believe our ability to provide attractive employee benefits and recognition programs gives us a competitive advantage in attracting and retaining a high quality workforce, which is an important factor in the successful operation of our centers. The center directors at our KinderCare centers have an average of approximately eight years with us, and those at our Mulberry centers have an average of approximately seven years with us. As part of our focus on investing in our people, we have implemented attractive benefit and incentive programs, employee recognition programs and training programs.

        Experienced Management Team.    The top six members of our senior management average approximately eight years of experience with us. In addition, our six region vice presidents and 81 area managers average over nine years with us. Our senior management has introduced and overseen quality initiatives such as NAEYC accreditation and improved training programs, developed systems to allow focus on labor productivity and expense control and built 213 new centers, acquired 89 centers and closed 201 underperforming centers.

Growth Opportunities

        We are pursuing the following growth opportunities:

        Increase Existing Center Revenue.    We have ongoing initiatives to increase center revenue by:

    Sharing best practices—Center directors are incentivized to share best practices. For example, we recently completed an incentive campaign that was designed to encourage center directors to think creatively about ways to increase enrollment. Each week during the campaign, center directors were encouraged to submit their ideas to our corporate headquarters and received recognition by having their winning ideas posted on our intranet;

    Providing incentives for center directors—Bonus programs reward center directors for enrollment growth and overall operating profit performance;

    Using targeted marketing—Targeted marketing programs include a referral program under which parents receive tuition credits for every new customer enrollment referral and a variety of direct mail solicitation, telephone directory and internet yellow pages listings and local advertising vehicles. We also periodically hold open house events and have established parent forums to involve parents in center activities and events;

    Maintaining competitive tuition pricing—In coordination with center directors, we carefully manage occupancy and tuition rates at the classroom level to maximize net revenue yield from each of our centers;

    Increasing the number and availability of supplemental fee programs—We offer tutorial programs in the areas of literacy, reading, foreign languages and mathematics in the majority of our centers for a supplemental fee and are exploring additional supplemental fee programs; and

    Continuing to operate clean, safe and attractive facilities—We continue to maintain and upgrade our facilities on a regularly scheduled basis to enhance their curb appeal. In the past five years,

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      we have improved the signage at our centers to ensure a uniform standard to enhance customer recognition of our brands.

        Continue to Open Centers.    Many attractive markets across the United States offer opportunities to locate new community and employer-sponsored centers. We plan to expand by opening 15 to 30 new, higher capacity centers per year in locations where we believe the market for center-based child care will support tuition rates higher than our current average rates. We opened 28 new centers during fiscal year 2003 and expect to open 17 new centers during fiscal year 2004. We believe we have multiple sources of funding available to fund new center openings, including our sale-leaseback program, our revolving credit facility and cash flows from operations. Our new centers typically produce positive EBITDA in their first full year of operation and positive net income by the end of their second full year of operation. For centers opened in fiscal years 1997 through 2000, average net revenues were $1.0 million and EBITDA margins were 24.0% for their third full year of operation. The average total investment in these centers was approximately $1.6 million. The average rent expense for these centers was approximately 3.1% of net revenues.

        Pursue Strategic Acquisitions.    We plan to continue making selective acquisitions of existing high quality centers. Our strong market position enhances the opportunities to capitalize on consolidation of the highly fragmented early childhood education and care services industry. For example, our acquisition of Mulberry Child Care Centers, Inc. in 2001 allowed us to increase our presence in certain attractive markets in the northeast. In addition to making center acquisitions, we plan to continue evaluating investment and acquisition opportunities for companies in the education industry that offer educational content and services to children, teenagers and adults. We believe these opportunities would complement our center based educational and our distance learning services.

        Increase Profitability Through Operational Efficiencies.    We have developed a culture dedicated to operational efficiencies. We focus on center-level economics, which hold each center director accountable for profitability. Labor costs are the most significant component of a center's cost structure. We developed and utilize a proprietary labor management system to assist center directors in managing staff hours relative to attendance levels at their centers. We also require most supply purchases to be executed through our automated procurement system, which tracks expenses against benchmarks and requires field management oversight at the point of purchase. Strong controls have helped us contain costs and leverage our overhead over our large, nationwide center base. We believe we are well positioned to benefit from future utilization of our available capacity with our proven ability to manage our cost structure.

