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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
-------------------

(Mark One)

[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 13, 2002


OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 333-42137

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

Delaware 63-0941966
(State or other (I.R.S. Employer
jurisdiction of incorporation) Identification No.)


650 NE Holladay Street, Suite 1400
Portland, OR 97232
(Address of principal executive offices)


(503) 872-1300
(Registrant's telephone number,
including area code)


(Former name, address and fiscal year, if changed since last report)


Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [ ]

The number of shares of the registrant's common stock, $.01 par value per
share, outstanding at January 24, 2003 was 19,661,216.

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KinderCare Learning Centers, Inc. and Subsidiaries

Index

Part I. Financial Information............................................... 2

Item 1. Unaudited consolidated financial statements:

Consolidated balance sheets at December 13, 2002
and May 31, 2002 (unaudited)............................. 2

Consolidated statements of operations for the twelve
and twenty-eight weeks ended December 13, 2002 and
December 14, 2001 (unaudited)............................ 3

Consolidated statements of stockholders' equity and
comprehensive income for the twenty-eight weeks
ended December 13, 2002 and the fiscal year ended
May 31, 2002 (unaudited)................................. 4

Consolidated statements of cash flows for the
twenty-eight weeks ended December 13, 2002 and
December 14, 2001 (unaudited)............................ 5

Notes to unaudited consolidated financial statements....... 6

Item 2. Management's discussion and analysis of financial
condition and results of operations........................ 11

Item 3. Quantitative and qualitative disclosures about
market risk................................................ 25

Item 4. Controls and Procedures.................................... 25

Part II. Other Information................................................... 26

Item 6. Exhibits and reports on Form 8-K........................... 26

Signatures................................................................... 27

Certifications............................................................... 28

1

PART I.

ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
(Unaudited)



December 13, 2002 May 31, 2002
----------------- -----------------

Assets
Current assets:
Cash and cash equivalents....................................... $ 11,858 $ 8,619
Receivables, net................................................ 31,124 31,657
Prepaid expenses and supplies................................... 9,981 9,948
Deferred income taxes........................................... 10,850 13,904
Assets held for sale............................................ 679 1,787
----------------- -----------------
Total current assets........................................ 64,492 65,915

Property and equipment, net........................................ 700,738 700,373
Deferred income taxes.............................................. 199 8
Goodwill........................................................... 42,565 42,565
Other assets....................................................... 33,446 35,324
----------------- -----------------
$ 841,440 $ 844,185
================= =================
Liabilities and Stockholders' Equity
Current liabilities:
Bank overdrafts................................................. $ 9,299 $ 9,779
Accounts payable................................................ 8,753 9,836
Current portion of long-term debt............................... 1,349 6,237
Accrued expenses and other liabilities.......................... 99,479 105,692
----------------- -----------------
Total current liabilities................................... 118,880 131,544

Long-term debt..................................................... 518,809 526,080
Long-term self-insurance liabilities............................... 18,434 15,723
Deferred income taxes.............................................. 14,915 12,208
Other noncurrent liabilities....................................... 43,866 35,361
----------------- -----------------
Total liabilities........................................... 714,904 720,916
----------------- -----------------

Commitments and contingencies......................................

Stockholders' equity:
Preferred stock, $.01 par value; authorized 10,000,000 shares;
none outstanding............................................ -- --
Common stock, $.01 par value; authorized 100,000,000 shares;
issued and outstanding 19,671,638 and 19,819,352 shares,
respectively................................................ 197 198
Additional paid-in capital...................................... 26,060 28,107
Notes receivable from stockholders.............................. (1,159) (1,426)
Retained earnings............................................... 101,639 96,882
Accumulated other comprehensive loss............................ (201) (492)
----------------- -----------------
Total stockholders' equity.................................. 126,536 123,269
----------------- -----------------
$ 841,440 $ 844,185
================= =================

See accompanying notes to unaudited consolidated financial statements.


2

KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
(Unaudited)



Twelve Weeks Ended Twenty-Eight Weeks Ended
------------------------- -------------------------
December 13, December 14, December 13, December 14,
2002 2001 2002 2001
----------- ----------- ----------- -----------

Revenues, net....................... $ 197,030 $ 190,598 $ 453,282 $ 437,078
----------- ----------- ----------- -----------
Operating expenses:
Salaries, wages and benefits..... 110,254 105,912 256,601 247,193
Depreciation and amortization.... 14,322 12,538 31,570 29,076
Rent............................. 12,336 11,029 27,718 26,212
Provision for doubtful accounts.. 1,658 1,470 3,380 3,066
Other............................ 42,636 40,232 104,369 100,705
----------- ----------- ----------- -----------
Total operating expenses..... 181,206 171,181 423,638 406,252
----------- ----------- ----------- -----------
Operating income............... 15,824 19,417 29,644 30,826
Investment income................... 73 75 180 299
Interest expense.................... (9,615) (10,321) (22,454) (24,453)
----------- ----------- ----------- -----------
Income before income taxes and
discontinued operations........ 6,282 9,171 7,370 6,672
Income tax expense.................. (2,487) (3,651) (2,918) (2,737)
----------- ----------- ----------- -----------
Income before discontinued
operations..................... 3,795 5,520 4,452 3,935
Discontinued operations, net of
income tax (expense) benefit of
$(331), $45, $(200) and $175,
respectively..................... 505 (67) 305 (252)
----------- ----------- ----------- -----------
Net income..................... $ 4,300 $ 5,453 $ 4,757 $ 3,683
=========== =========== =========== ===========
Basic net income per share:
Income before discontinued
operations..................... $ 0.19 $ 0.28 $ 0.23 $ 0.20
Discontinued operations, net..... 0.03 -- 0.01 (0.01)
----------- ----------- ----------- -----------
Net income..................... $ 0.22 $ 0.28 $ 0.24 $ 0.19
=========== =========== =========== ===========
Diluted net income, per share:
Income before discontinued
operations..................... $ 0.19 $ 0.27 $ 0.23 $ 0.19
Discontinued operations, net..... 0.03 -- 0.01 (0.01)
----------- ----------- ----------- -----------
Net income..................... $ 0.22 $ 0.27 $ 0.24 $ 0.18
=========== =========== =========== ===========

Weighted average common shares
outstanding:
Basic............................ 19,683,253 19,819,352 19,733,510 19,819,352
Diluted.......................... 19,876,547 20,292,333 19,931,853 20,235,939

See accompanying notes to unaudited consolidated financial statements.


3

KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Dollars in thousands)
(Unaudited)



Notes Accumulated
Common Stock Additional Receivable Other
------------------- Paid-in from Retained Comprehensive
Shares Amount Capital Stockholders Earnings Loss Total
---------- ------- ---------- ------------ ---------- ------------- ----------

Balance at June 1, 2001............... 19,819,352 $ 198 $ 28,107 $ (1,355) $ 80,339 $ (558) $ 106,731
Comprehensive income:
Net income......................... -- -- -- -- 16,543 -- 16,543
Cumulative translation adjustment.. -- -- -- -- -- 66 66
----------
Total comprehensive income....... 16,609
Proceeds from collection of
stockholders' notes receivable..... -- -- -- 35 -- -- 35
Issuances of stockholders'
notes receivable................... -- -- -- (106) -- -- (106)
---------- ------- ---------- ------------ ---------- ------------- ----------
Balance at May 31, 2002.......... 19,819,352 198 28,107 (1,426) 96,882 (492) 123,269
Comprehensive income:
Net income......................... -- -- -- -- 4,757 -- 4,757
Cumulative translation adjustment.. -- -- -- -- -- 291 291
----------
Total comprehensive income....... 5,048
Retirement of common stock............ (119,838) (1) (1,645) -- -- -- (1,646)
Repurchase of common stock............ (27,876) -- (402) -- -- -- (402)
Proceeds from collection of
stockholders' notes receivable..... -- -- -- 267 -- -- 267
---------- ------- ---------- ------------ ---------- ------------- ----------
Balance at December 13, 2002..... 19,671,638 $ 197 $ 26,060 $ (1,159) $ 101,639 $ (201) $ 126,536
========== ======= ========== ============ ========== ============= ==========

See accompanying notes to unaudited consolidated financial statements.


