<PAGE> 1
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
CHILDTIME LEARNING CENTERS, INC.
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Payment of filing fee (Check the appropriate box):
[X] $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing
fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
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(4) Date filed:
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<PAGE> 2
CHILDTIME LEARNING CENTERS, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD AUGUST 14, 1996
To the Shareholders:
PLEASE TAKE NOTICE that the Annual Meeting of Shareholders of Childtime
Learning Centers, Inc. (the "Company") will be held at Tam O'Shanter Country
Club, 5051 Orchard Lake Road, W. Bloomfield, MI 48325, on August 14, 1996, at
10:00 a.m., Eastern Daylight Time, to consider and act upon the following
matters:
(1) The election of two directors to serve until the 1999 Annual
Meeting of Shareholders and until their successors shall have been duly
elected and qualified.
(2) Such other business as may properly come before the meeting.
Only shareholders of record at the close of business on July 1, 1996 will
be entitled to vote at the meeting.
Your attention is called to the attached proxy statement and the
accompanying proxy. You are requested to sign and return the proxy in the
enclosed envelope, to which no postage need be affixed if mailed in the United
States. If you attend the meeting, you may withdraw your proxy and vote your own
shares.
A copy of the Annual Report of the Company for the fiscal year ended March
29, 1996 accompanies this Notice.
By Order of the Board of Directors
MICHAEL M. YEAGER
Secretary
Farmington Hills, Michigan
July 15, 1996
<PAGE> 3
CHILDTIME LEARNING CENTERS, INC.
38345 WEST 10 MILE ROAD, SUITE 100
FARMINGTON HILLS, MICHIGAN 48335
-------------------------
PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD AUGUST 14, 1996
GENERAL INFORMATION
The Annual Meeting of Shareholders of Childtime Learning Centers, Inc. (the
"Company") will be held at Tam O'Shanter Country Club, 5051 Orchard Lake Road,
W. Bloomfield, MI 48325, on August 14, 1996, at 10:00 a.m., Eastern Daylight
Time, for the purposes set forth in the accompanying Notice of Annual Meeting of
Shareholders. The approximate mailing date for this proxy statement and proxy is
July 15, 1996.
It is important that your shares be represented at the meeting. If it is
impossible for you to attend the meeting, please sign and date the enclosed
proxy and return it to the Company. The proxy is solicited by the Board of
Directors of the Company. Shares represented by valid proxies in the enclosed
form will be voted if received in time for the Annual Meeting. Expenses in
connection with the solicitation of proxies will be borne by the Company and may
include requests by mail and personal contact by its directors, officers, and
employees. The Company will reimburse brokers or other nominees for their
expenses in forwarding proxy materials to principals. Any person giving a proxy
has the power to revoke it any time before it is voted.
All references in this Proxy Statement to "fiscal 1996" are references to
the Company's fiscal year ended March 29, 1996. Unless otherwise stated,
references to the "Company" mean Childtime Learning Centers, Inc. and its
wholly-owned subsidiary, Childtime Childcare, Inc.
VOTING SECURITIES AND PRINCIPAL HOLDERS
Only holders of record of shares of the Company's Common Stock, no par
value (the "Common Stock"), at the close of business on July 1, 1996 (the
"Record Date") are entitled to notice of, and to vote at, the meeting or at any
adjournment or adjournments thereof, each share having one vote. On the Record
Date, there were issued and outstanding 5,227,811 shares of the Common Stock.
As of the Record Date, the only persons known to the Company to be the
beneficial owners of more than 5% of the Company's outstanding Common Stock were
Childcare Associates, KD Partners II and George A. Kellner. Reference is made to
the table (and, in particular, note 5 to such table) set forth under the caption
"Election of Directors" for the number of shares and percentage of the Company's
outstanding Common Stock beneficially owned by Childcare Associates, KD Partners
II and George A. Kellner.
I. ELECTION OF DIRECTORS
The Board of Directors proposes that James W. Geisz and Jason K. Feld be
elected as directors of the Company to hold office until the Annual Meeting of
the Shareholders in 1999, and in each case, until his successor is elected and
qualified.
The persons named in the accompanying proxy intend to vote all valid
proxies received by them for the election of the foregoing nominees, unless such
proxies are marked to the contrary. The two nominees receiving the greatest
number of votes cast at the meeting or its adjournment shall be elected.
Abstentions, withheld votes and broker non-votes will not be deemed votes cast
in determining which nominees receive the greatest number of votes cast, but
they will be counted for purposes of determining whether a quorum is present. If
any nominee is unable or declines to serve, which is not anticipated, it is
intended that the proxies be voted in accordance with the best judgment of the
proxy holder. The following information is furnished with respect to each
nominee for election as a director, with respect to each director whose term of
office as a
<PAGE> 4
director will continue after this meeting, and with respect to each executive
officer of the Company named in the Summary Compensation Table below:
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OF OUTSTANDING SHARES
COMMON STOCK OF THE COMPANY'S
POSITIONS AND OF THE COMPANY COMMON STOCK
NAME AND YEAR OFFICES WITH THE BENEFICIALLY BENEFICIALLY
FIRST BECAME COMPANY AND OTHER OWNED AS OF OWNED AS OF
A DIRECTOR(1) AGE PRINCIPAL OCCUPATIONS THE RECORD DATE(2) THE RECORD DATE
- ------------------------------ --- ---------------------------------------------- ------------------
<S> <C> <C> <C> <C>
DIRECTORS AND NOMINEES FOR ELECTION AS DIRECTORS
Milton H. Dresner (1995)(3)... 70 President of
Highland Companies,
(Southfield, Michigan)...... 1,000 *
Jason K. Feld (1996).......... 42 Principal Research
Specialist
at the University of
Arizona,
(Tucson, Arizona)........... 0 0.0%
James W. Geisz (1995)(4)...... 43 General Partner of
TGV Partners,
(Los Angeles, California)... 183,436 3.5
Benjamin R. Jacobson (1996)... 51 Managing Partner
of Jacobson Partners,
(New York, New York)........ 0 0.0
George A. Kellner (1995)(5)... 52 Chairman of the Board
of the Company and
Managing Partner of
Kellner, DiLeo & Co.,
(New York, New York)........ 2,865,000 54.6
Harold A. Lewis (1995)........ 50 President and Chief
Executive Officer of
the Company................. 162,000 3.1
Leonard C. Tylka (1995)(6).... 49 Controller of KD Equities
(New York, New York)........ 0 0.0
OTHER EXECUTIVE OFFICERS
Michael M. Yeager................................................. 36,000 *
Deborah D. Ludwig................................................. 13,250 *
William H. VanHuis................................................ 10,750 *
Taylor V. Ward.................................................... 6,250 *
All directors and executive officers as a group (11 persons)...... 3,277,686 62.7%
</TABLE>
- -------------------------
* Less than 1%.
(1) All addresses are care of Childtime Learning Centers, Inc., 38345 West 10
Mile Road, Suite 100, Farmington Hills, Michigan 48335.
(2) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them. Does not include options to
purchase shares of Common Stock which are not exercisable within 60 days
after the Record Date.
(3) Mr. Dresner is a minority investor in Childcare Associates. Mr. Dresner
disclaims beneficial ownership in the shares of Common Stock owned by such
shareholder.
(4) Includes all of the shares of Common Stock owned by GCC Partners, Ltd. Mr.