        Expand Our Distance Learning Operations.    Our subsidiary, KC Distance Learning, Inc., is based in Bloomsburg, Pennsylvania and operates three business units: Keystone National High School, Learning and Evaluation Center and IQ Academies. We plan to expand our distance learning operations by offering these services in additional states and increasing sales of these services.

        Establish Strategic Relationships.    Through our strategic partnerships, we offer our customers proprietary conveniences and discounts, including access to various educational products and toys. We recently announced an exclusive arrangement with Discover® Card to accept payments via credit card online or at our centers. Our market position and large, nationwide base of centers with its associated customer base makes us an attractive strategic partner for companies with comparable products and services, and gives our strategic partners access to a valuable distribution network for such products and services. Since fiscal year 2000, we have been successfully offering literacy and reading tutorial programs in our centers, which we have licensed from companies that sell these same products in the retail market. We believe that strategic partnerships strengthen our reputation as an early childhood education and care service provider and enrich the experiences of children enrolled at our centers.

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Center Operations

        We operate the largest system of for-profit centers providing early childhood education and care in the United States. At March 5, 2004, we managed 1,245 centers in 39 states primarily under the KinderCare name with a licensed capacity of 166,000 students at March 5, 2004. We managed 69 of these centers under the Mulberry name. At March 5, 2004, we owned 738 centers, leased 502 centers and operated five centers under management contracts. Our centers are open year round. The hours vary by location, although Monday through Friday from 6:30 a.m. to 6:00 p.m. is typical. Children are usually enrolled on a weekly basis for either full- or half-day sessions.

        Centers.    We operate two types of centers, community centers and employer-sponsored centers. Community centers are designed to meet the needs of the general community in which they are located. Employer-sponsored centers partner with companies to provide on- site or near-site education and child care for the families of their employees. The vast majority of our centers are community centers.

        Our typical community and employer-sponsored center is a one-story, air-conditioned building constructed based on our design and located on approximately one acre of land. Larger capacity centers are situated on parcels ranging from one to four acres of land. The centers contain classrooms, play areas and complete kitchen and bathroom facilities. Each center is equipped with a variety of audio and visual aids, educational supplies, games, puzzles, toys and outdoor play equipment. Centers also lease vehicles used for field trips and transporting children enrolled in our before- and after-school programs. All centers are equipped with computers for children's educational programs. Most of our centers are able to accommodate from 95 to 190 children, with our older centers having an average capacity of 132 children. Since 1997, we have been developing and opening centers based on prototypes with average capacities of either 140 or 185 children. The employer-sponsored centers are individualized for each sponsor and range in capacity from 75 to 230 children.

        Tuition.    We determine tuition rates based upon a number of factors, including the age of the child, full- or part-time attendance, enrollment levels, location and competition. Tuition rates are typically adjusted company-wide each year to coincide with the back-to-school periods. However, we may adjust individual room rates within a specific center at any time based on competitive position, occupancy levels and demand. In order to maximize enrollment, center directors may also adjust the rates at their center or offer discounts at their discretion, within limits. These rate discounts and adjustments are closely monitored by our field and corporate management. Our focus on pricing at the classroom level within our centers has enabled us to improve comparable center net revenue growth throughout the year without losing occupancy in centers where the quality of our services, demand and other market conditions support such increases.

        Center Oversight.    Each of our centers is linked to our corporate headquarters through a fully automated information, communication and financial reporting system. This system is designed to provide timely information on items such as net revenues, enrollments, expenses, payroll and staff hours and provides center directors with the ability to distribute reports and update centrally maintained information on a daily basis. We regularly seek new uses for our intranet as a tool to communicate with our centers. For example, in fiscal year 2004, we used our intranet to collect creative marketing ideas from our center directors. Our intranet provides an automated way to communicate information to our corporate headquarters where management can use it to assess quality and identify best practices.