4

KinderCare Learning Centers, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)


Twenty-Eight Weeks Ended
-------------------------------------
December 13, 2002 December 14, 2001
----------------- -----------------

Cash flows from operations:
Net income................................................. $ 4,757 $ 3,683
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 31,617 27,815
Amortization of deferred financing costs, goodwill and
other intangible assets.............................. 1,823 3,116
Provision for doubtful accounts........................ 3,474 3,087
Gain on sales and disposals of property and equipment.. (1,507) (154)
Deferred tax expense................................... 5,570 49
Changes in operating assets and liabilities:
Increase in receivables.............................. (4,587) (11,648)
Decrease (increase) in prepaid expenses and supplies. (33) 353
Decrease (increase) in other assets.................. (1) 243
Decrease in accounts payable, accrued expenses and
other current and noncurrent liabilities.......... (5,537) (1,665)
Other, net............................................. 291 56
----------------- -----------------
Net cash provided by operating activities................ 35,867 24,935
----------------- -----------------
Cash flows from investing activities:
Purchases of property and equipment........................ (54,191) (55,889)
Proceeds from sales of property and equipment.............. 34,853 854

Proceeds from collection of notes receivable............... 56 --
----------------- -----------------
Net cash used by investing activities.................... (19,282) (55,035)
----------------- -----------------
Cash flows from financing activities:
Proceeds from long-term borrowings......................... 36,000 41,062
Payments on long-term borrowings........................... (48,158) (7,147)
Payments on capital leases................................. (573) (607)
Proceeds from collection of stockholders' notes receivable. 267 35
Repurchase of common stock................................. (402) --

Bank overdrafts............................................ (480) (673)
----------------- -----------------
Net cash (used) provided by financing activities......... (13,346) 32,670
----------------- -----------------
Increase in cash and cash equivalents.................. 3,239 2,570
Cash and cash equivalents at the beginning of
the period............................................... 8,619 3,657
----------------- -----------------
Cash and cash equivalents at the end of the period......... $ 11,858 $ 6,227
================= =================

Supplemental cash flow information:
Interest paid.............................................. $ 19,719 $ 22,054
Income taxes paid, net..................................... 1,823 5,011

Non-cash financial activities:
Retirement of common stock................................. $ 1,646 $ --

See accompanying notes to unaudited consolidated financial statements.


5

KinderCare Learning Centers, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements


1. Nature of Business

KinderCare Learning Centers, Inc., referred to as KinderCare, is the
leading for-profit provider of early childhood education and care in the United
States. At December 13, 2002, we served approximately 126,000 children and their
families at 1,266 child care centers. At our child care centers, we provide
educational services to infants and children up to twelve years of age. However,
the majority of the children we serve are from six weeks to five years old. The
total licensed capacity at our centers was approximately 167,000 at December 13,
2002.

We operate child care centers under two brands as follows:

o KinderCare - At December 13, 2002, we operated 1,196 KinderCare
centers. The brand was established in 1969 and operates centers in 39
states, as well as two centers located in the United Kingdom.

o Mulberry - We operated 70 Mulberry centers and 12 before- and
after-school programs at December 13, 2002. Mulberry operates
primarily in the northeast region of the United States and southern
California. We acquired Mulberry in April 2001.

In addition to our center-based child care operations, we have invested in
more broad-based education companies serving children, teenagers and young
adults. KC Distance Learning, Inc., our wholly-owned subsidiary, offers an
accredited high school program delivered through correspondence format and over
the internet. We have made minority investments in Chancellor Beacon Academies,
Inc., a charter school management company, and Voyager Expanded Learning, Inc.
Voyager developed Universal Literacy Systems(TM), a reading program for students
in grades kindergarten through sixth, provides summer school programs for
elementary and middle schools and created Voyager University for retraining
public school teachers.

This report will be available on our website, kindercare.com, as soon as
practicable after filing with the Securities and Exchange Commission. The
information on our website is not incorporated by reference in this report.

2. Summary of Significant Accounting Policies

Basis of Presentation. The unaudited consolidated financial statements
include the financial statements of KinderCare and our subsidiaries, all of
which are wholly owned. All significant intercompany balances and transactions
have been eliminated in consolidation.

In the opinion of management, the unaudited consolidated financial
statements reflect the adjustments, all of which are of a normal recurring
nature, necessary to present fairly our financial position at December 13, 2002,
and our results of operations for each of the twelve and twenty-eight week
periods ended December 13, 2002 and December 14, 2001, and cash flows for the
twenty-eight weeks ended December 13, 2002 and December 14, 2001. Interim
results are not necessarily indicative of results to be expected for a full
fiscal year because of seasonal and short-term variances and other factors such
as the timing of new center openings and center closures. The unaudited
consolidated financial statements should be read in conjunction with the annual
consolidated financial statements and notes thereto included in our Annual
Report on Form 10-K for the fiscal year ended May 31, 2002.

6

Fiscal Year. References to fiscal 2003 and fiscal 2002 are to the 52 weeks
ended May 30, 2003 and May 31, 2002, respectively. Our fiscal year ends on the
Friday closest to May 31. The first quarter is comprised of 16 weeks, while the
second, third and fourth quarters are each comprised of 12 weeks.

Goodwill and Other Intangible Assets. Effective June 1, 2002, we adopted
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. As a result, we ceased amortization of goodwill at June 1,
2002. Amortization of goodwill for the twelve and twenty-eight weeks ended
December 14, 2001 was $0.5 and $1.1 million, pre-tax, respectively. In
accordance with the provisions of SFAS No. 142, we performed a transitional
impairment test during the second quarter of fiscal 2003 and determined that the
fair value of the recorded goodwill, in the amount of $42.5 million, was greater
than the carrying value. In addition, the goodwill attributable to each of our
reporting units will be tested, at least annually, for impairment by comparing
the fair value of each reporting unit to its carrying value.

If SFAS No. 142 had been adopted in the prior fiscal year, our pro forma
net income and net income per share for the twelve and twenty-eight weeks ended
December 14, 2001 would have been as follows, with dollars in thousands, except
per share amounts:



Twelve weeks ended Twenty-eight weeks ended
December 14, 2001 December 14, 2001
--------------------------------------- ---------------------------------------
Net income per share Net income per share
Net ------------------------- Net -------------------------
Income Basic Diluted Income Basic Diluted
----------- ----------- ----------- ----------- ----------- -----------

Reported................. $ 5,453 $ 0.28 $ 0.27 $ 3,683 $ 0.19 $ 0.18
Goodwill amortization,
net of taxes.......... 297 0.02 0.02 677 0.03 0.03
----------- ----------- ----------- ----------- ----------- -----------
Adjusted.............. $ 5,750 $ 0.30 $ 0.29 $ 4,360 $ 0.22 $ 0.21
=========== =========== =========== =========== =========== ===========


At December 13, 2002 and May 31, 2002, we had approximately $2.7 million of
finite-lived intangible assets, which had associated accumulated amortization of
approximately $2.6 million and $2.3 million, respectively. These intangible
assets are noncompetition agreements, which are included in other assets in the
unaudited consolidated balance sheets. These intangible assets are amortized on
a straight-line basis over their contractual lives that range from 3 to 5 years.
Amortization expense was $0.1 million and $0.2 million for the twelve weeks
ended December 13, 2002 and December 14, 2001, respectively, and $0.2 million
and $0.3 million for the twenty-eight weeks ended December 13, 2002 and December
14, 2001, respectively.

Stock-Based Compensation. We measure compensation expense for our
stock-based employee compensation plans using the method prescribed by
Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued
to Employees, and provide, if material, pro forma disclosures of net income and
earnings per share as if the method prescribed by SFAS No. 123, Accounting for
Stock-Based Compensation, had been applied in measuring compensation expense.
See "Recently Issued Accounting Pronouncements."