Geisz is a general partner of such shareholder.
2
<PAGE> 5
(5) Includes 2,427,373 shares of Common Stock owned by Childcare Associates and
437,627 shares of Common Stock owned by KDPartners II. Mr. Kellner is the
managing partner of Childcare Associates and the managing partner of KD
Special Situations Partners, the investment general partner of KD Partners
II. The address for Childcare Associates is c/o KD Equities, 900 Third
Avenue, 10th Floor, New York, New York 10022, and the address for KD
Partners II is c/o Ansbacher (Cayman) Limited, Jeannette Street, P.O. Box
887, Georgetown, Grand Cayman, Cayman Islands, British West Indies. Does not
include shares beneficially owned by GCC Partners, Ltd. or Harold A. Lewis.
Pursuant to the Shareholders Agreement described in the paragraph
immediately following these notes, GCC Partners, Ltd. has agreed to vote its
shares in the same manner as the majority of the shares owned by Childcare
Associates and KD Partners II are voted, which voting arrangement will
remain in effect until February 1997. Pursuant to a voting agreement, Mr.
Lewis has agreed to vote his shares as directed by Mr. Kellner for the
five-year period ending on February 6, 2001 or, if sooner, until Childcare
Associates and KD Partners II beneficially own, in the aggregate, less than
25% of the then outstanding shares of Common Stock.
(6) Mr. Tylka is a minority investor in Childcare Associates. Mr. Tylka
disclaims beneficial ownership of the shares of Common Stock owned by such
shareholder.
The Company is a party to a shareholders agreement (the "Shareholders
Agreement") with Childcare Associates, KD Partners II, GCC Partners, Ltd. ("GCC
Partners"), Leonard B. Tessler and James W. Geisz, the general partners of GCC
Partners (collectively the "Holders"). Pursuant to the Shareholders Agreement,
until February 1997 Childcare Associates and KD Partners II (the "KD Holders")
will be entitled to designate a majority of the nominees to the Board of
Directors of the Company so long as they collectively hold at least 25% of the
outstanding Common Stock (on a fully diluted basis). In addition, GCC Partners
will be entitled to designate one nominee to the Board of Directors so long as
it or any permitted transferees continue to own at least 2% of such outstanding
Common Stock. The Shareholders Agreement requires the Holders to vote for such
nominees and not to vote in favor of the removal of any director nominated by
another Holder, unless such removal is for cause. The members of the Board of
Directors nominated by the KD Holders are Messrs. Kellner, Tylka, Lewis,
Dresner, Jacobson and Feld. The member of the Board of Directors nominated by
GCC Partners is Mr. Geisz.
OTHER INFORMATION RELATING TO DIRECTORS AND NOMINEES
The following is a brief account of the business experience during the past
five years of each member or nominee of the Board of Directors of the Company.
Milton H. Dresner has been a director of Childtime Childcare, Inc. since
November 1993. Mr. Dresner is a real estate developer and private investor with
his principal offices in Southfield, Michigan. Mr. Dresner also serves as a
director of Avatar Holdings, Inc., a real estate development company located in
Coral Gables, Florida; Flagship Federal Savings, located in San Diego,
California; and Hudson General Corporation, an aviation services company located
in Great Neck, New York.
Jason K. Feld has been a research scientist at the University of Arizona
since 1987 specializing in the field of early childhood development and
education. In addition, since 1987, Dr. Feld has been a director and vice
president of ATI, a private, Tucson, Arizona based corporation which conducts
national research in child development and education and provides multi-media
and educational products and services.
James W. Geisz has been a director of Childtime Childcare, Inc. since June
1992. Since April 1990, Mr. Geisz has been primarily engaged as a general
partner of TGV Partners, a Los Angeles based investment partnership focusing on
leveraged buyouts. In addition, in November 1992, Mr. Geisz became the general
counsel of Empire Kosher Poultry, Inc., a kosher food manufacturer located in
Mifflintown, Pennsylvania.
Benjamin R. Jacobson has been the managing general partner of Jacobson
Partners, a New York City based investment banking partnership since 1989. Mr.
Jacobson also serves as Chairman of the Board of the YMCA of Greater New York
and is a member of the Board of Trustees of Union College.
3
<PAGE> 6
George A. Kellner has been a director and Chairman of the Board of
Childtime Childcare, Inc. since July 1990. Mr. Kellner is Managing Partner of
Kellner, DiLeo & Co., a private New York City based partnership specializing in
merger arbitrage and a member firm of the New York and American Stock Exchanges.
He is also Managing Partner of KD Equities, a private equity investment firm
located in New York City. Mr. Kellner is a Trustee of Milton Academy, Trinity
College, Phoenix House, and a Member of the Advisory Council of the Department
of Economics at Princeton University.
Harold A. Lewis has been the President and Chief Executive Officer and a
director of Childtime Childcare, Inc. since August 1991. From 1990 to 1991, he
was Chief Operating Officer International Operations of U.S. Travel Systems,
Inc., a national, multi-unit travel company headquartered in Rockville,
Maryland.
Leonard C. Tylka has been a director of Childtime Childcare, Inc. since
November 1990. Since 1987, Mr. Tylka, a certified public accountant, has served
as the controller of KD Equities, a private equity investment firm located in
New York City.
MEETINGS OF THE BOARD OF DIRECTORS AND BOARD COMMITTEES AND COMPENSATION OF
DIRECTORS
The Board of Directors held two meetings during fiscal 1996. Except for Mr.
Lewis, who missed one Board meeting, each of the directors attended 100% of the
meetings of the Board of Directors and the committees of the Board of Directors
on which they serve, during the periods in which they were members of the Board
or of such committees.
The Board of Directors of the Company currently has an Audit Committee and
a Compensation Committee. The Board of Directors does not have a separate
nominating committee.
The Company established a Compensation Committee in January 1996. The
duties of the Compensation Committee include recommending to the entire Board of
Directors of the Company the compensation arrangements for senior management and
directors of the Company and administration of the 1995 Stock Incentive Plan For
Key Employees. During fiscal 1996, the Compensation Committee held one meeting.
The members of the Compensation Committee are Milton H. Dresner, James W. Geisz,
George A. Kellner and Benjamin R. Jacobson.
The Company established an Audit Committee in January 1996. The duties of
the Audit Committee include reviewing the services provided by the Company's
independent auditors, consulting with such auditors on audits and proposed
audits and reviewing the need for internal auditing procedures and the adequacy
of internal controls. During fiscal 1996, the Audit Committee did not hold any
meetings. The members of the Audit Committee are James W. Geisz, George A.
Kellner and Leonard C. Tylka.
The current standard arrangement for compensation of directors is as
follows: officers of the Company who are directors do not receive any additional
compensation for services as a director. Directors who are not employees of the
Company receive directors' fees of $6,000 per year, $500 for each Board meeting
attended and $250 for each Committee meeting attended. Such directors are also
participants in the Company's Director Stock Option Plan. Pursuant to such plan,
upon consummation of the initial public offering of the Company's Common Stock,
Messrs. Kellner, Tylka, Dresner and Geisz were each automatically granted an
option to purchase 2,500 shares of Common Stock at an exercise price of $11.
Messrs. Jacobson and Feld were automatically granted an option to purchase 2,500
shares of Common Stock upon their appointment to the Board of Directors on
February 9, 1996, at an exercise price of $12.50.
