<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 17, 1998
REGISTRATION NO. 333-56353
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
CHILDCARE NETWORK, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
GEORGIA 8351 63-0986576
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
3025 UNIVERSITY AVENUE
SUITE B-2
COLUMBUS, GEORGIA 31907
(706) 562-8600
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
---------------------
RAY E. CROWLEY
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
CHILDCARE NETWORK, INC.
3025 UNIVERSITY AVENUE
SUITE B-2
COLUMBUS, GEORGIA 31907
(706) 562-8600
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
COPIES:
<TABLE>
<S> <C>
LISA ANNE STATER, ESQ. ARTHUR JAY SCHWARTZ, ESQ.
JONES, DAY, REAVIS & POGUE SMITH, GAMBRELL & RUSSELL, LLP
3500 SUNTRUST PLAZA SUITE 3100, PROMENADE II
303 PEACHTREE STREET 1230 PEACHTREE STREET, N.E.
ATLANTA, GEORGIA 30308 ATLANTA, GEORGIA 30309
(404) 521-3939 (404) 815-3632
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable following the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JULY 17, 1998
2,850,000 SHARES
CHILDCARE NETWORK, INC.
COMMON STOCK
------------------------
Of the 2,850,000 shares of Common Stock (the "Common Stock") offered hereby
(the "Offering"), 1,600,000 shares are being sold by Childcare Network, Inc.
(the "Company") and 1,250,000 shares are being sold by certain shareholders of
the Company named herein (the "Selling Shareholders"). See "Principal and
Selling Shareholders." The Company will not receive any proceeds from the sale
of shares by the Selling Shareholders.
In accordance with the Company's Restated Articles of Incorporation, the
shares of Common Stock offered hereby, including those offered by the Selling
Shareholders, will be entitled to one vote per share until they have been held
by the same beneficial owner for a continuous period of greater than 48 months,
at which time each share so held will be entitled to ten votes per share. The
current holders of the remaining shares of Common Stock are entitled to ten
votes per share regardless of whether they have held such shares for a
continuous period of greater than 48 months. See "Description of Capital Stock."
Prior to the Offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering price
will be between $13.00 and $15.00 per share. See "Underwriting" for information
relating to the factors to be considered in determining the initial public
offering price. The Company has applied for listing of the Common Stock on the
Nasdaq National Market under the symbol "CCNI."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............................ $ $ $ $
- -------------------------------------------------------------------------------------------------------------------------
Total(3)............................. $ $ $ $
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for information relating to indemnification of the
Underwriters.
(2) Before deducting expenses of the Offering payable by the Company estimated
at $ .
(3) The Company and certain of the Selling Shareholders have granted to the
Underwriters a 30-day option to purchase up to an additional 427,500 shares
of Common Stock solely to cover over-allotments, if any. If the option is
exercised in full, the total Price to Public, Underwriting Discount,
Proceeds to Company and Proceeds to Selling Shareholders will be
$ , $ , $ and $ , respectively. See
"Underwriting."
------------------------
The shares of Common Stock are offered severally by the Underwriters named
herein, subject to prior sale, when, as and if received and accepted by them,
subject to their right to reject orders, in whole or in part, and to withdraw,
cancel or modify the offer without notice. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of The Robinson-Humphrey Company, LLC on or about , 1998.
------------------------
THE ROBINSON-HUMPHREY COMPANY INTERSTATE/JOHNSON LANE
CORPORATION
, 1998
<PAGE> 3
[MAP SHOWING NUMBER OF THE COMPANY'S SCHOOLS BY STATE]
[PICTURES OF CHILDREN ENGAGED IN VARIOUS ACTIVITIES AT THE COMPANY'S SCHOOLS]
------------------------
The Company intends to furnish its shareholders with annual reports
containing audited financial statements certified by an independent public
accounting firm and with quarterly reports containing unaudited financial
information for the first three quarters of each fiscal year.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and the financial statements and
notes thereto appearing elsewhere in this Prospectus. This Prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Except as otherwise indicated, the information contained herein (i) assumes no
exercise of the Underwriters' over-allotment option and (ii) gives effect to a
3-for-2 stock split effected in the form of a stock dividend on June 1, 1998.
THE COMPANY
Childcare Network, Inc. (the "Company") provides affordable, high quality
developmental education and child care to families through 67 private schools,
located predominantly in smaller and mid-sized cities ranging in population from
60,000 to 400,000 in the southeastern United States. The Company's schools
provide age-appropriate training and care to infants, toddlers and children aged
six weeks to 12 years through a combination of contemporary curricula, computer
programs, field trips and parent/student activities designed to promote both the
student's academic and social development. The Company's schools are principally
free-standing sites in suburban communities and generally operate five days a
week throughout the year. A majority of the schools are operated under the
"Childcare Network" name although 14 recently acquired schools operate under the
"Young World" name. As of June 26, 1998, the Company's 67 schools had an
aggregate licensed capacity of approximately 8,400 and served over 7,000
children in seven states.
The Company was formed in 1988 and, at the end of 1992, was operating five
schools that served 545 students. By the end of 1997, the Company had grown to
63 schools, increasing its full- and part-time enrollment to over 7,000
students. As a result, revenues increased from $1.1 million in 1992 to $16.3
million in 1997, and income before income taxes increased from approximately
$86,000 in 1992 to approximately $2.2 million in 1997. According to Child Care
Information Exchange(R), an industry publication, the Company is the 14th
largest for-profit provider of child care services in the United States measured
in terms of licensed capacity.
The Company's goal is to be the leading provider of affordable, high
quality developmental education and child care services in each of the markets
in which it operates. The Company believes that child care providers compete
based on accessibility, price and quality and breadth of services. The Company
believes its focus on directly serving a large number of families rather than a
smaller number of corporate clients, coupled with its emphasis on the efficient
operation of its schools, has allowed it to achieve an operating margin which
exceeds those of other child care providers for which public data is available.
The key elements of the Company's business strategy, which the Company believes
positions it for continued growth, are:
- High Quality Services at Competitive Prices. The Company's schools are
focused on providing affordable and convenient services through programs
which emphasize the child's development rather than mere supervision. The
Company attempts to price its services competitively relative to other
providers in each of the markets it serves. Central to the Company's
services are innovative and age-appropriate curricula. In order to
promote parents' understanding and appreciation of the Company's child
development programs, teachers and staff seek to actively partner with
parents through meetings, newsletters and written progress reports. In
addition, for the convenience of working parents, the Company provides
transportation to and from area elementary schools.
- Focus on Families. The Company believes it realizes benefits in pricing,
brand awareness, operating autonomy and flexibility to attract customers
from many sources by directly serving a large number of families rather
than focusing on a smaller number of corporate clients. The Company's
schools are principally free-standing sites in suburban communities
located in proximity to residences, elementary
3
<PAGE> 5
schools and major transportation arteries. As such, the Company's schools
are well positioned to conveniently provide services to parents and
children in these areas.
- Enhanced Utilization and Efficient Staff-to-Child Ratios. The Company
configures its schools to maximize licensed capacity while preserving an
attractive and inviting environment for students. The Company believes
that offering affordable, high quality developmental education and child
care at convenient locations leads to increased enrollment, thus enabling
the Company to enhance its capacity utilization. In addition, the Company
monitors staff-to-child ratios to ensure that schools are efficiently
staffed in accordance with regulatory guidelines, and that changes in
staff requirements due to shifts in enrollment levels are addressed in a
timely manner. By clustering schools and maintaining a balance of
full-time and part-time personnel, the Company is able to manage staff
deployment between schools more efficiently, thereby minimizing overall
payroll expenses.