        Field and Center Personnel.    Our centers are organized into six geographic regions, each headed by a region vice president. The region vice presidents are supported by 81 area manager positions for KinderCare and nine region director positions for Mulberry.

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        Individual centers are managed by a center director and, in most cases, an assistant director. All center directors participate in periodic training programs or meetings and must be familiar with applicable state and local licensing regulations. The corporate human resources department monitors salaries and benefits for competitiveness. During fiscal year 2002, we conducted a center director retention survey. We believe the results of the survey reflect overall center director satisfaction. As a result of the survey, we revised the center director bonus plan in fiscal year 2003 to increase the focus on customer retention and new enrollments.

        Due to high employee turnover rates in the early childhood education and care services industry in general, we emphasize recruiting and retaining qualified personnel. The turnover of personnel experienced by us and other providers in our industry results in part from the fact that a significant portion of our employees earn entry-level wages and are part-time employees.

        All center teachers and other non-management staff are required to attend an initial half-day training session prior to being assigned full duties and to complete a six week on-the-job basic training program. Our basic orientation and staff training program is delivered via a video series. Additionally, we have developed and implemented training programs to certify personnel as teachers of various age groups in accordance with our internal standards and in connection with our age-specific educational programs. We offer ongoing sales and service training to center directors, area managers and region directors that focuses on enrollment and retention of families, training on delivery of our educational programs and health and safety related training. Center staff also participate in ongoing in-service training as required by state licensing authorities, most of which is focused on education and child health and safety related issues.

        Marketing, Advertising and Promotions.    We conduct our marketing efforts through direct response programs supported by the use of the internet and grass roots efforts at the center level in conjunction with our corporate sponsored initiatives. We combine traditional direct mail, email, yellow pages listings, internet directory placements and search optimization for visibility that makes local efforts successful. We believe that our referral, drive-by and yellow pages marketing strategies are the most effective in helping customers find us. In addition to contacting a local center, customers can gain information by calling an advertised toll free number or visiting either of our websites, kindercare.com or mulberrychildcare.com. The information on our websites is not incorporated by reference in this proxy statement/prospectus.

        Our local marketing programs use a wide variety of approaches from extended hours to center events for existing and prospective families, to a parent referral program in order to acquire new families and retain those currently enrolled. The referral program provides tuition credits for every referral that becomes an enrollment to both the new and current family. We also periodically hold open house events and have established parent forums to involve parents in center activities and events, in an effort to retain customers.

        Each of our center directors receives training and support designed to facilitate their marketing success. These materials are developed using the most recent customer research and are designed specifically for the center director and staff. The end goal is to better prepare center level staff to convert each inquiry into an enrollment.

        From a corporate perspective, we have focused on center-specific marketing opportunities such as (1) choosing sites that are convenient for customers to encourage drive-by identification, (2) refurbishing our existing centers to enhance their curb appeal and (3) upgrading the signage at our centers to enhance customer recognition.

        Our new center pre-opening marketing effort includes direct mail and newspaper support, as well as local public relations support. Every new center hosts a grand opening and an open house and

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provides individualized center tours where parents and children can talk with staff, visit classrooms and play with educational toys and computers.

Employer-Sponsored Child Care Services

        Through KinderCare At Work®, we offer a more flexible format for our services by individually evaluating the needs of each sponsoring company to find the appropriate format to fit its needs for on-site or near-site employee child care. Our employer-sponsored centers utilize an operating model that is very similar to our community centers, including collecting tuition fees directly from the employee parent, however they support businesses, government, hospitals and universities with large, single site employee populations. Most employer-sponsored centers also allow community children to attend as a second priority to the sponsoring company employee's children, which helps to maximize the revenue and profit opportunity at each employer-sponsored center.