4
<PAGE> 7
II. COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table sets forth information for the fiscal year ended March
29, 1996 and March 31, 1995 concerning the compensation of the Company's Chief
Executive Officer and four of the Company's most highly compensated executive
officers whose annual salary and bonus exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------------- --------------------------
FISCAL OTHER ANNUAL OPTIONS ALL OTHER
NAME AND POSITION YEAR SALARY BONUS(1) COMPENSATION(2) (SHARES) COMPENSATION(3)
- -------------------------------- ------ -------- -------- --------------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Harold A. Lewis................. 1996 $190,000 $167,702 -- 24,000 $ 2,476
President and Chief 1995 180,000 191,708 -- -- 1,661
Executive Officer
Michael M. Yeager............... 1996 $ 96,000 $ 69,111 $ 6,211 6,750 $ 1,133
Chief Financial Officer, 1995 91,000 78,758 6,211 -- 858
Secretary and Treasurer
Deborah D. Ludwig............... 1996 $ 76,500 $ 40,158 -- 5,000 $ 937
Vice President 1995 73,500 45,955 -- -- 822
-- Eastern Region
Taylor V. Ward.................. 1996 $ 60,000 $ 37,965 $ 4,800 5,000 $ 698
Vice President 1995 55,000 43,585 5,200 -- 578
-- Western Region
William H. VanHuis.............. 1996 $ 67,000 $ 39,061 -- 5,000 $ 714
Vice President 1995 64,250 44,772 -- -- 612
-- Marketing
</TABLE>
- -------------------------
(1) Includes the bonus accrued in the year indicated, which was paid in the
following year.
(2) Includes reimbursement of expenses related to use of personal automobiles.
(3) Includes premiums paid in connection with life insurance policies and
contributions made by the Company to the Company's 401(k) plan.
OPTION GRANTS IN FISCAL 1996
The following table provides details regarding stock options granted to the
executive officers named in the above Summary Compensation Table in the last
fiscal year.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
--------------------------------------------------------- STOCK PRICE
% OF TOTAL APPRECIATION FOR
NUMBER OF OPTIONS GRANTED EXERCISE TERM (2)
OPTIONS TO EMPLOYEES IN PRICE PER EXPIRATION -----------------
NAME GRANTED(1) FISCAL YEAR SHARE DATE 5% 10%
- ------------------------------- ---------- ---------------- --------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Harold A. Lewis................ 24,000 36.9% $ 11.00 2/02/02 89,785 203,692
Michael M. Yeager.............. 6,750 10.4 11.00 2/02/02 25,252 57,288
Deborah D. Ludwig.............. 5,000 7.7 11.00 2/02/02 18,705 42,436
Taylor V. Ward................. 5,000 7.7 11.00 2/02/02 18,705 42,436
William H. VanHuis............. 5,000 7.7 11.00 2/02/02 18,705 42,436
</TABLE>
- -------------------------
(1) The indicated stock options vest at a rate of 33% per year, beginning on the
first anniversary of the date of the grant and have a term of six years
(subject to full accelerated vesting upon any entity or person, other
5
<PAGE> 8
than Childcare Associates or KD Equities, acquiring beneficial ownership
of more than 50% of the Company's outstanding voting stock). All rights to
exercise such stock options terminate upon the termination of such
optionees employment, except that the optionee may exercise that portion
of the stock option which has become fully vested on the date the
optionee's employment is terminated.
(2) In accordance with SEC rules, these columns show gains that might exist for
the option over the life of the option, a period of six years. This
valuation is hypothetical; if the stock price does not increase above the
exercise price, compensation to the named executive officers will be zero.
These gains are based on assumed rates of annual compounded stock price
appreciation of 5% and 10% from the date the options were granted over the
full option term. Of course, actual gains, if any, on stock option exercises
and stock accruals are dependent on the future performance of the Common
Stock and overall stock market conditions. There can be no assurance that
the amounts reflected in the table will be achieved. A 5% or 10% annually
compounded increase in the Company's stock price from the date of grant to
the end of the six-year option term would result in stock prices of $14.74
and $19.49 per share, respectively.
AGGREGATE OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning stock options
exercised during the fiscal year ended March 29, 1996 by the executive officers
named in the above Summary Compensation Table, as well as the value of
unexercised options held by such persons on March 29, 1996 as measured in terms
of the closing price of the Common Stock on that date as quoted on the NASDAQ
National Market System ($9.06 per share).
<TABLE>
<CAPTION>
SHARES VALUE OF UNEXERCISED
ACQUIRED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
UPON VALUE OPTIONS AT FISCAL YEAR-END AT 3/29/96
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ----------------------------- --------- -------- --------------------------- -------------------------
<S> <C> <C> <C> <C>
Harold A. Lewis.............. -- -- 0/24,000 --
Michael M. Yeager............ -- -- 0/ 6,750 --
Deborah D. Ludwig............ -- -- 0/ 5,000 --
Taylor V. Ward............... -- -- 0/ 5,000 --
William H. VanHuis........... -- -- 0/ 5,000 --
</TABLE>
SENIOR EXECUTIVE BONUS ARRANGEMENTS
The executive officers named above in the Summary Compensation Table (the
"Officers") received bonuses during 1996 (which are reflected in the Summary
Compensation Table) under various incentive bonus arrangements offered by the
Company.
Standard Incentive Plan. Each of the Officers participated in the Company's
Standard Incentive Plan. With respect to fiscal 1996, each Officer received a
bonus upon the Company's reaching a predetermined target performance level (the
"EBITDA Target") based on the Company's earnings before interest expense, income
taxes, depreciation and amortization, as adjusted ("EBITDA"). If EBITDA for the
fiscal year had been below 90% of the EBITDA Target, the Officers would have
received no bonus under the Standard Incentive Plan. If EBITDA for a fiscal year
had been between 90% and 100% of the EBITDA Target, the Officers would have
received a pro rata portion of the bonus based on the excess of fiscal 1996's
EBITDA over 90% of the EBITDA Target, up to 100%, at which point the bonus was
fully earned.
Incentive Bonus Pool. Each of the Officers also participated in the
Company's Incentive Bonus Pool and received a bonus as a result of the Company's
fiscal 1996 EBITDA exceeding that year's EBITDA Target by specified amounts (see
"Compensation Committee Report on Executive Compensation -- Bonuses").
Senior Management Subscription Agreement Bonus. Mr. Lewis, Mr. Yeager, Ms.
Ludwig and Mr. VanHuis also participate in a bonus arrangement pursuant to the
terms of the Senior Management Subscription Agreements to which the Company and
each of them is a party (the "Subscription Agreements"). Pursuant to the
Subscription Agreements, the Officers purchased shares of Common Stock, at a per
share price of $2.00, as follows: Harold A. Lewis -- 160,000 shares; Michael M.