- Decentralized School Operations. Each of the Company's schools is
managed by a director who is responsible for its operation and
profitability. Administrative functions performed by a director include
marketing, tuition and accounts receivable collection, regulatory
compliance, recruiting, purchasing, parent relations and corporate
reporting. Each director prepares profit and loss information for weekly
review by management and is incentivized through quarterly and annual
bonuses to maximize school-level profitability while maintaining the
Company's standards of quality. In addition, a team of four district
managers provides training and guidance to directors and makes regular
visits to the schools to monitor and, as necessary, assist with
operations. The Company believes that the decentralization of school
operations, together with support from district managers and senior
management, leads to a sense of entrepreneurship in each director and a
spirit of teamwork throughout the Company. In addition, decentralization
enables each school to respond to the cultural, economic and regulatory
differences which exist in its respective market.
- Participation in Government Assistance Programs. The Company derives
several benefits from its active participation in federal and state
programs which provide funding for child care assistance. While most of
these programs provide funding designed only to cover the cost of the
Company's services, certain of these programs provide reimbursement to
the Company of an allocable portion of its overhead or permit the Company
to increase the utilization of its facilities. Further, the Company
believes that participation in such programs enhances recognition of the
Company.
- Expansion Through Acquisitions. The Company seeks to acquire child care
centers that present it with opportunities to increase utilization and
improve profitability through implementation of enhanced operating and
financial controls. Acquiring existing child care centers allows the
Company access to an established customer base and an experienced staff
with acceptance in the local community. In addition, by avoiding the cost
and time associated with constructing new facilities, the Company is able
to expand more rapidly and realize a return on its investment more
quickly.
The Company believes that the market for child care services is growing
rapidly and that demand for high quality child care will continue to increase as
a result of the following factors: a growing number of young children; an
increasing percentage of mothers in the workforce; a shift toward the more
structured and education-based environment of center-based child care; and the
effects of federal and state policy initiatives which would make child care
accessible to a larger number of families. In addition, the child care industry
is highly fragmented. Within the United States, for-profit chains, including
national and regional chains and operators of four or more centers, represent
only 7.0% of total market share. Substantially all of the industry's licensed
centers are owned or operated individually or by small providers, many of which
lack the financial, technological and managerial resources to operate their
centers profitably in an increasingly regulated and competitive environment. As
a result, the Company believes that the number of providers seeking to exit the
industry is likely to grow, leading to an increase in the number of potential
centers available to the Company for acquisition.
The Company anticipates that future growth will come from acquiring
individual centers in its existing markets and acquiring groups of centers in
both existing and new markets. The Company generally seeks either to acquire
child care centers in areas close to the Company's existing schools and district
managers or to
4
<PAGE> 6
acquire a provider which has a sufficient number of centers to justify the
employment of an additional district manager. The Company targets facilities in
cities with populations of 60,000 to 400,000 in the southeastern United States.
Within this target market, the Company believes that there are numerous centers
which could provide attractive locations for its schools, thus enabling the
Company to continue to acquire facilities on terms which compare favorably to
the costs and risks of establishing new facilities.
The Company's principal executive offices are located at 3025 University
Avenue, Suite B-2, Columbus, Georgia 31907, and its telephone number is (706)
562-8600.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company.................................... 1,600,000 shares
The Selling Shareholders....................... 1,250,000 shares
Voting rights:
Common Stock offered hereby.................... 1 vote per share(1)
Outstanding Common Stock....................... 10 votes per share
Common Stock to be outstanding after the 6,535,000 shares(2)
Offering.......................................
Use of proceeds.................................. Repayment of indebtedness and other general
corporate purposes, including working capital and
possible acquisitions. See "Use of Proceeds."
Proposed Nasdaq National Market symbol........... CCNI
</TABLE>
- ---------------
(1) Holders of the Common Stock who purchase shares in the Offering will be
entitled to one vote per share until such shares have been held by the same
beneficial owner for a continuous period of greater than 48 months, at which
time each share so held will be entitled to ten votes per share. See
"Description of Capital Stock."
(2) Excludes 750,000 shares of Common Stock reserved for issuance under the
Company's stock option plan. As of June 1, 1998, there were outstanding
options to purchase 424,500 shares of Common Stock at a weighted average
exercise price of $10.11 per share. See "Management -- 1998 Stock Option
Plan."
5
<PAGE> 7
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND SCHOOL DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, JANUARY 1, 1997 JANUARY 1, 1998
---------------------------------------------------------- THROUGH THROUGH
PRO FORMA JUNE 27, JUNE 26,
1993 1994 1995 1996 1997 1997(2) 1997(3) 1998(3)
------ ------ ------ ------- ------- ----------- ----------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA(1):
Revenues.............. $4,825 $6,505 $9,209 $12,183 $16,331 $21,052 $7,128 $13,574
Operating expenses.... 4,158 5,417 7,758 10,281 13,991 19,053 5,766 11,399
------ ------ ------ ------- ------- ------- ------ -------
Income from
operations.......... 667 1,088 1,451 1,902 2,340 1,999 1,362 2,175
Interest expense,
net................. (211) (262) (311) (277) (190) (344) (86) (213)
------ ------ ------ ------- ------- ------- ------ -------
Income before income
taxes............... 456 826 1,140 1,625 2,150 1,655 1,276 1,962
Pro forma provision
for income
taxes(4)............ 173 314 433 618 817 629 485 746
------ ------ ------ ------- ------- ------- ------ -------
Pro forma net
income.............. $ 283 $ 512 $ 707 $ 1,007 $ 1,333 $ 1,026 $ 791 1,216
====== ====== ====== ======= ======= ======= ====== =======
Basic shares
outstanding......... 4,905 4,905 4,905 4,905 4,932 4,932 4,931 4,935
Diluted shares
outstanding......... 4,905 4,905 4,905 4,905 4,932 4,932 4,931 4,955
Pro forma net income
per basic
share(5)............ $ 0.06 $ 0.10 $ 0.14 $ 0.21 $ 0.27 $ 0.21 $ 0.16 $ 0.25
Pro forma net income
per diluted
share(5)............ $ 0.06 $ 0.10 $ 0.14 $ 0.21 $ 0.27 $ 0.21 $ 0.16 $ 0.25
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 26,
1998
---------------------
AS
ACTUAL ADJUSTED(6)
------- -----------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $ 1,915 $15,230
Total assets.............................................. 12,801 26,116
Total debt, including current portion..................... 6,517 --
Shareholders' equity...................................... 4,904 24,636
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------- AT JUNE 26,
1993 1994 1995 1996 1997(1) 1998(3)
------ ------ ------ ------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
SCHOOL DATA(1):
Number of schools................................ 25 25 32 34 63 67
Licensed capacity................................ 2,731 2,731 3,431 3,631 7,788 8,431
</TABLE>
- ---------------
(1) In September 1997, the Company acquired 29 schools in two transactions,
which were accounted for under the purchase method of accounting. Results of
operations of these schools have been included in the Company's operations
since the respective dates of purchase. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Pro Forma
Financial Information" and the financial statements and notes thereto
appearing elsewhere in this Prospectus for information concerning other
acquisitions and additional information related to these acquisitions.