Discontinued Operations. Effective June 1, 2002, we adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of and the accounting and reporting
provisions of APB No. 30, Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions for the disposal of a segment of
business. SFAS No. 144 modifies the accounting and reporting for long-lived
assets to be disposed of by sale and it broadens the presentation of
discontinued operations to include more disposal transactions.

7

We closed 16 centers in the twenty-eight weeks ended December 13, 2002,
which included four owned and 12 leased centers. These center closures meet the
criteria of discontinued operations in SFAS No. 144. In addition, we have one
owned, operating center that meets the criteria of held for sale at December 13,
2002 that will be closed in the subsequent quarter and, therefore, is included
in discontinued operations. The operating results for these 17 centers were
classified as discontinued operations, net of tax, in the unaudited consolidated
statements of operations for all periods presented. A summary of discontinued
operations was as follows, with dollars in thousands:



Twelve Weeks Ended Twenty-Eight Weeks Ended
------------------------- -------------------------
December 13, December 14, December 13, December 14,
2002 2001 2002 2001
----------- ----------- ----------- -----------

Revenues, net............................. $ 281 $ 1,550 $ 1,489 $ 3,520
Operating expenses........................ (555) 1,662 984 3,946
----------- ----------- ----------- -----------
Operating income (loss)................ 836 (112) 505 (426)
Interest expense.......................... -- -- -- (1)
----------- ----------- ----------- -----------
Discontinued operations before income 836 (112) 505 (427)
tax..................................
Income tax (expense) benefit.............. (331) 45 (200) 175
----------- ----------- ----------- -----------
Discontinued operations, net of tax.... $ 505 $ (67) $ 305 $ (252)
=========== =========== =========== ===========


Operating expenses included gains on closed center sales in the amount of
$1.2 million and an impairment charge of $0.1 million for the twelve and
twenty-eight weeks ended December 13, 2002. The owned centers that meet the
criteria of held for sale have been classified as current in the unaudited
consolidated balance sheets for all periods presented. As a result, property and
equipment in the amount of $0.7 and $1.8 million was classified current assets
held for sale at December 13, 2002 and May 31, 2002, respectively.

Net Income per Share. The difference between basic and diluted net income
per share was a result of the dilutive effect of options, which are considered
potential common shares. A summary of the weighted average common shares was as
follows:



Twelve Weeks Ended Twenty-Eight Weeks Ended
------------------------- -------------------------
December 13, December 14, December 13, December 14,
2002 2001 2002 2001
----------- ----------- ----------- -----------

Basic weighted average common shares
outstanding............................ 19,683,253 19,819,352 19,733,510 19,819,352
Dilutive potential common shares.......... 193,294 472,981 198,343 416,587
----------- ----------- ----------- -----------
Diluted weighted average common shares
outstanding............................ 19,876,547 20,292,333 19,931,853 20,235,939
=========== =========== =========== ===========
Shares excluded from potential shares due
to their anti-dilutive effect.......... 2,167,972 1,299,397 2,162,924 1,355,791
=========== =========== =========== ===========


Comprehensive Income. Comprehensive income is comprised of the following,
for the periods indicated, with dollars in thousands:



Twelve Weeks Ended Twenty-Eight Weeks Ended
------------------------- -------------------------
December 13, December 14, December 13, December 14,
2002 2001 2002 2001
----------- ----------- ----------- -----------

Net income................................ $ 4,300 $ 5,453 $ 4,757 $ 3,683
Cumulative translation adjustment......... 82 (10) 291 56
----------- ----------- ----------- -----------
$ 4,382 $ 5,443 $ 5,048 $ 3,739
=========== =========== =========== ===========


8

Recently Issued Accounting Pronouncements. SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities, requires that costs
associated with exit or disposal activities be recorded at their fair values
when a liability has been incurred, rather than at the date of commitment to an
exit or disposal plan. SFAS No. 146 is effective for disposal activities
initiated after December 31, 2002, with early application encouraged. We applied
SFAS No. 146 in the second quarter of fiscal 2003. This application did not have
a material impact on our financial position and results of operations.

SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, amends the disclosure requirements of SFAS No. 123, Accounting for
Stock-Based Compensation, to require prominent disclosures in annual and interim
financial statements about the method of accounting for stock-based compensation
and the effect in measuring compensation expense. SFAS No. 148 is effective for
interim periods beginning after December 15, 2002, with early application
encouraged. We are still evaluating the impact of adopting SFAS No. 148.

Financial Accounting Standards Board ("FASB") Interpretation 46 ("FIN 46"),
Consolidation of Variable Interest Entities, requires consolidation where there
is a controlling financial interest in a variable interest entity, previously
referred to as a special-purpose entity. Under this requirement our synthetic
lease facility will be consolidated in our consolidated balance sheet. Property
and equipment financed in the synthetic lease facility will be recorded as
assets and the related lease obligation will be recorded as a liability. The
impact to our future statement of operations will be reduced rent expense and
increased depreciation and interest expense. See "Note 4. Commitments and
Contingencies." FIN 46 is effective during the second quarter of our fiscal year
2004.

Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates under different conditions or if our assumptions change.

Reclassifications. Certain prior period amounts have been reclassified to
conform to the current period's presentation.

3. Acquisitions

In April 2001, we acquired Mulberry Child Care Centers, Inc., referred to
as Mulberry, a child care and early education company based in Dedham,
Massachusetts. We acquired 100% of Mulberry's stock in exchange for 860,000
shares of our common stock valued at $11.8 million. In connection with the
transaction, we paid $13.1 million to the sellers and assumed $3.3 million of
Mulberry's debt. In August 2002, 119,838 of the 860,000 shares were returned to
us, which included 99,152 shares that were released from an indemnity escrow and
20,686 shares that were repurchased from certain former shareholders of
Mulberry. All 119,838 shares have been cancelled.

4. Commitments and Contingencies

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, which may be extended,
subject to the consent of the lessors. A total of 44 centers were constructed
for $97.9 million. The related leases are classified as operating leases for
financial reporting purposes. We currently do not consolidate the assets or
liabilities related to the synthetic lease in our consolidated

9

financial statements. See "Note 2. Summary of Significant Accounting Policies,
Recently Issued Accounting Pronouncements."

The synthetic lease facility closed to draws on February 13, 2001 and, at
December 13, 2002, $97.9 million had been funded through the facility. We have
the option to purchase the centers for $97.9 million at the end of the lease
term, which is February 13, 2004. We are required to notify the lessors by May
14, 2003 as to whether or not we will be exercising our option to purchase the
centers at the end of the lease term. If we do not elect to exercise our
purchase option, then we are required to market the leased centers for sale to
third parties. In addition, we would pay the lessors a guaranteed residual
amount of up to $82.2 million. The guaranteed residual amount that we may have
to pay would be reduced to the extent the net sales proceeds from the centers
exceed $15.7 million. Any such payment of the guaranteed residual amount to the
lessors would be recognized as rental expense when and if payment becomes
probable.

The synthetic lease facility includes covenants and restrictions that are
substantially identical to those in our credit facility. In the event of certain
defaults under the terms of the synthetic lease facility, all amounts under the
synthetic lease facility, including the full property cost of the leased
centers, may become immediately due and payable.

We are presently, and are from time to time, subject to claims and
litigation arising in the ordinary course of business. We believe that none of
the claims or litigation of which we are aware will materially affect our
financial position, operating results or cash flows, although assurance cannot
be given with respect to the ultimate outcome of any such actions.

5. Stock Split

On July 15, 2002, the Board of Directors authorized a 2-for-1 stock split
of our $0.01 par value common stock effective August 19, 2002 for stockholders
of record on August 9, 2002. All references to the number of common shares and
per share amounts within these unaudited consolidated financial statements and
notes thereto for the twelve and twenty-eight weeks ended December 13, 2002 and
December 14, 2001 and the fiscal year ended May 31, 2002 have been restated to
reflect the stock split. Concurrent with the stock split, the number of
authorized common shares was increased from 20.0 million to 100.0 million
shares.