Yeager -- 30,000 shares;
6
<PAGE> 9
Deborah D. Ludwig -- 10,000 shares and William H. VanHuis -- 5,000 shares. Each
of the other Officers, except Mr. Lewis, made an initial cash payment of 50% of
the purchase price with the remaining 50% payable to the Company, together with
interest at the rate of 8% per annum, over a five-year period. The outstanding
balance of such purchase price is secured by 50% of the Officer's stock and is
subject to repayment pursuant to the Company's Senior Management Subscription
Agreement Bonus program. Mr. Lewis purchased his shares under each of his
Subscription Agreements by making an initial cash payment of 25% of the purchase
price and delivering two promissory notes to the Company for the balance. These
notes are secured by 75% of his shares and are repayable, together with interest
at the rate of 8% per annum, over a five-year period. As of the beginning of
fiscal 1996, only Mr. Lewis had, with regard to any of the notes issued under
the Subscription Agreements, an aggregate outstanding balance in excess of
$60,000. During the fiscal year ended March 29, 1996, the maximum aggregate
principal balance outstanding under his notes to the Company was $112,000, with
$42,667 owed at the end of fiscal 1996.
Under the Senior Management Subscription Agreement Bonus, the Company pays
an annual bonus equal to the amount of the annual principal and interest
payments due under the note executed by the respective executive pursuant to
such Subscription Agreements. These bonuses are paid if the Company (i) repays
during such year all amounts due under its outstanding indebtedness in
accordance with the terms of the applicable loan agreements and (ii) achieves
90% of the EBITDA Target for that fiscal year. If these earning targets are not
met for a particular year, participating executives receive a bonus payment
equal to the annual interest payable on the note.
EMPLOYMENT AGREEMENT
The Company entered into an Employment Agreement with Mr. Lewis in fiscal
1996. Under this agreement, the Company will employ Mr. Lewis for an initial two
year employment term, which term of employment will renew automatically every
two years thereafter until terminated by the Company or Mr. Lewis. The
Employment Agreement provides for a minimum base salary of $190,000 to be
reviewed annually by the Company's Board of Directors, and participation in
various management bonus incentive arrangements. The Employment Agreement also
provides for, among other things, Mr. Lewis' participation in the Company's 1995
Stock Incentive Plan for Key Employees and certain medical, death, disability
and other benefits available to the Company's senior management. The Employment
Agreement may be terminated by the Company upon the death of Mr. Lewis, upon his
permanent disability or with or without cause. If Mr. Lewis' employment is
terminated without cause, he will be entitled to receive the greater of (a)
one-year of salary or (b) the remainder of his salary to be paid during the
current employment term, and in either case, benefits and a pro-rata portion of
his bonus for the fiscal year in which such termination occurs. If Mr. Lewis is
terminated within six months after a change in control (as defined in the
Employment Agreement), including a constructive termination within such
six-month period, Mr. Lewis will be entitled to receive two-years of salary,
benefits and a pro-rata portion of his bonus for the fiscal year in which such
termination occurs. During the term of the agreement and for a period of 12
months thereafter (9 months in the event Mr. Lewis' employment is terminated
without cause), Mr. Lewis will be subject to noncompetition and nonsolicitation
restrictions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
All the members of the Compensation Committee are non-employee directors of
the Company. The Compensation Committee currently consists of Messrs. Dresner,
Geisz, Kellner and Jacobson.
On July 9, 1990, Childtime Childcare, Inc. entered into separate consulting
service agreements (the "Consulting Agreements") with TGV Partners ("TGV") and
KD Equities, affiliates of James W. Geisz and George A. Kellner, two of the
Company's directors, respectively. The Consulting Agreements required TGV and KD
Equities to provide, in consideration of an annual consulting fee, certain
consulting services to the Company relating to the management and direction of
the Company, including the negotiation of the sale and leaseback of various
assets of the Company and any refinancing of indebtedness incurred in connection
with the acquisition of Gerber Children's Centers. The Consulting Agreements
were terminated, each pursuant to a
7
<PAGE> 10
Termination Agreement dated as of November 18, 1995, effective February 1996.
During fiscal 1996, the Company paid under the Consulting Agreements $61,387 to
TGV and $143,236 to KD Equities.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
General
The Compensation Committee's overall compensation policy applicable to the
Company's executive officers is to provide a compensation program that will
attract and retain qualified executives for the Company and provide them with
incentives to achieve the Company's goals and increase shareholder value. The
Compensation Committee implements this policy through establishing salaries,
incentive bonuses and by granting stock options. The Compensation Committee's
current policy is not to provide significant pension or other retirement
benefits for the Company's executives.
Because the Compensation Committee was not established until January 1996,
most of the compensation decisions for fiscal 1996 were made by Mr. George
Kellner, the Company's Chairman of the Board, after receiving recommendations
from Mr. Harold Lewis, the Company's President and Chief Executive Officer.
Salaries
The Compensation Committee's policy is to provide salaries that are
generally competitive with those of comparable officers in comparably sized
companies in the child care and other industries. The Committee relies heavily
on the recommendations of the Company's Chief Executive Officer as well as its
members' own subjective judgments in setting individual salary levels.
In making his recommendations with regard to the fiscal 1996 salaries for
the executive officers, the Chief Executive Officer generally utilized a range
of 3%-6% for establishing salary increases or a higher percentage if he deemed
it necessary to provide a generally competitive salary for a particular officer.
The Chief Executive Officer's salary was established by the Chairman of the
Board in accordance with Mr. Lewis' employment agreement with the Company and
the Chairman's subjective view of his individual performance and contributions
to the overall performance of the Company.
Bonuses
The Compensation Committee's policy is that a significant portion of the
executive's total compensation should be tied to incentive bonus plans. As a
result, the compensation of the Company's executive officers is directly related
to the overall financial and operating performance of the Company.
During fiscal 1996, each of the executive officers of the Company
participated in certain bonus pools which were predicated upon meeting certain
operating cash flow levels. In light of management's extensive efforts in
connection with the Company's successful initial public offering, the
Compensation Committee approved a total incentive bonus pool for fiscal 1996 of
$300,000, which was approximately $50,000 higher than the formula amount
calculated from operating cash flows actually realized.
The allocation of the incentive bonus pool amounts among the officers was
determined by the Chief Executive Officer and approved by the Chairman of the
Board. The portion allocated to the Chief Executive Officer was determined by
the Chairman of the Board and equalled 41%, which was the same percentage
allocated in prior years to Mr. Lewis and reflected, in part, the desire to
provide total cash compensation to Mr. Lewis which was generally competitive in
the market. The Chief Executive Officer's allocation among the other officers
was based on his subjective view of various factors, including his perception of
the relative contribution made by each of the officers to the Company's overall
performance and the need to provide generally competitive cash compensation to
each officer. The determination was not based on specific objectives and no
specific weight was given to any of the factors considered.
Certain executives also participated in a Senior Management Subscription
Agreement bonus arrangement whereby a bonus is earned equal to the amount of the
annual principal and interest payments due under a note executed by the
respective executive pursuant to such Subscription Agreements. Such bonuses
required
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<PAGE> 11
that the Company reach 90% of its budgeted cash flow and amounted to $54,000 in
fiscal 1996. Because the amount of bonus payable to each officer, including the
Chief Executive Officer, during any fiscal year is based entirely on the
principal and interest due that year under such officer's subscription notes,
there is no decision to be made as to the amount of, or the entitlement to, this
bonus.
Stock Options
The Committee's policy is to award stock options to the Company's officers
and other key employees in amounts reflecting the participant's position and
ability to influence the Company's overall performance. Options are intended to
provide participants with an increased incentive to make contributions to the
long-term growth of the Company, to join the interests of participants with the
interests of shareholders of the Company, and to attract and retain qualified
employees. The Committee's policy has been to grant options with a term of up to
ten years (three year pro rata vesting) and to fix the exercise price of the
options at the fair market values of the underlying shares on the date of grant.