(2) The pro forma statement of income data for the year ended December 31, 1997
reflects the acquisition of the operations of Young World, Inc. as if it
occurred at January 1, 1997 and has been accounted for under the purchase
method of accounting.
(3) Effective January 1, 1998, the Company changed its fiscal year end from
December 31 to the last Friday in December. As a result, the Company will
report its quarterly results in 13 week periods beginning in 1998. Quarterly
results for 1997 have been presented on a comparable basis.
(4) The Company has historically elected to be taxed as an S corporation and
accordingly, income taxes have been paid by its shareholders. The Company's
S corporation status will terminate upon consummation of the Offering, and
the Company will be taxed as a C corporation in future periods. The pro
forma provision for income taxes has been calculated at a 38% rate, which is
the Company's expected effective income tax rate.
(5) The calculation of a supplemental pro forma earnings per share reflecting
(i) the impact of the additional shares to be outstanding after consummation
of the Offering and (ii) the repayment of indebtedness with a portion of the
Offering proceeds is not presented as the impact is not material.
6
<PAGE> 8
(6) As adjusted to give effect to (i) the sale by the Company of 1,600,000
shares of Common Stock offered hereby at an assumed initial public offering
price of $14.00 per share and the application of the estimated net proceeds
therefrom, (ii) the payment of approximately $200,000 in dividends to
shareholders prior to consummation of the Offering and (iii) the provision
for deferred tax liabilities of $100,000 for temporary differences related
to the tax and book bases of assets at the date of termination of S
corporation status. See "Use of Proceeds."
7
<PAGE> 9
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors should carefully consider the following risk
factors, in addition to the other information set forth elsewhere in this
Prospectus, including the financial statements and notes thereto, prior to
making an investment in the Company.
DEPENDENCE ON GOVERNMENT FUNDING
The Company participates in certain state and federal programs which
provide funding for services to disadvantaged children and, in the State of
Georgia, for prekindergarten students. Certain of these programs provide for
tuition subsidies which are determined as a percentage of the market rate for a
given area and often are less than the tuition charged by the Company to
non-subsidized customers. Revenues from such programs represented approximately
57.0% of the Company's total revenues in each of 1996 and 1997 with the
remaining 43% representing payments from individuals. The eligibility of the
Company to continue its participation in such programs is subject to compliance
with numerous state and federal regulations. In the event that the Company's
schools presently participating in such programs become ineligible for funding
or such funding is decreased, the Company's revenues and results of operations
would be materially adversely affected. In addition, the continuation of such
programs is dependent upon the future availability of federal and state funds
and the continued adoption of economic policies which support these efforts.
There is no assurance that funding of such programs will continue at current
levels, or at all. See "-- Government Regulation" and "Business -- Government
Regulation."
IMPACT OF GOVERNMENT REGULATION
Child care providers must comply with various state and local statutes,
regulations and licensing requirements. Failure to comply with any of such laws
or regulations could result in sanctions ranging from fines or corrective
orders, which could require significant expenditures by the Company, to license
suspension or revocation. The Company is licensed to operate each of its
facilities as a child care or day care center. However, licenses for certain of
the Company's schools are in the process of renewal or, in the case of recent
acquisitions, have been issued on a temporary basis pending final licensing.
There is no assurance that final licenses will be obtained for such schools. New
laws or regulations or changes in existing laws or regulations or their manner
of application or enforcement may increase compliance costs to the Company,
which could have a material adverse effect on the Company's financial condition
or results of operations. In addition, tax laws presently provide for credits
and other incentives relating to child care costs. Changes in such tax laws
could result in decreased enrollment in the Company's schools, which would have
a material adverse effect on the Company. The Company also is required to comply
with the Americans with Disabilities Act (the "ADA"), which prohibits
discrimination on the basis of disability in public accommodations and
employment. Failure of a school to comply with the ADA or applicable regulations
can subject it to sanctions, which might include fines, corrective orders,
probation, or, in more serious cases, suspension or revocation of a center's
license to operate, or an award of damages to private litigants, any of which
could require significant expenditures by the Company to bring the Company's
facilities into compliance. See "Business -- Government Regulation."
REGULATION OF MOTOR VEHICLES
The Company presently operates passenger vans for the transportation of
students. Recently, safety concerns over the use of passenger vans by child care
providers have caused, or are expected to cause, federal authorities and many
state agencies to reevaluate whether children should be transported in passenger
vans, as opposed to school buses which meet more stringent safety requirements.
Further, certain states are now vigorously enforcing their school bus and safety
regulations. In addition, one or more states are enforcing such regulations
against child care centers. Certain states have enacted or may enact new
legislation or have changed their interpretation and enforcement of existing
rules and regulations to discourage the use of passenger vans by child care
centers in transporting children. As a result, the application of state school
bus laws and regulations as they relate to child care providers is unclear and
may be subject to change.
8
<PAGE> 10
Although the Company believes that it is in compliance with all applicable
state laws, rules and regulations governing transportation of children in motor
vehicles in all states in which it operates, a court or administrative agency
may determine that child care providers generally, or the Company in particular,
are not in compliance with such laws, rules or regulations. Any such
determination could result in the imposition of fines or sanctions against the
Company, require the Company's drivers to be licensed as "school bus" operators
and/or require the Company to retrofit or replace its passenger vans with
vehicles which comply with applicable standards, any of which could have a
material adverse effect on the Company's financial condition or results of
operations. In addition, while the Company maintains liability insurance
concerning the operation of these motor vehicles, the Company could incur a
claim resulting from such operation which may have a material adverse effect on
its financial condition or results of operations. See "-- Insurance,"
"Business -- Insurance" and "Business -- Government Regulation."
RISKS OF ACQUISITIONS AND FAILURE TO INTEGRATE ACQUIRED CENTERS
An important element of the Company's growth strategy has been and will
continue to be expansion through acquisitions. The Company's ability to expand
successfully through acquisitions depends on many factors, including the
identification of appropriate acquisition opportunities, negotiation of
acceptable terms and management's ability to effectively integrate and operate
the acquired schools. The Company competes for acquisitions with other
companies, certain of which have significantly greater financial and management
resources than the Company. The Company's financial performance will be subject
to the risks of the performance of the acquired businesses as well as the
financial effects associated with the integration of such businesses. In the
event that the Company is unable to retain both the students and staff of any
acquired facility, the Company could experience decreased revenues accompanied
by increased costs for marketing and recruitment.
MANAGEMENT'S LIMITED OPERATING HISTORY
Certain of the Company's officers have recently joined the Company,
including Ray E. Crowley, Chairman and Chief Executive Officer; Lanier Merritt,
Senior Vice President and Chief Financial Officer; and Conway Tucker, Vice
President of Operations. Although each of these officers has significant
business experience and, in the case of Mr. Tucker, substantial experience in
the operation of multi-unit child care centers through past employment, these
officers have been working together for a limited period of time. There can be
no assurance that such management team will be successful in operating the
Company. See "-- Dependence Upon Key Personnel" and "Management."
COMPETITION
The child care industry is highly fragmented and competitive. The Company
competes with child care centers owned by national and regional chains and other
multi-unit service providers, many of which are larger and have substantially
greater name recognition and financial resources than the Company. The Company
also competes with child care facilities operated by local, community and
church-affiliated and non-profit organizations, which may be supported by
endowments, charitable contributions and other forms of subsidies, and
consequently may charge less for their services than the Company. In addition,
the Company competes with individually owned proprietary child care centers,
licensed and unlicensed child care homes, in-home individual child care
providers, public schools and businesses that provide child care for their
employees, many of which charge lower fees than the Company. There can be no
assurance that the Company can compete effectively against current competitors
or new market entrants in the future. See "Business -- Competition."