10

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Introduction

The following discussion should be read in conjunction with the unaudited
consolidated financial statements and the related notes included elsewhere in
this report. Our fiscal year ends on the Friday closest to May 31. The
information presented refers to the twelve weeks ended December 13, 2002 as "the
second quarter of fiscal 2003" and the twelve weeks ended December 14, 2001 as
"the second quarter of fiscal 2002." Our first fiscal quarter includes 16 weeks
and the remaining quarters each include twelve weeks.

We calculate the average weekly tuition rate as net revenues, exclusive of
fees and non-tuition income, divided by FTE attendance for the related time
period. The average weekly tuition rate represents the approximate weighted
average weekly tuition rate at all of the centers paid by parents for children
to attend the centers five full days during a week. However, the occupancy mix
between full- and part-time children at each center can significantly affect
these averages with respect to any specific center. 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. Occupancy is a measure of the utilization of center capacity. We
calculate occupancy as the full-time equivalent, or FTE, attendance at all of
the centers divided by the sum of the centers' licensed capacity.

A center is included in comparable center net revenues when it has been
open and operated by us at least one year and it has not been rebuilt or
permanently relocated within that year. Therefore, a center is considered
comparable during the second quarter it has prior year net revenues.
Non-comparable centers include those that have been closed during the past year.

Second Quarter of Fiscal 2003 compared to Second Quarter of Fiscal 2002

The following table shows the comparative operating results of KinderCare,
with dollars in thousands, except the average weekly tuition rate:



Twelve Weeks Twelve Weeks Change
Ended Percent Ended Percent Amount
December 13, of December 14, of Increase/
2002 Revenues 2001 Revenues (Decrease)
------------ ------------ ------------ ------------ ------------

Revenues, net........................ $ 197,030 100.0% $ 190,598 100.0% $ 6,432
------------ ------------ ------------ ------------ ------------
Operating expenses:
Salaries, wages and benefits:
Center expense.................. 101,970 51.8 98,621 51.7 3,349
Region and corporate expense.... 8,284 4.2 7,291 3.8 993
------------ ------------ ------------ ------------ ------------
Total salaries, wages and
benefits.................... 110,254 56.0 105,912 55.5 4,342
Depreciation and amortization..... 14,322 7.3 12,538 6.6 1,784
Rent.............................. 12,336 6.2 11,029 5.8 1,307
Other............................. 44,294 22.5 41,702 21.9 2,592
------------ ------------ ------------ ------------ ------------
Total operating expenses........ 181,206 92.0 171,181 89.8 10,025
------------ ------------ ------------ ------------ ------------
Operating income.............. $ 15,824 8.0% $ 19,417 10.2% $ (3,593)
============ ============ ============ ============ ============

Average weekly tuition rate.......... $ 144.06 $ 137.21 $ 6.85
Occupancy............................ 64.0% 66.9% (2.9)


11

Revenues, net. Net revenues increased $6.4 million, or 3.4%, from the same
period last year to $197.0 million in the second quarter of fiscal 2003. The
increase was due to higher average weekly tuition rates as well as additional
net revenues generated by the newly opened centers. Comparable center net
revenues increased $1.5 million, or 0.8%. During the second quarter of fiscal
2003 and 2002, we opened and closed centers as follows:



Twelve Weeks Ended
-------------------------------------
December 13, 2002 December 14, 2001
----------------- -----------------

Number of centers at the beginning of the period......... 1,264 1,252
Openings................................................. 6 8
Closures................................................. (4) (3)
----------------- -----------------
Number of centers at the end of the period............ 1,266 1,257
================= =================
Total center licensed capacity at the end of the period.. 167,000 165,000


The average weekly tuition rate increased $6.85, or 5.0%, to $144.06 in the
second quarter of fiscal 2003 due primarily to tuition increases. Occupancy
declined to 64.0% from 66.9% for the same period last year due to reduced
full-time equivalent attendance within the older center population.

Salaries, wages and benefits. Expenses for salaries, wages and benefits
increased $4.3 million, or 4.1%, from the same period last year to $110.3
million. Total salaries, wages and benefits expense as a percentage of net
revenues was 56.0% for the second quarter of fiscal 2003 compared to 55.5% for
the second quarter of fiscal 2002.

The expense directly associated with the centers was $102.0 million, an
increase of $3.3 million from the same period last year. The increase was
primarily due to costs from newly opened centers, 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 increased
slightly to 51.8% from 51.7% for the same period last year due primarily to
higher medical insurance costs and wage rates, partially offset by improved
labor productivity. At the region and corporate level, salaries, wages and
benefits as a percentage of net revenues increased to 4.2% from 3.8% due to the
recognition of one-time termination benefits.

Depreciation and amortization. Depreciation and amortization expense
increased $1.8 million from the same period last year to $14.3 million.
Depreciation increased primarily due to newly opened centers and an impairment
charge. During the second quarter, eleven under-performing centers and certain
undeveloped properties were determined to be impaired, which resulted in an
impairment charge of $0.7 million in the twelve weeks ended December 13, 2002,
compared to $0.1 million in the twelve weeks ended December 14, 2001.
Under-performing centers are those with estimated future cash flows,
undiscounted and without interest charges, less than the carrying value of the
asset. The impairment of eleven centers in the second quarter of fiscal 2003 was
primarily the result of occupancy declines of individual centers.

Amortization of goodwill decreased $0.5 million as a result of the adoption
of SFAS No. 142 in the first quarter of fiscal 2003. See "Note 2. Summary of
Significant Accounting Policies, Goodwill and Intangible Assets" to the
unaudited consolidated financial statements.

Rent. Rent expense increased $1.3 million from the same period last year to
$12.3 million primarily due to our sale-leaseback program. See "Liquidity and
Capital Resources." In addition, the rental rates experienced on new and renewed
center leases are higher than those experienced in previous fiscal periods.

12

Other operating expenses. Other operating expenses increased $2.6 million,
or 6.2%, from the same period last year, to $44.3 million. Other operating
expenses as a percentage of net revenues increased to 22.5% from 21.9% for the
same period last year. The increase was due primarily to higher insurance costs,
offset by cost controls in other expenditures.

Other operating expenses include costs directly associated with the
centers, such as food, insurance, transportation, janitorial, maintenance,
utilities and marketing costs, and expenses related to region management and
corporate administration.

Operating income. Operating income was $15.8 million, a decrease of $3.6
million, or 18.5%, from the same period last year. Operating income decreased
due to higher insurance costs, additional depreciation expense related to an
impairment charge and higher rent expense due to our sale-leaseback program.
These additional costs were offset by higher tuition rates and the cessation of
goodwill amortization. Operating income as a percentage of net revenues was 8.0%
compared to 10.2% for the same period last year.

Interest expense. Interest expense was $9.6 million compared to $10.3
million for the same period last year. The decrease was attributable to lower
interest rates and reduced borrowings. Our weighted average interest rate on our
long-term debt, including amortization of deferred financing costs, was 7.5% and
7.6% for the second quarter of fiscal 2003 and fiscal 2002, respectively.

Income tax expense. Income tax expense was $2.5 million, or 39.6% of pretax
income, in the second quarter of fiscal 2003 and $3.7 million, or 39.8% of
pretax income, in the second quarter of fiscal 2002. The decrease in the
effective tax rate was due to a change in our estimate of necessary tax expense
and the relative impact of disallowed expenses at different levels of taxable
income. Income tax expense was computed by applying estimated effective income
tax rates to the income before income taxes. Income tax expense varies from the
statutory federal income tax rate due primarily to state and foreign income
taxes, offset by tax credits.

Discontinued operations. Discontinued operations resulted in income of $0.5
million and a loss of $0.1 million in the second quarter of fiscal 2003 and
2002, respectively. Discontinued operations represents the operating results for
all periods presented of the 16 centers closed during the twenty-eight weeks
ended December 13, 2002, and one operating center that is held for sale at
December 13, 2002.