Such options will, therefore, only have value if the price of the underlying
shares increases.
Options were granted by the Compensation Committee to executive officers
(including Mr. Lewis) based upon the recommendation of the Chief Executive
Officer. In making his recommendations, the Chief Executive Officer subjectively
considered certain factors, including his perception of individual performance,
the individuals' contribution to the overall performance of the Company and the
anticipated value of the executive's contribution to the Company's future
performance, as well as the need to retain executives. The determination was not
based on specific objectives and no specific weight was given to any of the
factors considered.
By the Compensation Committee
George A. Kellner, Chairman
Milton H. Dresner
James W. Geisz
Benjamin R. Jacobson
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<PAGE> 12
PERFORMANCE GRAPH
The following line graph compares for the fiscal year ended March 29, 1996
(i) the yearly cumulative total shareholder return (i.e., the change in share
price plus the cumulative amount of dividends, assuming dividend reinvestment,
divided by the initial share price, expressed as a percentage) on the Company's
Common Stock, with (ii) the cumulative total return of the NASDAQ Stock
Market-US Index, and with (iii) the cumulative total return of the NASDAQ Stock
Market-US Index and with a selected peer group consisting of KinderCare Learning
Centers, Inc. and Children's Discovery Centers, Inc.
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG CHILDTIME LEARNING CENTERS, INC.,
THE NASDAQ STOCK MARKET-US INDEX AND A PEER GROUP
<TABLE>
<CAPTION>
CHILDTIME
LEARNING NASDAQ
MEASUREMENT PERIOD CENTERS, STOCK
(FISCAL YEAR COVERED) INC. PEER GROUP MARKET-US
<S> <C> <C> <C>
2/02/96 100 100 100
2/29/96 106 97 103
3/29/96 82 98 103
</TABLE>
CERTAIN TRANSACTIONS
Senior Management Subscription Agreements. For information concerning these
transactions and the related loans to executive officers, see "Senior Executive
Bonus Arrangements -- Senior Management Subscription Agreement Bonus" above.
Shareholder Consulting Agreements. For information concerning these
transactions, see "Compensation Committee Interlocks and Insider Participation"
above.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission ("SEC") initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater than ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended
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March 29, 1996, all Section 16(a) filing requirements applicable to its
officers, directors and greater than ten percent beneficial owners were complied
with.
III. SUMMARY OF CHILDTIME LEARNING CENTERS, INC.
1995 STOCK INCENTIVE PLAN FOR KEY EMPLOYEES
In connection with the initial public offering of the Company's Common
Stock, the Board of Directors of the Company adopted, and the shareholders
approved the Childtime Learning Centers, Inc. 1995 Stock Incentive Plan for Key
Employees (the "Plan"). Under the Plan, stock options and restricted stock
relating to shares of Common Stock may be granted to key employees of the
Company or any corporation in which the Company owns, directly or indirectly,
stock possessing more than fifty percent of the combined voting power of all
classes of stock (each, a "Subsidiary"). A maximum of 300,000 shares of Common
Stock are subject to the Plan.
The Board of Directors believes that the Plan allows the Company to provide
key employees of the Company with an increased incentive to make significant and
extraordinary contributions to the long-term performance and growth of the
Company, to join the interests of key employees with the interests of the
shareholders of the Company and to facilitate attracting and retaining key
employees of exceptional ability. The Plan could, however, have an
"anti-takeover" effect, particularly with regard to the award of restricted
stock which generally will require no payment from the employee.
The Plan is not subject to any provisions of the Employee Retirement Income
Security Act of 1974 and is not qualified under Section 401(a) of the Internal
Revenue Code of 1986, as amended (the "Code").
THE MAJOR FEATURES OF THE PLAN ARE SUMMARIZED BELOW, BUT THIS IS ONLY A
SUMMARY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE ACTUAL TEXT OF THE
PLAN, A COPY OF WHICH HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
AS PART OF THE COMPANY'S REGISTRATION STATEMENT ON FORM S-1 AND MAY BE OBTAINED
FROM THE COMPANY OR THE SEC. CAPITALIZED TERMS NOT OTHERWISE DEFINED HEREIN HAVE
THE MEANINGS GIVEN THEM IN THE PLAN.
ADMINISTRATION
The Plan is administered by the Compensation Committee of the Board of
Directors (the "Committee"). The Committee is comprised of persons who meet the
standards of Rule 16b-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), or any similar successor rule and the regulations
thereunder. Currently, the Committee is composed of Messrs. Dresner, Geisz,
Kellner and Jacobson.
Subject to the provisions of the Plan, the Committee will determine, from
those eligible to be participants under the Plan, the persons to be granted
stock options and restricted stock, the amount of stock or rights to be optioned
or granted to each such person and the terms and conditions of any stock options
and restricted stock. In addition, the Committee is authorized to interpret the
Plan, to make, amend and rescind rules and regulations relating to the Plan and
to make all other determinations necessary or advisable for its administration,
all subject to the provisions of the Plan.
PLAN PARTICIPANTS
The selection of persons who are eligible to participate in the Plan and
grants and awards to those individuals are determined by the Committee, in its
sole discretion. The only established criterion to determine eligibility under
the Plan is that individuals must be key employees (including officers and
directors who are also key employees) of the Company or any Subsidiary. Each
grant or award under the Plan is to be evidenced by a written agreement which
will contain such provisions as may be approved by the Committee.
SHARES SUBJECT TO GRANT OR AWARD
The maximum number of shares of Common Stock with respect to which stock
options may be granted or which may be awarded as restricted stock under the
Plan is 300,000 shares. No employee may receive
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<PAGE> 14
options, restricted stock or any combination thereof for more than 300,000
shares of Common Stock over the term of the Plan, and no Incentive Option may be
granted under the Plan to any one participant which would result in the
aggregate fair market value of underlying stock with respect to which Incentive
Options are exercisable for the first time by such participant during any
calendar year under any plan maintained by the Company (or any parent or
Subsidiary corporation of the Company) exceeding $100,000. For purposes of the
Plan, an "Incentive Option" means an option to purchase Common Stock which meets
the requirements set forth in the Plan and also meets the definition of an
incentive stock option within the meaning of Section 422 of the Code. The number
of shares subject to each outstanding stock option or restricted stock award,
the option price with respect to outstanding stock options, the aggregate number
of shares remaining available under the Plan and the 300,000 share per-employee
limitation are subject to adjustment by the Committee to reflect events such as
stock dividends, stock splits, recapitalizations, mergers, consolidations or
reorganizations of or by the Company. No fractional shares will be issued
pursuant to the Plan. If a stock option expires or terminates for any reason
without having been fully exercised, or if shares of restricted stock are
forfeited, the number of shares with respect to which the stock option was not
exercised at the time of its expiration or termination, and the number of
forfeited shares of restricted stock, will again become available for the grant
of stock options or the award of restricted stock under the Plan, unless the
Plan has been terminated.