AVAILABILITY AND ADEQUACY OF INSURANCE
Recently, as a result of alleged incidents of physical and sexual abuse in
the child care industry, and the length of time before the expiration of
applicable statutes of limitations for the bringing of child abuse and
9
<PAGE> 11
personal injury claims (typically a number of years after the child reaches the
age of majority), many operators of child care centers have had difficulty
obtaining adequate general liability insurance or child abuse liability
insurance or have been able to obtain such insurance only at unacceptably high
rates. The Company currently maintains insurance policies which provide for a
variety of coverages but are subject to various limitations, exclusions and
deductibles, including a limitation of coverage for child physical and sexual
abuse claims of $500,000 annually in the aggregate. There can be no assurance
that such insurance will be adequate, that insurance premiums for such coverages
will not increase, or that in the future the Company will be able to obtain
insurance at acceptable rates, if at all. Any such inadequacy of or inability to
obtain insurance coverage could have a material adverse effect on the Company's
business, financial condition or results of operations. See "-- Adverse
Publicity," "-- Litigation" and "Business -- Insurance."
ABILITY TO ATTRACT AND RETAIN STAFF; IMPACT OF COMPENSATION LEVELS
The success of the Company is dependent on its continued ability to attract
and retain quality staff at its schools at acceptable compensation levels.
Compensation costs historically have exceeded 50.0% of the Company's revenues,
and the profitability of the Company is dependent upon its ability to
successfully manage such compensation costs. There are substantial market
pressures on such costs, particularly at the lower end of the pay scale. Any
significant increase in the minimum wage would materially impact compensation
costs and could have a material adverse effect on the Company's business,
results of operations or financial condition. There can be no assurance that in
the future the Company will be able to hire and retain quality staffing at
acceptable compensation levels, or at all.
ADVERSE PUBLICITY
Some providers of child care have received negative publicity concerning
alleged child abuse, inadequate supervision and on-site accidents. Any such
adverse publicity relating to the Company or other providers of child care,
whether accurate or not, could have a material adverse effect on the Company's
business as a result of, among other things, decreased enrollment, inability to
attract new enrollees or increased insurance costs. See "Business -- Insurance."
LITIGATION
Due to the nature of its business, the Company is and expects that in the
future it may be subject to claims and litigation alleging negligence,
inadequate supervision or other grounds for liability arising from harm to
children. In addition, claimants may seek damages from the Company for child
abuse, sexual abuse and other criminal acts allegedly committed by the Company's
employees. There can be no assurance that additional suits will not be filed,
that the Company's insurance will be adequate to cover liabilities resulting
from any claim or that any such claim, or the adverse publicity resulting from
it will not have a material adverse effect on the Company's business, financial
position or results of operations, including, without limitation, adverse
effects caused by increased cost or decreased availability of insurance and
decreased demand for the Company's services. See "-- Insurance" and
"Business -- Legal Proceedings."
DEPENDENCE UPON KEY PERSONNEL
The Company has experienced significant growth in its business, which has
placed demands on the Company's administrative, operational and financial
personnel. The success of the Company will be largely dependent upon the
continued employment of Ray E. Crowley, Chairman and Chief Executive Officer,
and James F. Loudermilk, President, as well as the Company's other executive
officers. In addition to his position with the Company, Mr. Crowley is involved
in the management of other businesses. The loss of the services of one or more
of the Company's key management personnel or the inability to attract and retain
additional personnel necessary to accommodate future growth could have a
material adverse effect on the Company's business. The Company does not have
employment agreements with or key man insurance on any of its employees. See
"-- Management's Limited Operating History" and "Management."
10
<PAGE> 12
CHANGES IN DEMOGRAPHIC TRENDS AND ECONOMIC CONDITIONS
The Company's revenues depend, in part, on the number of working parents
who require child care services. Any change in demographic trends, particularly
those related to parents in the workforce or a deterioration in the general
economy resulting in a reduction in the work force, could adversely impact the
Company as out-of-work parents are more likely to discontinue utilization of
third party child care services.
POTENTIAL IMPACT OF ANTI-TAKEOVER PROVISIONS; SUBSTANTIAL CONTROL OF DIRECTORS
AND OFFICERS
Certain provisions of the Company's Restated Articles of Incorporation (the
"Restated Articles") and Restated Bylaws (the "Bylaws") could make it more
difficult for shareholders to effect certain corporate actions. Such provisions
include greater voting power for certain shares as described below, staggered
terms for members of the Company's Board of Directors, the requirement that
directors may only be removed for cause by a supermajority vote of shareholders,
a requirement that shareholders act only at an annual or special meeting or by
supermajority written consent and various procedural and other requirements.
These provisions and the election of the Company in its Bylaws to be subject to
the "fair price" and "business combination" provisions of the Georgia Business
Corporation Code (the "GBCC") could have the effect of delaying, deferring or
preventing a change in control of the Company or the removal of existing
management of the Company, even if such event would be beneficial to the
interest of the holders of Common Stock. Such provisions could also discourage
offers for Common Stock at a premium as well as create a depressive effect on
the market price of the Common Stock. See "Description of Capital
Stock -- Georgia Law and Certain Charter Provisions."
Furthermore, upon consummation of the Offering, without giving effect to
the exercise of outstanding options, executive officers and directors of the
Company will collectively beneficially own an aggregate of approximately
2,187,821 shares of Common Stock, representing 33.5% of the issued and
outstanding Common Stock. Because each share of Common Stock held by the same
beneficial owner on July 16, 1998 is entitled to ten votes per share, upon
completion of the Offering, executive officers and directors will collectively
control in the aggregate approximately 55.1% of the voting power of the
Company's outstanding Common Stock. In addition, each share acquired pursuant to
options granted prior to July 16, 1998 will be entitled to ten votes per share.
Consequently, such persons will have the power to control the outcome of matters
submitted for the vote of shareholders, including the election of members of the
Board of Directors and the approval of significant change in control
transactions. Their combined equity interest in the Company accordingly may have
the effect of making certain transactions more difficult, may have the effect of
delaying, deferring or preventing a change in control of the Company and may
adversely affect the voting and other rights of other holders of Common Stock.
LIMITED VOTING RIGHTS OF COMMON STOCK OFFERED HEREBY
Pursuant to the Restated Articles, holders of shares of Common Stock
acquired in the Offering, until they have held their shares for a continuous
period of greater than 48 months, will have one vote per share on all matters on
which the Company's shareholders have the right to vote, including the election
of directors, while the current holders of Common Stock are entitled to ten
votes per share. The differential in voting rights will limit both the
individual and collective voting power for holders of Common Stock purchasing
shares in the Offering. Following the Offering, the holders of the 2,850,000
shares offered hereby will have 7.2% of the voting power of the 6,535,000 shares
to be outstanding. In addition, the differential voting rights may affect the
market price and subsequent marketability of the Common Stock offered hereby.
See "-- Potential Impact of Anti-Takeover Provisions; Substantial Control of
Directors and Officers."