Discontinued operations included the following, with dollars in thousands:



Twelve Weeks Ended
-------------------------------------
December 13, 2002 December 14, 2001
----------------- -----------------

Revenues, net............................................ $ 281 $ 1,550
----------------- -----------------
Operating expenses:
Salaries, wages and benefits.......................... 191 1,034
Depreciation.......................................... 220 112
Rent.................................................. 51 166
Provision for doubtful accounts....................... 67 9
Other................................................. (1,084) 341
----------------- -----------------
Total operating expenses.......................... (555) 1,662
----------------- -----------------
Operating income (loss)............................. 836 (112)
Interest expense........................................ -- --
----------------- -----------------
Discontinued operations before income tax............. 836 (112)
Income tax (expense) benefit............................ (331) 45
----------------- -----------------
Discontinued operations, net of tax................... $ 505 (67)
================= =================


13

For the twelve weeks ended December 13, 2002, depreciation expense included
an impairment charge of $0.1 million and other operating expense included gains
on closed center sales in the amount of $1.2 million.

Net income. Net income was $4.3 million in the second quarter of fiscal
2003, a decrease of $1.2 million, or 21.1% from the same period last year. The
decline was due to decreased operating income, discussed above, offset by
reduced interest costs and gains on closed center sales that are included in
discontinued operations. Basic and diluted net income per share were both $0.22
for the second quarter of fiscal 2003. For the second quarter of fiscal 2002,
basic and diluted net income per share were $0.28 and $0.27, respectively.

Twenty-eight weeks ended December 13, 2002 compared to twenty-eight weeks ended
December 14, 2001

The following table shows the comparative operating results of KinderCare,
with dollars in thousands, except the average weekly tuition rate:



Twenty-eight Twenty-eight Change
Weeks Ended Percent Weeks Ended Percent Amount
December 13, of December 14, of Increase/
2002 Revenues 2001 Revenues (Decrease)
------------ ------------ ------------ ------------ ------------

Revenues, net........................ $ 453,282 100.0% $ 437,078 100.0% $ 16,204
------------ ------------ ------------ ------------ ------------
Operating expenses:
Salaries, wages and benefits:
Center expense.................. 238,345 52.6 229,996 52.6 8,349
Region and corporate expense.... 18,256 4.0 17,197 4.0 1,059
------------ ------------ ------------ ------------ ------------
Total salaries, wages and
benefits.................... 256,601 56.6 247,193 56.6 9,408
Depreciation and amortization..... 31,570 7.0 29,076 6.7 2,494
Rent.............................. 27,718 6.1 26,212 6.0 1,506
Other............................. 107,749 23.8 103,771 23.7 3,978
------------ ------------ ------------ ------------ ------------
Total operating expenses........ 423,638 93.5 406,252 93.0 17,386
------------ ------------ ------------ ------------ ------------
Operating income.............. $ 29,644 6.5% $ 30,826 7.0% $ (1,182)
============ ============ ============ ============ ============

Average weekly tuition rate.......... $ 143.50 $ 136.27 $ 7.23
Occupancy............................ 63.1% 65.8% (2.7)


Revenues, net. Net revenues increased $16.2 million, or 3.7%, from the same
period last year to $453.3 million in the twenty-eight weeks ended December 13,
2002. The increase was due to higher average weekly tuition rates as well as
additional net revenues generated by the newly opened centers. Comparable center
net revenues increased $4.3 million, or 1.0%. During the periods indicated, we
opened and closed centers as follows:



Twenty-eight Weeks Ended
-------------------------------------
December 13, 2002 December 14, 2001
----------------- -----------------

Number of centers at the beginning of the period......... 1,264 1,242
Openings................................................. 18 22
Closures................................................. (16) (7)
----------------- -----------------
Number of centers at the end of the period............ 1,266 1,257
================= =================

Total center licensed capacity at the end of the period.. 167,000 165,000


14

The average weekly tuition rate increased $7.23, or 5.3%, to $143.50 in the
twenty-eight weeks ended December 13, 2002, due primarily to tuition increases.
Occupancy declined to 63.1% from 65.8% for the same period last year due to
reduced full-time equivalent attendance within the older center population.

Salaries, wages and benefits. Expenses for salaries, wages and benefits
increased $9.4 million, or 3.8%, from the same period last year to $256.6
million. Total salaries, wages and benefits expense as a percentage of net
revenues was 56.6% for both of the twenty-eight week periods ended December 13,
2002 and December 14, 2001.

The expense directly associated with the centers was $238.3 million, an
increase of $8.3 million from the same period last year. The increase was
primarily due to costs from newly opened centers, overall higher wage rates and
higher medical insurance costs, partially offset by improved labor productivity.
At the center level, salaries, wages and benefits expense as a percentage of net
revenues remained flat at 52.6% for both periods.

Depreciation and amortization. Depreciation and amortization expense
increased $2.5 million from the same period last year to $31.6 million.
Depreciation increased primarily due to newly opened centers and an impairment
charge. During the twenty-eight weeks ended December 13, 2002, eleven centers
and certain undeveloped properties were determined to be impaired, which
resulted in an impairment charge of $0.8 million compared to $0.2 million in the
twenty-eight weeks ended December 14, 2001. Under-performing centers are those
with estimated future cash flows, undiscounted and without interest charges,
less than the carrying value of the asset. The impairment of eleven centers in
the twenty-eight weeks ended December 13, 2002, was primarily the result of
occupancy declines of individual centers.

Amortization of goodwill decreased $1.1 million as a result of the adoption
of SFAS No. 142 in the first quarter of fiscal 2003. See "Note 2. Summary of
Significant Accounting Policies, Goodwill and Intangible Assets" to the
unaudited consolidated financial statements.

Rent. Rent expense increased $1.5 million from the same period last year to
$27.7 million primarily due to our sale-leaseback program. In addition, the
rental rates experienced on new and renewed center leases are higher than those
experienced in previous fiscal periods.

Other operating expenses. Other operating expenses increased $4.0 million,
or 3.8%, from the same period last year, to $107.7 million. The increase was due
primarily to higher insurance costs. Other operating expenses as a percentage of
net revenues were 23.8% for both periods.

Operating income. Operating income was $29.6 million, a decrease of $1.2
million, or 3.8%, from the same period last year. Operating income decreased due
to higher insurance costs, depreciation and rent. Operating income as a
percentage of net revenues was 6.5% compared to 7.0% for the same period last
year.

Interest expense. Interest expense was $22.5 million compared to $24.5
million for the same period last year. The decrease was substantially
attributable to lower interest rates and reduced borrowings. Our weighted
average interest rate on our long-term debt, including amortization of deferred
financing costs, was 7.6% and 8.0% for the twenty-eight weeks ended December 13,
2002 and December 14, 2001.

Income tax expense. Income tax expense was $2.9 million, or 39.6% of pretax
income, in the twenty-eight weeks ended December 13, 2002 and $2.7 million, or
41.0% of pretax income, in the

15

twenty-eight weeks ended December 14, 2001. The decrease in the effective tax
rate was due to a change in our estimate of necessary tax expense and the
relative impact of disallowed expenses at different levels of taxable income.
Income tax expense was computed by applying estimated effective income tax rates
to the income before income taxes. Income tax expense varies from the statutory
federal income tax rate due primarily to state and foreign income taxes, offset
by tax credits.

Discontinued operations. Discontinued operations resulted in income of $0.3
million and a loss of $0.3 million in the twenty-eight weeks ended December 13,
2002 and December 14, 2001, respectively. Discontinued operations represents the
operating results for all periods presented of the 16 centers closed during the
twenty-eight weeks ended December 13, 2002, and one operating center that is
held for sale at December 13, 2002.

Discontinued operations included the following, with dollars in thousands:



Twenty-eight Weeks Ended
-------------------------------------
December 13, 2002 December 14, 2001
----------------- -----------------

Revenues, net............................................ $ 1,489 $ 3,520
----------------- -----------------
Operating expenses:
Salaries, wages and benefits.......................... 1,070 2,418
Depreciation.......................................... 277 247
Rent.................................................. 216 403
Provision for doubtful accounts....................... 94 21
Other................................................. (673) 857
----------------- -----------------
Total operating expenses.......................... 984 3,946
----------------- -----------------
Operating income (loss)............................. 505 (426)
Interest expense........................................ -- (1)
----------------- -----------------
Discontinued operations before income tax............. 505 (427)
Income tax (expense) benefit............................ (200) 175
----------------- -----------------
Discontinued operations, net of tax................... $ 305 $ (252)
================= =================


For the twenty-eight weeks ended December 13, 2002, depreciation expense
included an impairment charge of $0.1 million and other operating expense
included gains on closed center sales in the amount of $1.2 million.