AMENDMENT OR TERMINATION OF THE PLAN
The Board of Directors may terminate or amend the Plan at any time,
provided that, except as described under the caption "Shares Subject to Grant or
Award" set forth above, (a) the Board may not, without shareholder approval, (i)
amend the Plan so as to increase the maximum number of shares in the aggregate
which are subject to the Plan, (ii) increase the maximum number of shares for
which any participant may be granted stock options or awarded restricted stock
under the Plan, (iii) change the class of persons eligible to be participants
under the Plan, or (iv) materially increase the benefits accruing to
participants under the Plan, and (b) the Board may not, without the consent of
the holder of a stock option or restricted stock award, change the stock option
price or alter or impair any stock option or restricted stock which has been
previously granted or awarded under the Plan.
Unless sooner terminated by the Board of Directors of the Company, the Plan
terminates ten years after its adoption by the Board of Directors. Termination
will not affect the validity or expiration date of any then outstanding stock
option or restricted stock award.
STOCK OPTIONS
Grant and Exercise of Stock Options. Both Incentive Options and
Nonqualified Options may be granted under the Plan. Subject to the following
rules, the Committee establishes the price per share for which shares covered by
the option may be purchased. An Incentive Option is intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code. Any
Incentive Option granted under the Plan will have an exercise price of not less
than 100% of the fair market value of the shares on the date on which such
option is granted. With respect to an Incentive Option granted to a participant
who owns more than 10% of the total combined voting stock of the Company or of
any parent or Subsidiary of the Company, the exercise price for such option must
be at least 110% of the fair market value of the shares subject to the option on
the date the option is granted. A Nonqualified Option granted under the Plan
(i.e., an option to purchase shares of Common Stock that does not meet the
Code's requirements for Incentive Options) must have an exercise price of at
least 75% of the fair market value of the shares subject to the option on the
date on which the option is granted.
The Committee is to specify in its grants of stock options the time or
times at which such options will be exercisable. At the time of exercise of any
option granted pursuant to the Plan, the participant must pay the full option
price of all shares purchased in cash or, with the consent of the Committee, in
Common Stock or in such other manner as the Committee determines is appropriate.
The fair market value of the Common Stock with respect to which Incentive
Options are first exercisable in any one calendar year by a participant cannot
exceed $100,000.
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<PAGE> 15
Terms of Stock Options. Generally, no stock option granted under the Plan
may remain outstanding for more than ten years from the date of grant. With
respect to an Incentive Option granted to a participant who, at the time of the
grant, owns more than 10% of the total combined voting stock of all classes of
stock of the Company or of any parent or Subsidiary of the Company, such option
will, however, expire not more than five years after the date of the grant.
Continuation of Employment. Unless the Committee in its discretion
determines otherwise, stock options granted under the Plan may be exercised only
while a participant is an employee of the Company or a Subsidiary. If the
participant's employment is terminated, the Committee may, in its discretion and
on certain terms and conditions specified in the Plan, extend the period of time
in which stock options may be exercised. Nevertheless, no stock option is to be
exercisable after its expiration date and a stock option may only be exercised
after termination of a participant's employment to the extent that it would have
been exercisable on the date of termination of the participant's employment, or
to the extent exercisable as a result of the reason for termination of
employment.
The Plan provides that, as a condition to granting a stock option under the
Plan, the Committee may require, in its discretion, that the prospective
participant agree in writing to remain in the employ of the Company or a
Subsidiary for a designated minimum period from the date of the granting of such
stock option.
Sequential Exercise. Successive stock options may be granted to the same
participant, whether or not any stock option previously granted to such
participant remains unexercised. A stock option may be exercised even though
stock options previously granted to such participant remain unexercised.
Non-Transferability of Stock Options. No stock option granted under the
Plan is permitted to be transferred by a participant other than by will or by
the laws of descent and distribution, and such stock option will be exercisable,
during the lifetime of the participant, only by the participant.
RESTRICTED STOCK
Subject to the terms of the Plan, the Committee may award shares of
restricted stock to participants. Generally, a restricted stock award will not
require the payment of any option price by the participant but will call for the
transfer of shares to the participant subject to forfeiture, without payment of
any consideration by the Company, if the participant's employment terminates
during a "restricted period" (which must be at least six months) specified in
the award of the restricted stock. If the participant's employment terminates as
a result of his or her death or permanent disability, the restricted stock will
be released from the restrictions, unless otherwise determined by the Committee.
If the participant's employment is terminated by action of the Company or a
Subsidiary without cause or by mutual agreement, the Committee may determine
that some or all of the shares will be released from the restrictions. Although
the participant is not permitted to sell, assign, transfer, pledge, hypothecate
or otherwise encumber shares acquired upon the grant of restricted stock during
the restricted period, the participant has the right to vote, and receive any
dividends payable with respect to, such shares. The Committee may also prescribe
other terms and conditions in connection with the award of restricted stock.
Any stock, securities or other property which a participant receives or is
entitled to receive by reason of his or her ownership of restricted shares,
including as a result of stock dividends, stock splits, recapitalizations,
mergers, consolidations or reorganizations by the Company, will, unless
otherwise determined by the Committee, be subject to the same restrictions as
those applicable to the restricted shares.
FEDERAL INCOME TAX CONSEQUENCES
The rules governing the tax treatment of stock options, restricted stock
and shares acquired upon the exercise of stock options are quite technical.
Therefore, the description of federal income tax consequences set forth below is
necessarily general in nature and does not purport to be complete. Moreover,
statutory provisions are subject to change, as are their interpretations, and
their application may vary in individual circumstances. Finally, the tax
consequences under applicable state and local income tax laws may not be the
same as under the federal income tax laws.
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<PAGE> 16
Incentive Options. Incentive Options granted pursuant to the Plan are
intended to qualify as "Incentive Stock Options" within the meaning of Section
422 of the Code. If the participant makes no disposition of the shares acquired
pursuant to exercise of an Incentive Option within one year after the transfer
of shares to such participant and within two years from grant of the option,
such participant will realize no taxable income as a result of the grant or
exercise of such option, and any gain or loss that is subsequently realized may
be treated as long-term capital gain or loss, as the case may be. Under these
circumstances, the Company will not be entitled to a deduction for federal
income tax purposes with respect to either the issuance of the Incentive Options
or the transfer of shares upon their exercise.
If shares acquired upon exercise of Incentive Options are disposed of prior
to the expiration of the above time periods, the participant will recognize
ordinary income in the year in which the disqualifying disposition occurs, the
amount of which will generally be the lesser of (i) the excess of the market
value of the shares on the date of exercise over the option price, or (ii) the
gain recognized on such disposition. Such amount will ordinarily be deductible
by the Company for federal income tax purposes in the same year, provided that
the amount constitutes reasonable compensation and that the Company satisfies
certain federal income tax withholding requirements. In addition, the excess, if
any, of the amount realized on a disqualifying disposition over the market value
of the shares on the date of exercise will be treated as capital gain.
Nonqualified Options. A participant who acquires shares by exercise of a
Nonqualified Option generally realizes as taxable ordinary income, at the time
of exercise, the difference between the exercise price and the fair market value
of the shares on the date of exercise. Such amount will ordinarily be deductible
by the Company in the same year, provided that the amount constitutes reasonable
compensation and that the Company satisfies certain federal income tax
withholding requirements. Subsequent appreciation or decline in the value of the
shares on the sale or other disposition of the shares will generally be treated
as capital gain or loss.