        Employer-sponsored centers are typically located on the business owner's property and the business owner sponsors and usually supports the center with free or reduced rent, utilities and custodial maintenance. Employer-sponsored centers may be operated on a profit and loss basis, on a management fee basis or a variation of the two. The management contracts generally provide for a three- to five-year initial period with renewal options ranging from two to five years. Our compensation under existing agreements is generally based on a fixed fee with annual escalations. KinderCare At Work® can also assist organizations in one or more aspects of implementing a child care related benefit, including needs assessments, financial analysis, architectural design and development plans. KinderCare At Work's® website address is kindercareatwork.com. The information on our websites is not incorporated by reference into this proxy statement/prospectus.

        At March 5, 2004, we operated 43 on-site/near-site employer-sponsored early childhood education and care centers for 42 different employers, including Universal Orlando Resort, Saturn Corporation, LEGO Systems, Inc., Oregon State University, University of Utah and several hospitals and other businesses and universities. Of the 43 employer-sponsored centers, 38 were owned or leased by us and five were operated under management contracts.

        We also offer back-up child care, a program that utilizes our existing centers to provide back-up child care services to the employees of subscribed employers. Current clients include Universal Orlando Resort, Prudential Financial, US Cellular and KPMG.

Educational Programs

        We have developed a series of educational programs, including five separate proprietary age-specific curricula. Our educational programs recognize the importance of using high quality, research-based curriculum materials designed to create a rich and nurturing learning environment for children. The programs are revised on a rotating basis to take advantage of the latest research in child development.

        Our educational programs and materials are designed to respond to the needs of the children, parents and families we serve and to prepare children for success in school and in life. Specifically, we focus on the development of the whole child: physically, socially, emotionally, cognitively and linguistically.

        Infant and Toddler Curricula.    Our infant and toddler program, Welcome to Learning®, is designed for children ages six weeks to two years. The infant component, for children from six weeks to 15 months, is based on building relationships with the child and the family and focuses on providing a safe and nurturing environment. The toddler component lets children from 12 to 24 months feel free to explore and discover the world around them.

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        Two-Year-Old Curriculum.    Our Early Learning Curriculum focuses on using the latest research in brain development to provide learning experiences for children during one of their most critical developmental stages. This curriculum provides children with opportunities to explore and discover the world around them with both daily and long-term extended activities and projects. The Early Learning Curriculum is offered for children from 24 to 36 months.

        Preschool Curricula.    We have two preschool programs designed for children three to five years of age. Both programs use research-based goals and objectives as their framework to provide a high quality learning experience for children. We also offer tutorial programs in the areas of literacy, reading, foreign languages and mathematics for a supplemental fee in the majority of our centers.

        The Preschool Readiness Curriculum focuses on three-year-olds. Monthly themes are divided into two-week units to allow children extended time for in-depth exploration and discovery. Curriculum activities emphasize emerging readiness skills in reading and language development. Specially designed LetterBooks are used to introduce children to phonics and letter and word recognition. Discovery areas support children's learning of basic math and science concepts, computer awareness, creative arts, cooking and homeliving.

        The Preschool at KinderCare curriculum focuses on four-year-olds. It teaches children to enjoy learning through hands-on involvement and stimulating activities. Monthly themes are divided into one-week units providing a comprehensive array of activities relevant to the lives of older preschoolers. Curriculum materials build pre-reading, writing and language skills. Discovery areas provide opportunities for exploration and choice based on children's interests.

        We are investigating the demand for a new pre-kindergarten concept that represents a more academic approach to learning. This program is being pilot tested in a select group of centers. The curriculum focuses on teaching basic skills in literacy, math, science and social studies in learning stations set up to provide challenging daily lessons. We use experienced degreed teachers who work from a scope and sequence based on standards recognized by state departments of education to define what children should know and be able to do. We will provide on-going assessments to parents that support children's language, cognitive, social, emotional and physical development.