IMPACT OF YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Proper functioning of
computer systems requires that these date code fields accept four-digit entries
to distinguish twenty-first century dates from twentieth century dates.
Consequently, computer systems and software used by many companies may need to
be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance. While the Company believes its computer systems
are designed to be Year
11
<PAGE> 13
2000 compliant, there can be no assurance that such systems contain all
necessary upgrades and modifications. The failure of such systems to be Year
2000 compliant could have a material adverse effect on the Company's business,
financial condition or results of operations. In addition, there can be no
assurance that third parties, including governmental agencies that provide
funding to the Company, will adequately address the Year 2000 problem in such a
way as to cause no disruption to the Company's business.
ABSENCE OF DIVIDENDS
The Company currently intends to retain earnings for use in its business
and does not anticipate paying any cash dividends for the foreseeable future. In
addition, the ability of the Company to pay cash dividends is restricted under
its bank credit agreement. See "Dividend Policy."
ABSENCE OF PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; AND POSSIBLE
VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price will be determined by negotiations
among the Company, the Selling Shareholders and the representatives of the
Underwriters. See "Underwriting" for information relating to the factors to be
considered in determining the initial public offering price of the Common Stock.
There is no assurance that an active trading market will develop or continue
after consummation of the Offering or that the market price of the Common Stock
will not decline below the initial public offering price. The Company believes
factors such as quarterly fluctuations in financial results and announcements of
material events by the Company or its competitors, investor perception of the
child care industry generally and general economic and market conditions may
impact the market price of the Common Stock, perhaps substantially. In addition,
the stock market has experienced volatility which has affected the market price
of securities of many companies and may impact the price of the Common Stock.
BROAD DISCRETION OVER USE OF PROCEEDS
Approximately 66.5% of the estimated net proceeds to the Company of the
Offering ($13.3 million) are allocated to general corporate purposes, including
working capital and possible acquisitions. The Company's management will have
broad discretion over the application of these funds. There can be no assurance
that management will make such application effectively or in a manner that will
not result in a material adverse effect on the Company's financial condition or
results of operations. See "Use of Proceeds."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 6,535,000 shares of
Common Stock outstanding, assuming no exercise of the Underwriters'
over-allotment option and no exercise of options outstanding under the Company's
stock option plan. Of these shares, the 2,850,000 shares of Common Stock offered
hereby will be eligible for sale in the open market without restriction (except
for any such shares purchased by affiliates of the Company). All of the
remaining shares of Common Stock are "restricted securities" as that term is
defined in Rule 144 ("Rule 144") promulgated under the Securities Act of 1933,
as amended (the "Securities Act"). All of these restricted securities will be
eligible for sale in the public market 90 days following the date of this
Prospectus pursuant to Rule 144. Additional shares of Common Stock, including
shares issuable upon exercise of options, will also become eligible for sale in
the public market pursuant to Rule 144 from time to time. The Company and its
executive officers, directors and shareholders have agreed, however, not to sell
any of their shares of Common Stock (other than the shares to be sold by the
Company and the Selling Shareholders in the Offering) for a period of 180 days
from the date of this Prospectus without the prior written consent of The
Robinson-Humphrey Company, LLC. Following the Offering, sales and potential
sales of substantial amounts of the Company's Common Stock in the public market
pursuant to Rule 144 or otherwise could adversely affect the prevailing market
price for the Common Stock and impair the Company's ability to raise additional
capital through the sale of equity securities. See "Principal and Selling
Shareholders," "Description of Capital Stock," "Shares Eligible for Future Sale"
and "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION
Investors who purchase Common Stock offered hereby will experience
immediate dilution estimated to be $10.55 per share in the net tangible book
value per share of the Common Stock. In addition, shareholders
12
<PAGE> 14
purchasing Common Stock in the Offering will pay substantially more per share of
Common Stock than existing shareholders invested per share of Common Stock, and
will therefore bear substantially more of the financial risk of investment in
the Company. See "Dilution."
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,600,000 shares of Common
Stock offered hereby (after deducting the underwriting discount and estimated
expenses of the Offering) are estimated to be $20.0 million ($22.7 million if
the Underwriters' over-allotment option is exercised in full) based on an
assumed initial public offering price of $14.00 per share. The Company will not
receive any of the proceeds from the sale of shares of Common Stock by the
Selling Shareholders.
Approximately $6.7 million of the net proceeds of the Offering will be used
to repay indebtedness under the Company's bank credit agreement and certain
acquisition indebtedness. The Company's bank credit agreement provides for a
$2.0 million line of credit which matures June 2000 and a $13.0 million
revolving line of credit which matures June 2003. At June 26, 1998, $1.5 million
was outstanding under the line of credit, and $4.2 million was outstanding under
the revolving line of credit. In addition, in connection with the Offering, the
Company will terminate its S corporation status and will pay a dividend to its
shareholders. It is estimated that this dividend will be $200,000 and will be
funded from additional borrowings under the Company's bank credit agreement.
Borrowings under the bank credit agreement bear interest at the bank's prime
rate, LIBOR plus 1.75% to 2.375% or the secondary certificate of deposit ("C/D")
rate plus 1.75% to 2.375%, at the Company's option. Such debt had an interest
rate of approximately 7.6% per annum as of June 26, 1998. The indebtedness under
the bank credit agreement was incurred to provide funds for acquisitions of
child care centers and for working capital. In connection with an acquisition,
the Company issued a note, bearing interest at 8.5% per annum, of which the
principal amount was $833,333 at June 26, 1998. The Company intends to defease
this indebtedness by deposit of the principal amount thereof plus the present
value of future interest.
The Company currently has no specific plan for the remaining estimated net
offering proceeds of approximately $13.3 million. The Company is raising such
monies at this time in order to create a market for the Common Stock, to
facilitate future access by the Company to public equity markets and for general
corporate purposes, including working capital and possible acquisitions. While
the Company continuously reviews possible acquisition opportunities, the Company
does not presently have any agreements, arrangements or understandings regarding
any material acquisition.
Pending such uses, the net proceeds of the Offering will be invested in
investment grade securities or U.S. government securities.
DIVIDEND POLICY
The Company currently intends to retain earnings for use in its business
and does not anticipate paying any cash dividends for the foreseeable future. In
addition, the ability of the Company to pay cash dividends is restricted under
its bank credit agreement. Future cash dividends, if any, will be at the
discretion of the Company's Board of Directors and will depend upon, among other
things, the Company's future earnings, operations, capital requirements and
surplus, general financial condition, contractual restrictions and such other
factors as the Board of Directors may deem relevant.
13
<PAGE> 15
DILUTION
At June 26, 1998, the net tangible book value of the Company was
$2,827,872, or $0.57 per share of Common Stock. The net tangible book value
attributable to holders of Common Stock of the Company is tangible assets (total
assets less intangible assets and total liabilities). Dilution per share
represents the difference between net tangible book value per share and the
amount paid per share of Common Stock by investors in the Offering.