Restricted Stock. A participant granted shares of restricted stock under
the Plan is not required to include the value of such shares in ordinary income
until the first time such participant's rights in the shares are transferable or
are not subject to substantial risk of forfeiture, whichever occurs earlier,
unless such participant timely files an election under Section 83(b) of the Code
to be taxed on the receipt of the shares. In either case, the amount of such
income will be equal to the excess of the fair market value of the stock at the
time the income is recognized over the amount (if any) paid for the stock. The
Company will ordinarily be entitled to a deduction, in the amount of the
ordinary income recognized by the participant, for the Company's taxable year in
which the participant recognizes such income, provided that the amount
constitutes reasonable compensation and that the Company satisfies certain
federal income tax withholding requirements.
Withholding Payments. If upon the exercise of a Nonqualified Option or upon
the award of restricted stock or the expiration of restrictions applicable to
restricted stock, or upon a disqualifying disposition of shares acquired upon
exercise of an Incentive Option, the Company or any Subsidiary must pay amounts
for income tax withholding, then in the Committee's sole discretion, either the
Company will appropriately reduce the amount of stock to be delivered or paid to
the participant or the participant must pay such amount to the Company or the
Subsidiary to reimburse it for such income tax withholding. The Committee may,
in its sole discretion, permit a participant to satisfy such withholding
obligations by electing to reduce the number of shares of Common Stock delivered
or deliverable to the participant upon exercise of a stock option or award of
restricted stock or by electing to tender an appropriate number of shares of
Common Stock back to the Company subsequent to exercise of a stock option or
award of restricted stock (with such restrictions as the Committee may adopt).
Limitation on Compensation Deduction. Publicly-held corporations are
precluded from deducting compensation paid to certain of their executive
officers in excess of $1 million. The employees covered by the $1 million
limitation on deductibility of compensation include the chief executive officer
and those employees whose annual compensation is required to be reported to the
Securities and Exchange Commission because the employee is one of the company's
four highest compensated employees for the taxable year (other than the chief
executive officer). Income from stock options and restricted stock generally is
included in an employee's compensation for purposes of the $1 million limitation
on deductibility of compensation.
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<PAGE> 17
There is an exception to the $1 million deduction limitation for
compensation (including compensation from stock options and restricted stock)
paid pursuant to a qualified performance-based compensation plan. Compensation
attributable to stock options is deemed to satisfy the qualified
performance-based compensation exception if the grant or award is made by a
compensation committee comprised of outside directors; the plan under which the
option or right is granted states the maximum number of shares with respect to
which options or rights may be granted during a specified period to any
employee; and, under the terms of the option or right, the amount of
compensation the employee could receive is based solely on an increase in the
value of the stock after the date of the grant or award.
If the amount of compensation a covered employee will receive under the
grant or award is not based solely on an increase of the value of the stock
after the date of the grant (e.g., restricted stock or an option that is granted
with an exercise price that is less than the fair market value as of the date of
the grant), none of the compensation attributable to the grant or award is
qualified performance-based compensation unless the grant or award is made on
account of the attainment of a performance goal that has been previously
established and approved by the shareholders of the Company.
The grant of stock options to a participant under the Plan to purchase the
Company's stock at fair market value on the date of the grant will be deemed to
satisfy the requirements of the performance-based compensation exception and the
$1 million deduction limitation will not limit the otherwise deductibility of
the compensation paid to covered employees of the Company. However, the issuance
of restricted stock or the grant of an option at an exercise price of less than
fair market value as of the date of grant will be included in a covered
employee's compensation in determining the $1 million deductibility limit.
ACCOUNTING TREATMENT
Generally, under current accounting rules neither the grant nor the
exercise of an Incentive Option or a Nonqualified Option under the Plan requires
any charge against earnings, if the exercise price of the option is equal to or
in excess of the fair market value of the shares on the date of grant. If the
exercise price is below the fair market value of the shares on the date of
grant, an earnings charge equal to the difference will be required either at the
date of grant or possibly over the term of the option.
Restricted stock will require a charge against income representing the
value of the benefit conferred, which may be spread over the restricted period.
Such charge is based on the market value of the stock at the time the shares are
transferred to the participant.
OPTION GRANTS
For information regarding option grants made under the Plan in fiscal 1996,
see the table under "Compensation of Executive Officers -- Option Grants in
Fiscal 1996" in Part II above.
IV. SUMMARY OF CHILDTIME LEARNING CENTERS, INC.
DIRECTOR STOCK OPTION PLAN
Pursuant to the Childtime Learning Centers, Inc. Director Stock Option Plan
(the "Directors' Plan") 75,000 shares of Common Stock are reserved for the
automatic grant of options to directors of the Company who (i) are directors of
the Company as of the date the option is granted under the Directors' Plan, and
(ii) are not officers or employees of the Company or of any subsidiary of the
Company ("Participants"). The options to be granted under the Directors' Plan
are not qualified under Section 422 of the Code. The Directors' Plan provides
for the automatic grant of an option to purchase 2,500 shares of Common Stock to
each Participant at each annual meeting of the Company's shareholders at which
such Participant is elected or remains in office commencing with the 1997 annual
meeting. As described in Part I above under "Election of Directors -- Meetings
of the Board of Directors and Board Committees and Compensation of Directors",
in fiscal 1996 each of the Company's Directors was granted an option to purchase
2,500 shares of Common Stock pursuant to the Directors' Plan.
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<PAGE> 18
The Company believes that the Directors' Plan, as amended, allows the
Company to grant appropriate amounts of stock options to new and existing
independent directors to attract and retain the services of experienced and
knowledgeable independent directors of the Company and to provide additional
incentive for such directors to continue to work for the best interests of the
Company and its shareholders through an investment interest in the future
success of the Company.
THE MAJOR FEATURES OF THE DIRECTORS' PLAN ARE SUMMARIZED BELOW, BUT THIS IS
ONLY A SUMMARY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE ACTUAL TEXT
OF THE PLAN, A COPY OF WHICH HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION AS PART OF THE COMPANY'S REGISTRATION STATEMENT ON FORM S-1 AND MAY
BE OBTAINED FROM THE COMPANY OR THE SEC. CAPITALIZED TERMS NOT OTHERWISE DEFINED
HEREIN HAVE THE MEANINGS GIVEN THEM IN THE DIRECTORS' PLAN.
ADMINISTRATION
The Directors' Plan will be administered by Board of Directors of the
Company. Subject to the provisions of the Directors' Plan, the Board is
authorized to interpret the Directors' Plan, to promulgate, amend and rescind
rules and regulations relating to the Directors' Plan, and to make all other
determinations necessary or advisable for its administration.
SHARES SUBJECT TO GRANT
Under the Directors' Plan, as amended, the maximum number of shares of
Common Stock with respect to which stock options may be granted is 75,000
shares. Shares covered by cancelled or expired options under the Directors' Plan
are again available for option and sale under the Directors' Plan.
In the event of a change in the Common Stock through a stock dividend,
merger, consolidation, recapitalization, reclassification, reorganization,
split-up, combination of shares, statutory share exchange, or otherwise, the
number, price and kind of the shares available for option and of the shares
subject to any option, and the number and kind of shares subject to each option
to be granted under the Directors' Plan, will be appropriately adjusted. The
Company will not be required to issue fractional shares pursuant to the
Directors' Plan.
GRANT AND EXERCISE OF STOCK OPTIONS
Grant of Stock Options. Only Nonqualified Options (stock options which do
not constitute "incentive stock options" within the meaning of Section 422 of
the Code) may be granted under the Directors' Plan. The exercise price of each
option granted under the Directors' Plan is equal to 100% of the fair market
value of the stock on the date of grant.