        Kindergarten Curriculum.    For five-year-olds, we offer the Kindergarten at KinderCare...Journey to Discovery® program. Children learn through play, hands-on exploration, activities and experiences that are real world and sensory in nature. This curriculum emphasizes reading development, beginning math concepts and those skills necessary to give children the confidence to succeed in school. Our kindergarten is offered in approximately two-thirds of our child care centers and meets state requirements for instructional curriculum prior to first grade.

        School-Age Curriculum.    Our KC Imagination Highway® program is a project-based curriculum designed for children ages six to 12. The program includes a number of challenging activities and projects designed to stimulate the imagination of elementary school-age children through researching, designing, building, decorating and presenting. This program meets the needs of parents looking for content rich after-school experiences that keep school-age children interested and involved.

        Summer Curriculum.    We offer a summer program called Summer AdventuresSM to elementary school-agers. This program is a fun-filled, academic-based curriculum of 20 weekly themes, including themes that help children learn new vocabulary, try out recipes for foods that are actually good for them, make volcanoes that erupt, construct robots out of junk and learn about patriotism.

        Distance Learning.    Although center-based child-care is our primary business, we also own and operate a distance learning company serving teenagers and young adults. Our subsidiary, KC Distance Learning, Inc., operates Keystone National High School, an accredited distance-learning program which is licensed as a private high school. Keystone National High School is accredited by several national

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and regional bodies, including Northwest Association of Colleges and Schools; Distance Education and Training Council and the National Collegiate Athletic Association. Keystone's curriculum has been developed to reflect the curriculum being taught in high schools across the country. Our course catalog consists of over 60 courses, covering all the subjects required to obtain a diploma. We deliver courses in both correspondence and online formats. We provide each student with current textbooks from major publishers, which have been selected by subject matter specialists. Accompanying each textbook, our learning guides are written by veteran classroom teachers and provide the appropriate level of direction. Our certified teachers provide guidance, tutoring and grading services for our students.

        Center Accreditation.    We continue to stress the importance of offering high quality programs and services to children and families. We also pursue accreditation of our centers by various accrediting bodies recognized by states as meeting quality improvement initiatives and believe that the accreditation process improves the quality of our centers by motivating the teaching staff and enhancing their understanding of developmentally appropriate childhood practices. In certain states, these quality initiatives are tied to financial incentives such as higher child care assistance reimbursement rates and property tax incentives. At March 5, 2004, we had 483 centers accredited by NAEYC, which is the most widely recognized accrediting body by states that have implemented these quality initiatives. Other agencies that have been recognized by a number of states include the National Early Childhood Program Accreditation and the National Accreditation Commission of the National Association of Child Care Professionals.

        Training.    We provide curriculum-specific training for teachers and caregivers to assist them in effectively delivering our programs. Each curriculum is designed to provide teachers with the necessary materials and enhancements to enable effective delivery based on the resources and needs of the local community. We emphasize selection of staff who are caring adults responsive to the needs of children. We strive to give each teacher the opportunity, training and resources to effectively implement the best in developmentally and age appropriate practice. Opportunities for professional growth are available through company-wide training such as the Certificate of Excellence Program. We also make available more advanced training opportunities, including tuition reimbursement for employment-related college courses or course work in obtaining a Child Development Associate credential.

Asset Management

        We have developed processes designed to effectively manage our real estate assets at all stages beginning with site selection and development and including center maintenance, refurbishment and, where appropriate, center closure.

        Site Selection and Development of New Centers.    We seek to identify attractive new sites for our centers in large, metropolitan markets and smaller, growth markets that meet our operating and financial goals. We look for sites where we believe the market for our services will support tuition rates higher than our current average rates. Our real estate department performs comprehensive studies of geographic markets to determine potential areas for new center development. These studies include analysis of land prices, development costs, competitors, tuition pricing and demographic data such as population, age, household income and employment levels. In addition, we review state and local laws, including zoning requirements, development regulations and child care licensing regulations to determine the timing and probability of receiving the necessary approvals to construct and operate a new center. This information is reviewed by our Development Committee, which includes our Chief Executive Officer, our Executive Vice President and Chief Financial Officer, our Senior Vice President and Chief Development Officer and our Senior Vice President of Operations, among others. The Development Committee meets every two weeks and evaluates new center development opportunities as well as center acquisition opportunities, lease renewals and center closures.