Net income. Net income was $4.8 million in the twenty-eight weeks ended
December 13, 2002, an increase of $1.1 million, or 29.2%, from the same period
last year. The increase was due to lower interest costs and gains on closed
center sales, which are included in discontinued operations. Basic and diluted
net income per share were both $0.24 for the twenty-eight weeks ended December
13, 2002. For the twenty-eight weeks ended December 14, 2001, basic and diluted
net loss per share were $0.19 and $0.18, respectively.

Liquidity and Capital Resources

Our principal sources of liquidity are cash flow generated from operations
and borrowings under a $300.0 million revolving credit facility. At December 13,
2002, we had drawn $168.0 million under the revolving credit facility, had
committed to outstanding letters of credit totaling $33.2 million and had funded
$97.9 million under the synthetic lease facility discussed below. Our
availability under the revolving credit facility at December 13, 2002 was $98.8
million. The revolving credit facility is scheduled to terminate on February 13,
2004.

16

Our consolidated net cash provided by operating activities for the
twenty-eight weeks ended December 13, 2002, was $35.9 million compared to $24.3
million in the same period last year. The increase in net cash flow was due to
the increase in EBITDAR and changes in working capital; see the calculation of
EBITDAR below. Cash and cash equivalents totaled $11.9 million at December 13,
2002, compared to $8.6 million at May 31, 2002.

EBITDAR is earnings before interest, taxes, depreciation, amortization,
rent and related components of discontinued operations. EBITDAR was calculated
as follows, with dollars in thousands:



Twelve Weeks Ended Twenty-Eight Weeks Ended
------------------------- -------------------------
December 13, December 14, December 13, December 14,
2002 2001 2002 2001
----------- ----------- ----------- -----------

Net income................................ $ 4,300 $ 5,453 $ 4,757 $ 3,683
Interest expense, net..................... 9,542 10,246 22,274 24,154
Income tax expense........................ 2,487 3,651 2,918 2,737
Depreciation and amortization............. 14,322 12,538 31,570 29,076
Discontinued operations:
Income tax expense (benefit)........... 331 (45) 200 (175)
Interest expense....................... -- -- -- 1
Depreciation........................... 220 112 277 247
----------- ----------- ----------- -----------
EBITDA............................... 31,202 31,955 61,996 59,723
Rent expense.............................. 12,336 11,029 27,718 26,212
Discontinued operations - rent............ 51 166 216 403
----------- ----------- ----------- -----------
EBITDAR................................ $ 43,589 $ 43,150 $ 89,930 $ 86,338
=========== =========== =========== ===========
EBITDAR - percentage of net revenues... 22.1% 22.6% 19.8% 19.8%


During the twelve and twenty-eight week periods ended December 13, 2002,
EBITDAR increased $0.4 million or 1.0%, and $3.6 million or 4.2%, respectively.
The increase was due to higher tuition rates, control over center labor
productivity and gains on closed center sales, offset by higher insurance costs.
EBITDAR is not intended to indicate that cash flow is sufficient to fund all of
our cash needs or represent cash flow from operations as defined by accounting
principles generally accepted in the United States of America. In addition,
EBITDAR should not be used as a tool for comparison as the computation may not
be the same for all companies.

In fiscal year 2001, we issued 860,000 shares of our common stock and paid
$13.1 million to the sellers of Mulberry and assumed $3.3 million of debt. In
August 2002, 119,838 of the 860,000 shares were returned to us, which included
99,152 shares that were released from an indemnity escrow and 20,686 shares that
were repurchased from certain former shareholders of Mulberry. All 119,838
shares have been cancelled.

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, which may be extended,
subject to the consent of the lessors. A total of 44 centers were constructed
for $97.9 million. The related leases are classified as operating leases for
financial reporting purposes. We currently do not consolidate the assets or
liabilities related to the synthetic lease in our consolidated financial
statements. In January 2003, the FASB issued FIN 46, see "Note 2. Summary of
Significant Accounting Policies, Recently Issued Accounting Pronouncements." We
expect to have to consolidate the assets and liabilities of the synthetic lease
facility during the second quarter of our fiscal year 2004.

The synthetic lease facility closed to draws on February 13, 2001 and, at
December 13, 2002, $97.9 million had been funded through the facility. We have
the option to purchase the centers for $97.9 million at the end of the lease
term, which is February 13, 2004. We are required to notify the lessors by May
14, 2003, as to whether or not we will be exercising our option to purchase the
centers at the end of

17

the lease term. If we do not elect to exercise our purchase option, then we are
required to market the leased centers for sale to third parties. In addition, we
would pay the lessors a guaranteed residual amount of up to $82.2 million. The
guaranteed residual amount that we may have to pay would be reduced to the
extent the net sales proceeds from the centers exceed $15.7 million. Any such
payment of the guaranteed residual amount to the lessors would be recognized as
rental expense when and if payment becomes probable.

The synthetic lease facility includes covenants and restrictions that are
substantially identical to those in our credit facility. In the event of certain
defaults under the terms of the synthetic lease facility, all amounts under the
synthetic lease facility, including the full property cost of the leased
centers, may become immediately due and payable.

During the fourth quarter of fiscal year 2002, we began marketing efforts
to sell centers to individual real estate investors and then lease them back.
The Board of Directors has authorized sales of up to $150.0 million, which we
expect will represent 60 to 70 centers. The resulting leases are expected to be
classified as operating leases. We will continue to manage the operations of any
centers that are sold in such transactions. By December 13, 2002, we had
completed sales totaling $40.9 million, which represented 19 centers. Subsequent
to December 13, 2002, we closed $20.3 million in sales and are currently in the
process of negotiating another $51.5 million of sales. We expect our
sale-leaseback efforts to continue into fiscal year 2004, assuming the
investment market for such transactions remains favorable.

Our principal uses of liquidity are meeting debt service requirements,
financing capital expenditures and providing working capital. We expect to fund
future new center development through the revolving credit facility and
sale-leaseback proceeds, although alternative forms of funding continue to be
evaluated and new arrangements may be entered into in the future.

We have certain contractual obligations and commercial commitments.
Contractual obligations are those that will require cash payments in accordance
with the terms of a contract, such as a borrowing or lease agreement. Commercial
commitments represent potential obligations for performance in the event of
demands by third parties or other contingent events, such as lines of credit.
Our contractual obligations and commercial commitments at December 13, 2002 were
as follows, with dollars in thousands:



Remainder Fiscal Year
of Fiscal -------------------------------------------------------------------
Total 2003 2004 2005 2006 2007 Thereafter
----------- ----------- ----------- ----------- ----------- ----------- -----------

Long-term debt........... $ 352,158 $ 1,175 $ 1,049 $ 4,555 $ 46,417 $ 263 $ 298,699
Capital lease obligations 31,181 1,104 2,529 2,234 2,277 2,396 20,641
Operating leases......... 426,746 18,893 139,826 35,416 31,239 27,701 173,671
Line of credit........... 168,000 -- 168,000 -- -- -- --
Standby letters of credit 33,168 17,995 15,173 -- -- -- --
Other commitments........ 12,286 12,123 163 -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 1,023,539 $ 51,290 $ 326,740 $ 42,205 $ 79,933 $ 30,360 $ 493,011
=========== =========== =========== =========== =========== =========== ===========


Other commitments include center development commitments, obligations to
purchase vehicles and other purchase order commitments.

We may experience decreased liquidity during the summer months and the
calendar year-end holidays due to decreased attendance during these periods. New
enrollments are generally highest during the traditional fall "back to school"
period and after the calendar year-end holidays. Enrollment generally decreases
5% to 10% during the summer months and calendar year-end holidays.