Each director of the Company who was not an officer or employee of the
Company or of any subsidiary and who was a Participant, was automatically
granted a Nonqualified Option to purchase 2,500 shares of Common Stock upon
consummation of the Company's public offering of its Common Stock (the "Public
Offering"). Each director who was appointed to the Board within six months after
the Public Offering was automatically granted a Nonqualified Option to purchase
2,500 shares of Common Stock upon such appointment. In addition, each
Participant will be automatically granted an option to purchase 2,500 shares of
Common Stock at each annual meeting of the Company's shareholders at which such
Participant is elected or remains in office commencing with the 1997 annual
meeting. The grants are subject to a sufficient number of shares being available
under the Directors' Plan, and will not be made in a particular year unless
sufficient shares are available under the Directors' Plan to make all option
grants required for that year.
At the time of exercise of any option granted under the Directors' Plan,
the optionee must pay the full option price for all shares purchased (a) in cash
or, (b) with the consent of the Board, in its sole discretion, (i) in Common
Stock, or (ii) by delivery of irrevocable instructions to a stockbroker to
promptly deliver to the stockbroker full payment of the option price of the
shares from the proceeds of the stockbroker's sale of, or loan against, the
shares.
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Term and Vesting of Stock Options. Options granted under the Directors'
Plan are 100% exercisable on the first anniversary of the date of grant and,
except as described under the caption "Exercise After Termination of Service",
options may be exercised for five years after the date of grant, if not sooner
terminated.
Exercise After Termination of Service. If the service of the Participant as
a director of the Company is terminated by the death of the Participant, the
option may be exercised within 12 months of the date of death. If the
Participant ceases to be a director of the Company for any cause other than
death, the Participant will have the right, for a period of 90 calendar days
after the date he or she ceases to be a director, to exercise the remaining
portion of his or her option. In no event, however, will an option be
exercisable after its expiration date.
Non-Transferability of Stock Options. No option granted under the
Directors' Plan may be transferred by a Participant other than by will or by the
laws of descent and distribution or pursuant to a qualified domestic relations
order as defined by the Code or Title 1 of the Employee Retirement Income
Security Act, or the rules thereunder, and such option is exercisable during the
Participant's lifetime only by the Participant.
Shareholder Rights. No Participant in the Directors' Plan has any of the
rights of a shareholder of the Company under any option granted under the
Directors' Plan until the actual issuance of shares to the Participant, and
prior to such issuance no adjustment shall be made for dividends, distributions
or other rights in respect of such shares, except as described under the caption
"Shares Subject to Grant".
Change in Control. The Options granted under the Directors' Plan will
become immediately exercisable upon occurrence of a "Change in Control". A
"Change in Control" is defined as any person or other entity, other than
Childcare Associates or KD Partners II, becoming the beneficial owner, directly
or indirectly, of more than 50% of the total combined voting power of all
classes of capital stock normally entitled to vote for the election of directors
of the Company.
AMENDMENT OR TERMINATION OF THE DIRECTORS' PLAN
The Board may terminate or amend the Plan in any respect at any time,
except that any such amendment may not (i) increase the maximum number of shares
in the aggregate which are subject to the Directors' Plan (subject, however, to
the anti-dilution provisions of the Directors' Plan), change the definition of
"Participant" under the Directors' Plan, change the allotment of shares as
provided in the Directors' Plan, change the option price set forth in the
Directors' Plan, change the date of grant set forth in the Directors' Plan, or
materially increase the benefits accruing to Participants under the Directors'
Plan, without approval or ratification of the shareholders of the Company, or
(ii) change the option price or alter or impair any option previously granted
under the Directors' Plan, without the consent of the holder of such option.
In addition, the provisions of the Directors' Plan concerning the
Participants in the Directors' Plan, the allotment of shares under the
Directors' Plan, the exercise price of options granted under the Directors' Plan
may not be amended more than once every six months, other than to comport with
changes in the Code, the Employee Retirement Income Security Act, or the rules
thereunder. Unless sooner terminated, the Directors' Plan will terminate on
February 6, 2006. The termination of the Directors' Plan will not affect the
validity of any option outstanding on the date of termination.
FEDERAL INCOME TAX CONSEQUENCES
The rules governing the tax treatment of Nonqualified Options and shares
acquired upon the exercise of Nonqualified Options granted under the Directors'
Plan (including related withholding payment requirements) are described above
under the heading "Summary of Childtime Learning Centers, Inc. 1995 Stock
Incentive Plan for Key Employees -- Federal Income Tax Consequences."
17
<PAGE> 20
ACCOUNTING TREATMENT
The rules governing the accounting treatment of Nonqualified Options are
described above under the heading "Summary of Childtime Learning Centers, Inc.
1995 Stock Incentive Plan for Key Employees -- Accounting Treatment."
V. OTHER MATTERS
OTHER PROPOSALS
Neither the Company nor the members of its Board of Directors intend to
bring before the Annual Meeting any matters other than those set forth in the
Notice of Annual Meeting of Shareholders, and they have no present knowledge
that any other matters will be presented for action at the meeting by others. If
any other matters properly come before such meeting, however, it is the
intention of the persons named in the enclosed form of proxy to vote in
accordance with their best judgment.
A shareholder proposal which is intended to be presented at the 1997 Annual
Meeting of Shareholders must be received by the Company at its principal
executive offices, 38345 West 10 Mile Road, Suite 100, Farmington Hills,
Michigan 48335, by April 16, 1997.
AUDITORS
The Board of Directors has selected Coopers & Lybrand LLP to serve as the
Company's independent auditors for fiscal 1996. Coopers & Lybrand LLP has served
in such capacity since July 1990. Representatives from Coopers & Lybrand LLP
will be present at the Annual Meeting of Shareholders, will have an opportunity
to make a statement if they wish, and will be available to respond to
appropriate questions.
By Order of the Board of Directors
MICHAEL M. YEAGER
Secretary
Dated: July 15, 1996
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<PAGE> 21
PROXY PROXY
CHILDTIME LEARNING CENTERS, INC.
Proxy Solicited on Behalf of The Board of Directors
For The Annual Meeting of Stockholders - August 14, 1996
The undersigned appoints Harold A. Lewis and Michael M. Yeager, and each of
them, as proxies, with full power of substitution and revocation, to vote, as
designated on the reverse side hereof, all the Common Stock of Childtime
Learning Centers, Inc. which the undersigned has power to vote, with all powers
which the undersigned would possess if personally present, at the annual meeting
of stockholders thereof to be held on August 14, 1996, or at any adjournment
thereof.
Unless otherwise marked, this proxy will be voted FOR the election of the
nominees named.
PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
(Continued and to be signed on reverse side.)
<PAGE> 22
<TABLE>
<S><C>
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. /X/
CHILDTIME LEARNING CENTERS, INC.
[ ]
For All
1. Election of Directors For Withheld Except
Jason K. Feld / / / / / / ______________________________
James W. Geisz (Except Nominee written above)
Dated: ________________, 1996
Signature(s) _______________________________
____________________________________________
Please sign exactly as your name(s) appear(s)
on this Proxy. Joint owners should indicate
capacity in which they are signing. Trustees,
Executors, etc. should indicate capacity in
which they are signing.
</TABLE>