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        We target sites that offer convenience for our customers, are located in appealing markets and provide opportunities for drive-by interest. We make specific site location decisions for new centers based upon a detailed site analysis that includes feasibility and demographic studies, as well as comprehensive financial modeling. Within a prospective area, we often analyze several alternative sites. Each potential site is evaluated against our standards for location, convenience, visibility, traffic patterns, size, layout, affordability and functionality, as well as potential competition.

        Our new center development is supported by a team of individuals from our operations, purchasing, human resources, marketing and legal departments to streamline the new center opening process. We believe this results in a more efficient transition of new centers from the construction phase to field operation.

        We opened 28 new centers during fiscal year 2003 and 12 more through March 5, 2004. These new centers have an average licensed capacity of 175. When mature, these larger centers are designed to generate higher revenues, operating income and margins than the older centers. These new centers also have higher average costs of construction and typically take three to four years to reach maturity. On average, our new centers should begin to produce positive EBITDA during the first year of operation and begin to produce positive net income by the end of the second year of operation. Accordingly, as more new centers are developed and opened, profitability will be negatively impacted in the short-term but is expected to be enhanced in the long-term once these new, more profitable centers achieve anticipated levels.

        The following is a summary of our center opening activity over the past five years:

 
  Fiscal Year Ended
 
 
  May 28, 1999
  June 2, 2000
  June 1, 2001
  May 31, 2002
  May 30, 2003
 
Number of centers, beginning of fiscal year   1,147   1,160   1,169   1,242   1,264  
   
 
 
 
 
 
Openings   39   35   44   35   28  
Acquisitions     13   75      
Centers closed or sold   (26 ) (39 ) (46 ) (13 ) (28 )
   
 
 
 
 
 
  Net centers additions   13   9   73   22    
   
 
 
 
 
 
  Number of centers, end of fiscal year   1,160   1,169   1,242   1,264   1,264  
   
 
 
 
 
 

        Center Maintenance.    We believe it is critical to maintain a fresh, clean, pleasant and safe environment for the children and families we serve as well as our employees. The appearance of our facilities affects tuition rates, occupancy and the long term success of our centers.

        We use a centralized maintenance program to ensure consistent high quality maintenance of our facilities located across the country. Each of our approximately 100 maintenance technicians has a van stocked with spare parts and handles emergency, routine and preventative maintenance functions through an automated work order system. Technicians are notified and track all work orders via palm top computers. At March 5, 2004, specific geographic areas were supervised by two regional directors and 12 facility managers, each of whom manages between six and 10 technicians.

        Our facilities management department has developed a center assessment system that allows our facilities technicians to assess the condition of the major building components of our centers, such as roofing, parking lots, exteriors, playgrounds, mechanical systems, appliances and building finishes. The assessment data is recorded in a central database, which is accessible over the intranet. The system includes replacement benchmarks for building components, which will be used to assist in determining replacement schedules and capital priorities. Preliminary assessments have been completed on approximately 1,000 of our centers and we expect to complete assessments on the remaining centers by the end of the current fiscal year. We believe this system will enable us to make better capital deployment decisions on more significant center enhancements.

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        Asset Evaluation and Center Closings.    We routinely analyze the profitability of our existing centers through a detailed evaluation that considers leased versus owned status, lease options, operating history, premises expense, capital requirements, area demographics, competition and site assessment. Through this evaluation process, our asset management staff formulates a plan for the property reflecting our strategic direction and marketing objectives.