After giving effect to (i) the sale of 1,600,000 shares of Common Stock
offered by the Company in the Offering at an assumed initial public offering
price of $14.00 per share and the receipt of the estimated net proceeds
therefrom, (ii) additional debt incurred for the payment of approximately
$200,000 in dividends to shareholders of the Company prior to consummation of
the Offering and (iii) the provision for deferred tax liabilities of $100,000
for temporary differences related to the tax and book bases of assets at the
date of termination of S corporation status, the net tangible book value of the
Company as of June 26, 1998, would have been approximately $22,559,872, or $3.45
per share of Common Stock. This represents an increase in net tangible book
value per share of Common Stock of $2.88 to the Company's existing shareholders
and an immediate dilution of $10.55 per share of Common Stock to purchasers of
Common Stock in the Offering. The following table illustrates this dilution on a
per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $14.00
Net tangible book value per share before the Offering..... $ 0.57
Increase in net tangible book value per share attributable
to the Offering........................................ 2.88
------
Net tangible book value per share after the Offering........ 3.45
------
Dilution per share to new investors......................... $10.55
======
</TABLE>
Assuming the Underwriters' over-allotment option is exercised in full, pro
forma net tangible book value upon consummation of the Offering would be $3.75
per share, the immediate increase in pro forma net tangible book value of shares
owned by existing shareholders would be $3.18 per share and the immediate
dilution to new investors would be $10.25 per share.
The following table summarizes, on a pro forma basis as of June 26, 1998,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price paid per share by the
existing shareholders and new investors purchasing shares of Common Stock
offered hereby assuming an initial public offering price of $14.00 per share
(without giving effect to the underwriting discount and estimated offering
expenses):
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION PAID
------------------- --------------------- AVERAGE
NUMBER PERCENT AMOUNT PERCENT PRICE PER SHARE
--------- ------- ----------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Existing shareholders...... 4,935,000 75.5% $ 531,800 2.3% $ 0.11
New investors.............. 1,600,000 24.5% 22,400,000 97.7% $14.00
--------- ------ ----------- ------
Total............ 6,535,000 100.0% $22,931,800 100.0%
========= ====== =========== ======
</TABLE>
The sale of shares by the Selling Shareholders in the Offering will cause
the pro forma number of shares held by all existing shareholders as of June 26,
1998 to be reduced to 3,685,000 shares, or 56.4% of total shares of Common Stock
to be outstanding after the Offering, and the pro forma number of shares held by
new investors as of June 26, 1998 to be 2,850,000 shares, or 43.6% of the total
shares of Common Stock to be outstanding after the Offering. See "Principal and
Selling Shareholders."
The above computations assume no exercise of options outstanding as of June
26, 1998 to purchase an aggregate of 424,500 shares of Common Stock at a
weighted average exercise price of approximately $10.11 per share. The exercise
of such options would not increase the dilution per share to new investors.
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
26, 1998 and as adjusted to give effect to the sale of 1,600,000 shares of
Common Stock by the Company offered hereby at an assumed initial public offering
price of $14.00 per share, and the application of the estimated net proceeds
therefrom. See "Use of Proceeds." This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's financial statements and notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 26, 1998
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt:
Bank credit agreement..................................... $ 5,684 $ --
Acquisition note.......................................... 833 --
------- -------
Total long-term debt.............................. 6,517 --
Shareholders' equity:
Common Stock, no par value, 20,000,000 shares authorized;
4,935,000 shares issued and outstanding; 6,535,000
shares issued and outstanding, as adjusted(1).......... 532 20,564
Retained earnings......................................... 4,372 4,072(2)
------- -------
Total shareholders' equity........................ 4,904 24,636
------- -------
Total capitalization............................ $11,421 $24,636
======= =======
</TABLE>
- ---------------
(1) Does not include 750,000 shares of Common Stock reserved for issuance upon
exercise of stock options under the Company's stock option plan. See
"Management -- 1998 Stock Option Plan."
(2) As adjusted to give effect to (i) the payment of approximately $200,000 in
dividends to shareholders of the Company prior to consummation of the
Offering and (ii) the provision for deferred tax liabilities of $100,000 for
temporary differences related to the tax and book bases of assets at the
date of termination of S corporation status.
15
<PAGE> 17
SELECTED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND SCHOOL DATA)
The selected financial data presented below for the five years ended
December 31, 1997 are derived from the audited financial statements of the
Company. The selected financial data for the periods January 1, 1997 through
June 27, 1997 and January 1, 1998 through June 26, 1998 are derived from
unaudited financial statements of the Company. In the opinion of management,
such unaudited financial statements have been prepared on the same basis as the
audited financial statements referred to above and include all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
the financial position of the Company and the results of operations for the
indicated periods. Operating results for the period January 1, 1998 through June
26, 1998 are not necessarily indicative of the results that may be expected for
the entire year ending December 26, 1998. The selected financial data should be
read in conjunction with, and are qualified in their entirety by, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements, related notes and other financial information
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, JANUARY 1, 1997 JANUARY 1, 1998
-------------------------------------------- THROUGH THROUGH
1993 1994 1995 1996 1997 JUNE 27, 1997(2) JUNE 26, 1998(2)
------ ------ ------ ------- ------- ---------------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA(1):
Revenues...................... $4,825 $6,505 $9,209 $12,183 $16,331 $7,128 $13,574
Operating expenses:
Cost of services............ 3,510 4,643 6,761 8,981 12,249 5,038 10,175
Selling, general and
administrative expenses... 369 374 496 616 888 362 602
Depreciation and
amortization expense...... 279 400 501 684 854 366 622
------ ------ ------ ------- ------- ------ -------
Total operating
expenses............. 4,158 5,417 7,758 10,281 13,991 5,766 11,399
------ ------ ------ ------- ------- ------ -------
Income from operations........ 667 1,088 1,451 1,902 2,340 1,362 2,175
Interest expense, net......... (211) (262) (311) (277) (190) (86) (213)
------ ------ ------ ------- ------- ------ -------
Income before income taxes.... 456 826 1,140 1,625 2,150 1,276 1,962
Pro forma provision for income
taxes(3).................... 173 314 433 618 817 485 746
------ ------ ------ ------- ------- ------ -------
Pro forma net income.......... $ 283 $ 512 $ 707 $ 1,007 $ 1,333 $ 791 $ 1,216
====== ====== ====== ======= ======= ====== =======
Basic shares outstanding........ 4,905 4,905 4,905 4,905 4,932 4,931 4,935
Diluted shares outstanding...... 4,905 4,905 4,905 4,905 4,932 4,931 4,955
Pro forma net income per basic
share(4)...................... $ 0.06 $ 0.10 $ 0.14 $ 0.21 $ 0.27 $ 0.16 $ 0.25
Pro forma net income per diluted
share(4)...................... $ 0.06 $ 0.10 $ 0.14 $ 0.21 $ 0.27 $ 0.16 $ 0.25
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------- AT JUNE 26,
1993 1994 1995 1996 1997 1998
------ ------ ------ ------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....................... $ 23 $ 215 $ 241 $ 260 $ 65 $ 1,915
Total assets.......................... 4,453 4,529 6,886 6,285 10,911 12,801
Total debt, including current
portion(3).......................... 3,418 2,945 3,769 2,992 5,122 6,517
Shareholders' equity.................. 735 1,221 1,999 2,543 3,896 4,904
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------- AT JUNE 26,
1993 1994 1995 1996 1997 1998(2)
------ ------ ------ ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
SCHOOL DATA(1):
Number of schools............................... 25 25 32 34 63 67
Licensed capacity............................... 2,731 2,731 3,431 3,631 7,788 8,431
</TABLE>
- ---------------
(1) In September 1997, the Company acquired 29 schools in two transactions,
which were accounted for under the purchase method of accounting. Results of
operations of these schools have been included in the Company's operations
since the respective dates of purchase. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Pro Forma
Financial Information" and the financial statements and notes thereto
appearing elsewhere in this Prospectus for information concerning other
acquisitions and additional information related to these acquisitions.