18

We believe that cash flow generated from operations and borrowings under
the revolving credit facility will adequately provide for our working capital
and debt service needs and will be sufficient to fund our expected capital
expenditures for the foreseeable future. Any future acquisitions, joint ventures
or similar transactions may require additional capital, and such capital may not
be available to us on acceptable terms or at all. Although no assurance can be
given that such sources of capital will be sufficient, the capital expenditure
program has substantial flexibility and is subject to revision based on various
factors, including but not limited to, business conditions, cash flow
requirements, debt covenants, competitive factors and seasonality of openings.
If we experience a lack of working capital, it may reduce our future capital
expenditures. If these expenditures were substantially reduced, in management's
opinion, our operations and cash flow would be adversely impacted.

Capital Expenditures

During the twenty-eight weeks ended December 13, 2002 and December 14,
2001, we opened 18 and 22 new centers, respectively. We expect to open 29 new
centers in fiscal 2003 and to continue our practice of closing centers that are
identified as not meeting performance expectations. In addition, we may acquire
existing centers from local or regional early childhood education and care
providers. We may not be able to successfully negotiate and acquire sites and/or
previously constructed centers, meet our targets for new center additions or
meet targeted deadlines for development of new centers.

New centers are located based upon detailed site analyses that include
feasibility and demographic studies and financial modeling. The length of time
from site selection to construction and, finally, the opening of a community
center ranges from 16 to 24 months. Frequently, new site negotiations are
delayed or canceled or construction is delayed for a variety of reasons, many of
which are outside our control. The average total cost per community center
typically ranges from $1.8 million to $2.6 million depending on the size and
location of the center. However, the actual costs of a particular center may
vary from such range.

Our new centers typically have a licensed capacity of 180, while the
centers constructed during fiscal 1997 and earlier have an average licensed
capacity of 125. When mature, these larger centers are designed to generate
higher revenues, operating income and margins than our older centers. These new
centers also have higher average costs of construction and typically take three
to four years to reach maturity. On average, our new centers should begin to
produce positive EBITDAR by the end of the first year of operation and begin to
produce positive net income by the end of the second year of operation.
Accordingly, as more new centers are developed and opened, profitability will be
negatively impacted in the short-term but is expected to be enhanced in the
long-term once these new centers achieve anticipated levels of occupancy.

We continue to make capital expenditures in connection with a renovation
program, which includes interior and playground renovations and signage
replacements. The program is designed to bring all of our existing facilities to
a company standard for plant and equipment and to enhance the curb appeal of
these centers.

Capital expenditures included the following, with dollars in thousands:



Twenty-Eight Weeks Ended
-------------------------------------
December 13, 2002 December 14, 2001
----------------- -----------------

New center development.......................... $ 34,568 $ 38,561
Renovation of existing facilities............... 11,223 11,447
Equipment purchases............................. 7,424 3,869
Information systems purchases................... 976 2,012
----------------- -----------------
$ 54,191 $ 55,889
================= =================


19

Capital expenditure limits under our credit facilities for fiscal year 2003
are $190.0 million. The capital expenditure limit may be increased by carryover
of a portion of unused amounts from previous periods and are subject to
exceptions. Also, we have some ability to incur additional indebtedness,
including through mortgages or sale-leaseback transactions, subject to the
limitations imposed by the indenture under which our senior subordinated notes
were issued and the credit facilities.

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.
Summary of Significant Accounting Policies" to the unaudited consolidated
financial statements. For a more complete description, please refer to our
Annual Report on Form 10-K for the fiscal year ended May 31, 2002. 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. 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. The recognition of our net revenues meets the
criteria of the Securities and Exchange Commission Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements, including the existence of an
arrangement, the rendering of services, a determinable fee and probable
collection.

Accounts receivable. Our accounts receivable are comprised primarily of
tuition due from governmental agencies, parents and employers. Accounts
receivable are presented at estimated net realizable value. We use estimates in
determining the collectibility of our accounts receivable and must rely on our
evaluation of historical experience, governmental funding levels, specific
customer issues and current economic trends to arrive at appropriate reserves.
Material differences may result in the amount and timing of bad debt expense if
actual experience differs significantly from management estimates.

Long-lived and intangible assets. During the first quarter of fiscal 2003,
we adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Please refer to "Initial Adoption of Accounting Policies" below. Under
the requirements of SFAS No. 144, 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.

20

Impairment charges were as follows, with dollars in thousands:



Twelve Weeks Ended Twenty-Eight Weeks Ended
------------------------- -------------------------
December 13, December 14, December 13, December 14,
2002 2001 2002 2001
----------- ----------- ----------- -----------

Impairment charges included in
depreciation expense................... $ 669 $ 81 $ 749 $ 195
Impairment charges included in
discontinued operations................ 106 -- 106 --
----------- ----------- ----------- -----------
Total impairment charges.................. $ 775 $ 81 $ 855 $ 195
=========== =========== =========== ===========


During the first quarter of fiscal 2003, we adopted SFAS No. 142, which
addresses the evaluation of goodwill and other indefinite-lived intangibles for
impairment. Please refer to "Initial Adoption of Accounting Policies" below.

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 $37.9 and
$35.5 million at December 13, 2002 and May 31, 2002, respectively. Our internal
estimates are reviewed annually by a third party actuary. While we believe that
the amounts accrued for these obligations are sufficient, any significant
increase in the number of claims and costs associated with claims made under
these programs could have a material adverse effect on our financial position,
cash flows or results of operations.

Income taxes. Accounting for income taxes requires us to estimate our
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.

Initial Adoption of Accounting Policies. During the first quarter of fiscal
2003, we adopted the following new accounting pronouncements. Please also refer
to "Note 2. Summary of Significant Accounting Policies, Goodwill and Other
Intangibles and Discontinued Operations" to the unaudited consolidated financial
statements.

Goodwill and Other Intangible Assets. Effective June 1, 2002, we adopted
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires
discontinuing the amortization of goodwill and other intangible assets with
indefinite useful lives. Therefore, we ceased amortization of goodwill at June
1, 2002. Goodwill amortization was $0.5 and $1.1 million during the twelve and
twenty-eight week periods ended December 14, 2001, respectively. These assets
must now be tested at least annually for impairment and written down to their
fair market values, if necessary. As of June 1,

21

2002, we had $42.5 million of goodwill recorded on our consolidated balance
sheet. We performed a transitional impairment test in the second quarter of
fiscal 2003, as required by SFAS No. 142. Although quoted market prices are the
best evidence in determining fair value, we used the value of our stock, as
determined by the Board of Directors, as it was a more practical measure. The
fair value of the reporting unit related to the recorded goodwill, as of June 1,
2002 exceeded the carrying value at the same date, hence there was no evidence
of impairment. We will perform our annual impairment test in the fourth quarter
of fiscal 2003.

Impairment of Long-Lived Assets and Discontinued Operations. Effective June
1, 2002, we adopted SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of and
the accounting and reporting provisions of APB No. 30, Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of business. SFAS No. 144 modifies the accounting and
reporting for long-lived assets to be disposed of by sale and it broadens the
presentation of discontinued operations to include more disposal transactions.
SFAS No. 144 does not apply to goodwill and other indefinite-lived intangible
assets. Please refer to the discussion of SFAS No. 142 above.

Under the requirements of SFAS No. 144, we revised our policy to estimate
future cash flows over the remaining useful life of the principal asset, which,
in most cases, is a longer time period than the 10-year estimate used
previously. Therefore, the adoption of SFAS No. 144 may materially impact our
assessment of impairment in the future. During the second quarter of fiscal
2003, eleven under-performing centers had estimated future cash flows less than
the carrying value of the assets, resulting in an impairment charge. Refer to
"Critical Accounting Estimates" above.