        At March 5, 2004, we owned 738, or 59.3%, of our 1,245 centers. Those centers have an approximate net book value of $567.6 million, which includes land, building and equipment costs. Our current sale-leaseback program began during the fourth quarter of fiscal year 2002. Under this initiative, we began selling centers to individual real estate investors and concurrently signing long term leases to continue operating the centers. Most leases have an average lease term of 15 years, with three to four five-year renewal options. We continue to manage the operations of any centers that are sold in such transactions. During fiscal year 2003, we completed sales totaling $88.7 million, which represented 41 centers. From the end of fiscal year 2003 through March 5, 2004, we completed another $58.1 million of sales, which represented 29 centers. Subsequent to March 5, 2004, we closed $15.2 million of sales, which included six centers. We are currently in the process of negotiating another $69.9 million of sales related to 27 centers. It is possible that we will be unable to complete these transactions. We expect this effort to continue, assuming the market for such transactions remains favorable.

        Our asset management department also manages the disposition of all surplus real estate owned or leased by us. These real estate assets include undeveloped sites, unoccupied buildings and closed centers. We disposed of 10 surplus properties in fiscal year 2003. From the end of fiscal year 2003 to March 5, 2004, we sold two surplus properties. We were in the process of marketing an additional 19 surplus properties at March 5, 2004.

        The profitability of our centers is closely monitored by our asset management program. If a center continues to under perform, exit strategies are employed in an attempt to minimize our financial liability. Typical reasons for a center closure include changing demographics that have adversely affected financial performance and inability to renew a lease on economically favorable terms. We make an effort to time center closures to minimize the negative impact on affected families. During fiscal year 2003, we closed 28 centers. From the end of fiscal year 2003 to March 5, 2004, we closed 32 additional centers.

The Early Childhood Education and Care Services Industry

        Our industry is the early childhood education and care services industry, which we refer to in this section as the child care industry. According to an industry analysis by Marketdata Enterprises, the U.S. child care industry generated an estimated $40 billion in revenues in 2000, and is estimated to generate revenues of approximately $60 billion in 2005. The Children's Foundation estimates that there are currently approximately 117,000 licensed child care centers throughout the United States, compared to approximately 106,000 in 2000.

        The growth in the child care industry has been driven by a number of factors some of which are discussed below. Although some of the trends that rose so sharply in the 1980s, such as the population of children under five and return of mothers to the workforce, have stabilized, the factors that drive demand for early education and child care services continue to be strongly positive.

        Number of Mothers in the Workforce.    As the number of traditional single earner and stay-at-home parent families has declined, many parents have been forced to struggle with alternative care options for their children. In 2002, approximately 65% of all U.S. families with children under six were dual-income or single parent households, with a declining percentage of children receiving care from a stay-at-home parent. As women and mothers have entered the workforce, the demand for child care has increased proportionally. According to the U.S. Bureau of Labor Statistics, the labor force

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participation rate of mothers with children under the age of six has increased from approximately 39% in 1975 to approximately 64% in 2002. In 2002, approximately 37% of all children were born to mothers over 30, as compared to 20% in 1980, according to the National Center for Health Statistics. These mothers are typically more committed to a career than their younger counterparts and are also more likely to be part of a two-income household with more to spend on child care services.

Labor Force Participation of Mothers with Children Under 6 Years of Age

GRAPHIC

        Source: U.S. Bureau of Labor Statistics

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        Increased Population of Children Under the Age of Five.    According to the National Center for Health Statistics, the annual number of live births was approximately 4.0 million in 2002, versus approximately 3.6 million in 1980. The U.S. Census Bureau projects the annual number of live births to increase to approximately 4.5 million in 2015. In addition, the number of children under the age of five has grown from approximately 18.9 million in 1990 to approximately 19.6 million in 2002, according to the U.S. Census Bureau.


Number of Children Under 5 Years of Age

         GRAPHIC

        Source: U.S. Census Bureau

        Awareness of the Importance of Early Childhood Development.    The demand for quality child care has increased as scientific research highlights the importance of education during a child's early developmental years. In 1996, the Families and Work Institute completed research demonstrating the importance of early childhood experiences in a child's overall cognitive development. In addition, recent scientific research into early childhood development has drawn widespread media and political attention, increasing parents' awareness of, and the demand for, quality educational facilities for their child