(2) Effective January 1, 1998, the Company changed its fiscal year end from
December 31 to the last Friday in December. As a result, the Company will
report its quarterly results in 13 week periods beginning in 1998. Quarterly
results for 1997 have been presented on a comparable basis.
(3) The Company has historically elected to be taxed as an S corporation and,
accordingly, income taxes have been paid by its shareholders. The Company's
S corporation status will terminate upon consummation of the Offering, and
the Company will be taxed as a C corporation in future periods. The pro
forma provision for income taxes has been calculated at a 38% rate, which is
the Company's expected effective income tax rate.
(4) Data relative to cash dividends per common share is not presented as it is
not meaningful. The Company has historically paid dividends to its
shareholders in amounts approximately equal to their estimated income tax
liabilities. The Company will terminate its S corporation status upon
consummation of the Offering. See "Dividend Policy."
17
<PAGE> 19
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed statement of income for the
year ended December 31, 1997 (the "Pro Forma Financial Statement") is derived
from (i) the Company's income statement for the year ended December 31, 1997 and
(ii) the Young World, Inc. statement of operations for the period January 1,
1997 through September 29, 1997. The Pro Forma Financial Statement gives effect
to the acquisition of substantially all of the assets of Young World, Inc. (the
"Young World Acquisition") as if it occurred at January 1, 1997.
The pro forma adjustments are based on available information and certain
assumptions that the Company believes are reasonable. The Pro Forma Financial
Statement does not purport to represent what the Company's results of operations
would actually have been had the above transaction in fact occurred on such date
or to be indicative of the results of operations for or at any future period.
The Pro Forma Financial Statement should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements of the Company and Young World, Inc.
and the notes thereto included elsewhere in this Prospectus.
The Young World Acquisition has been accounted for under the purchase
method of accounting.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CHILDCARE YOUNG WORLD PRO FORMA PRO FORMA
NETWORK, INC. ACQUISITION ADJUSTMENTS AS ADJUSTED
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenues..................................... $16,331 $ 4,721 $21,052
Total operating expenses..................... 13,991 4,937 $ 75(1) 19,053
50(2)
------- ------- ----- -------
Income from operations....................... 2,340 (216) (125) 1,999
Interest expense, net........................ (190) -- (154)(3) (344)
------- ------- ----- -------
Net income (loss) before pro forma
provision for income taxes....... 2,150 (216) (279) 1,655
Pro forma provision for income taxes(4)...... (817) -- 188 (629)
------- ------- ----- -------
Pro forma net income (loss).................. $ 1,333 $ (216) $ (91) $ 1,026
======= ======= ===== =======
Basic and diluted shares outstanding......... 4,932 4,932
Pro forma net income per basic and diluted
share...................................... $ 0.27 $ 0.21
======= =======
</TABLE>
- ---------------
(1) Reflects the $75,000 increase in depreciation and amortization of the Young
World, Inc. assets based on the Company's allocation of the purchase price.
Value assigned to property and equipment was $1,159,000 and useful lives
range from five to 10 years. Goodwill amounted to $1,341,000 and is being
amortized over 25 years.
(2) Reflects an increase in lease expense based on the new lease agreement
executed as part of the purchase agreement between the Company and Young
World, Inc.
(3) Reflects an increase in interest expense based on the $2.5 million purchase
price with interest calculated at the Company's borrowing rate under its
revolving line of credit ($833,333 at 7.6%) and the interest rate specified
in the note payable given to the sellers of Young World, Inc. ($1,666,667 at
8.5%).
(4) The Company has historically elected to be taxed as an S corporation and
accordingly, income taxes have been paid by its shareholders. The Company's
S corporation status will terminate upon consummation of the Offering, and
the Company will be taxed as a C corporation in future periods. The pro
forma provision for income taxes has been calculated at a 38% rate, which is
the Company's expected effective income tax rate.
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Prior to 1998, the Company's fiscal year ended on December 31. Effective
January 1, 1998, the Company changed its fiscal year end to the last Friday in
December and began reporting its quarterly results in 13 week periods. For
comparison purposes, quarterly results for years prior to 1998 have been
restated to reflect, as nearly as possible, the Company's current four reporting
periods. The term "quarter" refers to actual 13 week reporting periods for 1998
and comparable restated reporting periods for prior years.
OVERVIEW
The Company provides affordable, high quality developmental education and
child care to families through 67 private schools, located predominately in
smaller and mid-sized cities in the southeastern United States. The Company's
schools are principally free standing sites in suburban communities and
generally operate five days a week throughout the year.
The Company has expanded its business through the acquisition of centers
and subsequent enhancement of the operations and profitability of such centers.
Between 1992 and 1997, the Company grew from five to 63 schools, increasing
enrollment from 545 to over 7,000 students. As a result, revenues increased from
$1.1 million in 1992 to $16.3 million in 1997 and income before income taxes
increased from $86,000 in 1992 to approximately $2.2 million in 1997.
In June 1995, the Company purchased seven child care centers with an
aggregate licensed capacity of 700 for a total purchase price of approximately
$1.3 million. In May 1996, the Company purchased two child care centers with
aggregate licensed capacity of 200 for a total purchase price of approximately
$96,000. On September 22, 1997, the Company purchased 13 child care centers with
an aggregate licensed capacity of 1,471 for a total purchase price of
approximately $1.1 million. On September 29, 1997, the Company purchased 16
child care centers with an aggregate licensed capacity of 2,821 for a total
purchase price of $2.5 million. In March 1998, the Company acquired four child
care centers with an aggregate licensed capacity of 508 for a total purchase
price of $240,000.
The Company's revenues are derived from tuition payments and funding from
certain state and federal programs. The Company participates in certain state
and federal programs which provide funding for disadvantaged children and, in
the State of Georgia, for prekindergarten students. Revenues from such programs
represented approximately 57.0% of the Company's total revenues in each of 1997
and 1996 and approximately 43.9% of total revenues in 1995. Tuition for programs
varies depending upon location of the school, the age of the child and the
funding source and is proportionally higher for children attending part-time.
The Company's policy is to collect tuition on a weekly basis in advance although
government funding for tuition is paid monthly. The Company generally reviews
its tuition rates at each school on an annual basis and makes adjustments based
primarily on operating costs and utilization and the market rates for the
community where the school is located. The Company's current weekly charges for
full day services range from $55 to $131.
Cost of services consists of payroll and related expenses, occupancy costs,
food, supplies, transportation costs and other expenses directly related to the
operation of the schools. Selling, general and administrative expenses are
comprised primarily of salaries and related costs of non-school personnel,
accounting and legal fees, insurance and general corporate expenses.
Depreciation primarily relates to the property and equipment of the Company's
schools, and amortization relates to goodwill associated with acquisitions.
Quarterly results for the Company may vary according to seasonal demand for
child care services, which tends to be lower during the summer months. In
addition, the results of schools acquired by the Company are included in the
financial statements from the date of acquisition. Accordingly, year-to-year
results may fluctuate, depending on the timing of acquisitions.
As a result of its election to be treated as an S corporation for income
tax purposes, the Company has not been subject to federal or state income taxes.