We have determined that the 16 centers closed during the twenty-eight weeks
ended December 13, 2002, which included four owned and 12 leased centers, and
one owned operating center that is held for sale at December 13, 2002 meet the
criteria of discontinued operations. Therefore, the operating results for these
17 centers were classified as discontinued operations, net of tax, in the
unaudited consolidated statements of operations for all periods presented.
Discontinued operations were income of $0.5 million and a loss of $0.1 million
in the twelve weeks ended December 13, 2002 and December 14, 2001, respectively,
and income of $0.3 million and a loss of $0.3 million in the twenty-eight weeks
ended December 13, 2002 and December 14, 2001, respectively. See "Note 2.
Summary of Significant Accounting Policies, Discontinued Operations," for a
summary of financial results of discontinued operations. We believe that most of
our future center closures will now be categorized as discontinued operations.
The owned centers that meet the criteria of held for sale have been classified
as current in the unaudited consolidated balance sheets for all periods
presented. As a result, property and equipment in the amount of $0.7 and $1.8
million were classified as current assets held for sale at December 13, 2002 and
May 31, 2002, respectively.

Recently Issued Accounting Pronouncements

SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, requires costs associated with exit or disposal activities be
recorded at their fair values when a liability has been incurred, rather than at
the date of commitment to an exit or disposal plan. SFAS No. 146 is effective
for disposal activities initiated after December 31, 2002, with early
application encouraged. We applied SFAS No. 146 in the second quarter of fiscal
2003. This application did not have a material impact on our financial position
and results of operations.

SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, amends the disclosure requirements of SFAS No. 123, Accounting for
Stock-Based Compensation, to require prominent disclosures in annual and interim
financial statements about the method of accounting for stock-based compensation
and the effect in measuring compensation expense. SFAS No. 148 is effective for
fiscal years ending after December 15, 2002, with early application encouraged.
We are still evaluating the impact of adopting SFAS No. 148.

22

FIN 46, Consolidation of Variable Interest Entities, requires consolidation
where there is a controlling financial interest in a variable interest entity,
previously referred to as a special-purpose entity. Under this requirement our
synthetic lease facility will be consolidated in our consolidated balance sheet.
Property and equipment financed in the synthetic lease facility will be recorded
as assets and the related lease obligation will be recorded as a liability. The
impact to our future statement of operations will be reduced rent expense and
increased depreciation and interest expense. See "Note 4. Commitments and
Contingencies." FIN 46 is effective during the second quarter of our fiscal year
2004.

Wage Increases

Expenses for salaries, wages and benefits represented approximately 56.6%
of net revenues for the twenty-eight weeks ended December 13, 2002. We believe
that, through increases in our tuition rates, we can recover any future increase
in expenses caused by adjustments to the federal or state minimum wage rates or
other market adjustments. However, we may not be able to increase our rates
sufficiently to offset such increased costs. We continually evaluate our wage
structure and may implement changes at targeted local levels.

Forward-Looking Statements

We have made statements in this report that constitute forward-looking
statements as that term is defined in the federal securities laws. These
forward-looking statements concern our operations, economic performance and
financial condition and include statements regarding: opportunities for growth;
the number of early childhood education and care centers expected to be added in
future years; the profitability of newly opened centers; capital expenditure
levels; the ability to refinance or incur additional indebtedness; strategic
acquisitions, investments, alliances and other transactions; changes in
operating systems and policies and their intended results; our expectations and
goals for increasing center revenue and improving our operational efficiencies;
changes in the regulatory environment; the potential benefit of tax incentives
for child care programs; our projected cash flow; and our marketing efforts to
sell and lease back centers. The forward-looking statements are subject to
various known and unknown risks, uncertainties and other factors. When we use
words such as "believes," "expects," "anticipates," "plans," "estimates" or
similar expressions we are making forward-looking statements.

Although we believe that our forward-looking statements are based on
reasonable assumptions, our expected results may not be achieved. Actual results
may differ materially from our expectations. Important factors that could cause
actual results to differ from expectations include, among others:

o the effects of general economic conditions;

o competitive conditions in the child care and early education
industries;

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

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

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

o the loss of government funding for child care assistance programs;

o our inability to successfully execute our growth strategy;

23

o the availability of financing or additional capital;

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

o the availability of sites and/or licensing or zoning requirements that
may make us unable to open new centers;

o our ability to integrate acquisitions;

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

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

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

o other risk factors that are discussed in this report and, from time to
time, in our other Securities and Exchange Commission reports and
filings.

We caution you that these risks may not be exhaustive. We operate in a
continually changing business environment and new risks emerge from time to
time.

You should not rely upon forward-looking statements except as statements of
our present intentions and of our present expectations that may or may not
occur. You should read these cautionary statements as being applicable to all
forward-looking statements wherever they appear. We assume no obligation to
update or revise the forward-looking statements or to update the reasons why
actual results could differ from those projected in the forward-looking
statements.

24

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact our consolidated
financial position, results of operations or cash flows. We are exposed to
market risk in the areas of interest rates and foreign currency exchange rates.

Interest Rates

Our exposure to market risk for changes in interest rates relates primarily
to debt obligations. We have no cash flow exposure due to rate changes on our
9.5% senior subordinated notes aggregating $290.0 million at December 13, 2002.
We also have no cash flow exposure on certain industrial revenue bonds,
mortgages and notes payable aggregating $6.2 million at December 13, 2002.
However, we have cash flow exposure on our revolving credit facility, our term
loan facility and certain industrial revenue bonds subject to variable LIBOR or
adjusted base rate pricing aggregating $224.0 million at December 13, 2002.
Accordingly, a 1% (100 basis points) change in the LIBOR rate and the adjusted
base rate would have resulted in interest expense changing by approximately $0.5
and $0.6 million in the twelve weeks ended December 13, 2002 and December 14,
2001, respectively. The same change would have resulted in charges of $1.2 and
$1.4 million in the twenty-eight weeks ended December 13, 2002 and December 14,
2001, respectively.

We have cash flow exposure on our synthetic lease facility subject to
variable LIBOR pricing. We also have cash flow exposure on our vehicle leases
with variable interest rates. A 1% (100 basis points) change in the synthetic
lease LIBOR rate and the interest rate defined in the vehicle lease agreement
would have resulted in rent expense changing by approximately $0.4 million in
both of the twelve week periods ended December 13, 2002 and December 14, 2001.
The same change would have resulted in charges of $0.8 million in both of the
twenty-eight week periods ended December 13, 2002 and December 14, 2001.

Foreign Exchange Risk

We are exposed to foreign exchange risk to the extent of fluctuations in
the United Kingdom pound sterling. Based upon the relative size of our
operations in the United Kingdom, we do not believe that the reasonably possible
near-term change in the related exchange rate would have a material effect on
our financial position, results of operations and cash flows.

ITEM 4. CONTROLS AND PROCEDURES

In January 2003, we carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective. There have been no significant changes in
our internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation.

25

PART II.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits: The following exhibits are filed with this report or incorporated
herein by reference:

10(a)* Employment Separation Agreement, Waiver and Release dated October
9, 2002, between KinderCare and Robert Abeles (incorporated by
reference from Exhibit 10(aa) of our Registration Statement on Form
10, filed December 9, 2002, File No. 0-17098).

* Management contract or compensatory plan or arrangement.

(b) Reports on Form 8-K: None.

26

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on January 27, 2003.

KINDERCARE LEARNING CENTERS, INC.

By: DAVID J. JOHNSON
----------------------------------
David J. Johnson
Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)


By: DAN R. JACKSON
----------------------------------
Dan R. Jackson
Executive Vice President,
Chief Financial Officer
(Principal Financial and
Accounting Officer)

27

CERTIFICATION

I, David J. Johnson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of KinderCare Learning
Centers, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;

b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:

a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Dated: January 27, 2003


By: DAVID J. JOHNSON
----------------------------------
David J. Johnson
Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)

28

CERTIFICATION

I, Dan R. Jackson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of KinderCare Learning
Centers, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;

b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:

a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Dated: January 27, 2003


By: DAN R. JACKSON
----------------------------------
Dan R. Jackson
Executive Vice President,
Chief Financial Officer
(Principal Financial and
Accounting Officer)

29