Pro forma net income amounts discussed herein include pro forma provisions for
income taxes determined by applying the Company's anticipated statutory tax rate
to income before income taxes, adjusted for permanent tax differences. The
Company's S corporation status will terminate upon consummation of the Offering.
19
<PAGE> 21
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of revenues represented by items in the Company's statements of income.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, JANUARY 1, 1997 JANUARY 1, 1998
------------------------ THROUGH THROUGH
1995 1996 1997 JUNE 27, 1997 JUNE 26, 1998
------ ------ ------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues.................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Expenses:
Cost of services.......................... 73.4 73.7 75.0 70.7 75.0
Selling, general and administrative
expenses............................... 5.4 5.1 5.4 5.1 4.4
Depreciation and amortization expense..... 5.4 5.6 5.3 5.1 4.6
----- ----- ----- ----- -----
Income from operations...................... 15.8 15.6 14.3 19.1 16.0
Interest expense, net....................... 3.4 2.3 1.1 1.2 1.6
----- ----- ----- ----- -----
Income before income taxes.................. 12.4% 13.3% 13.2% 17.9% 14.4%
===== ===== ===== ===== =====
</TABLE>
Period Ended June 26, 1998 Compared to Period Ended June 27, 1997
Revenues increased $6.5 million, or 90.4%, to $13.6 million for the period
ended June 26, 1998 from $7.1 million for the period ended June 27, 1997. Of
this increase, $6.1 million was attributable to 29 schools acquired in September
1997 (the "1997 Acquisitions")and the four schools acquired in 1998, and the
balance of $400,000 related primarily to an increase in enrollments during the
period.
Cost of services increased $5.2 million, or 102.0%, to $10.2 million for
the first quarter of 1998 from $5.0 million for the first quarter of 1997. Of
this increase, $4.9 million related to the 1997 Acquisitions and the four
schools acquired in 1998 and the balance of $300,000 related primarily to cost
increases. Cost of services as a percentage of revenues increased to 75.0% for
the 1998 period from 70.7% for the 1997 period. This increase was attributable
to the higher cost of services associated with the integration and initial
operation of the 1997 Acquisitions during the 1998 period, which was partially
offset by lower cost of services associated with schools in operation at the
beginning of each period. Salaries and benefits for the 1998 period were 50.5%
of revenues compared to 48.5% of revenues for the 1997 period due to higher
salaries and benefits for the schools acquired in 1997. Rent expense for the
1998 period was 5.8% of revenues compared to 4.0% of revenues for the 1997
period due to the higher rental expense related to the 1997 Acquisitions.
Selling, general and administrative expenses increased $240,000, or 66.3%,
to $602,000 for the 1998 period from $362,000 for the 1997 period. This increase
related primarily to the employment of additional corporate personnel, including
two district managers. Selling, general and administrative expenses as a
percentage of revenues decreased to 4.4% for the 1998 period from 5.1% for the
1997 period.
Depreciation and amortization expense increased $256,000, or 70.0%, to
$622,000 for the 1998 period from $366,000 for the 1997 period. This increase
related primarily to depreciation of assets and amortization of goodwill
associated with the 1997 Acquisitions. Depreciation and amortization expense as
a percentage of revenues decreased to 4.6% for the 1998 period compared to 5.1%
for the 1997 period due to lower incremental depreciation and amortization
expense as a percentage of incremental revenues from the 1997 Acquisitions.
Income from operations increased $813,000, or 59.7%, to $2.2 million for
the 1998 period from $1.4 million for the 1997 period. Income from operations as
a percentage of revenues decreased to 16.0% for the 1998 period from 19.1% for
the 1997 period as a result of the factors discussed above.
Interest expense, net, increased $127,000, or 146.4%, to $213,000 for the
1998 period, from $86,000 for the 1997 period primarily as a result of debt
incurred for the 1997 Acquisitions, partially offset by repayments.
20
<PAGE> 22
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues increased $4.1 million, or 34.0%, to $16.3 million in 1997 from
$12.2 million in 1996. Of this increase, $2.5 million was attributable to the
1997 Acquisitions, and $366,000 related to two schools acquired in 1996 which
were included in 1997 for the entire year as compared to seven months in 1996.
The balance of $1.2 million related primarily to an increase in enrollment and,
to a lesser extent, tuition increases at schools which were in operation at the
beginning of each year.
Cost of services increased $3.2 million, or 36.4%, to $12.2 million in 1997
from $9.0 million in 1996. Of this increase, $2.3 million related to the 1997
Acquisitions, and $268,000 related to the two schools acquired in 1996 which
were included in 1997 for the entire year, as compared to seven months for 1996.
The balance of $632,000 related primarily to increases in variable costs
associated with additional enrollments at schools which were in operation at the
beginning of the year. Cost of services as a percentage of revenues increased to
75.0% in 1997 from 73.7% in 1996. This increase was attributable to the higher
cost of services associated with the integration and initial operation of the
1997 Acquisitions during 1997, which was partially offset by lower cost of
services associated with schools in operation at the beginning of each year.
Salaries and benefits for 1997 were 50.5% of revenues compared to 51.1% of
revenues in 1996 reflecting increased utilization. Rent expense for 1997 was
5.0% of revenues compared to 4.5% of revenues in 1996 due to the higher rental
expense related to the 1997 Acquisitions.
Selling, general and administrative expenses increased $272,000, or 44.2%,
to $888,000 in 1997 from $616,000 in 1996. This increase primarily related to
the employment of additional personnel in the corporate office, including two
district managers and a vice president of operations. As a result, selling,
general and administrative expenses as a percentage of revenues increased to
5.4% in 1997 from 5.1% in 1996.
Depreciation and amortization expense increased $170,000, or 24.7%, to
$854,000 in 1997 from $684,000 in 1996. This increase related primarily to the
depreciation on capital expenditures of $927,000 in 1997 and incremental
depreciation and amortization of goodwill related to the 1997 Acquisitions.
Depreciation and amortization expense as a percentage of revenues decreased to
5.3% in 1997 from 5.6% in 1996.
Income from operations increased $438,000, or 23.0%, to $2.3 million in
1997 from $1.9 million in 1996. Income from operations as a percentage of
revenues decreased to 14.3% in 1997 from 15.6% in 1996 as a result of the
factors discussed above.
Interest expense, net, decreased $87,000, or 31.4%, to $190,000 in 1997
from $277,000 in 1996. This decrease was primarily due to a decline in the
average outstanding debt and an increase in interest income.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues increased $3.0 million, or 32.3%, to $12.2 million in 1996 from
$9.2 million in 1995. Of this increase, $300,000 related to the two schools
acquired in 1996, and $1.3 million related to the seven schools acquired in 1995
which were included in 1996 for the entire year as compared to six months in
1995. The majority of the balance of $1.4 million related to an increase in
enrollment at schools which were in operation at the beginning of each year and
the balance is related to price increases.
Cost of services increased $2.2 million, or 32.8%, to $9.0 million in 1996
from $6.8 million in 1995. Of this amount, $240,000 related to the two schools
acquired in 1996, and $1.0 million related to the seven schools acquired in 1995
which were included in 1997 for the entire year as compared to six months in
1995. The balance of the increase of $960,000 related primarily to increases in
variable costs associated with additional enrollments including additional
payroll expense, food, supplies and transportation costs. Cost of services as a
percentage of revenues increased to 73.7% in 1996 from 73.4% in 1995. Salaries
and benefits for 1996 were 51.1% of revenues compared to 47.1% in 1995. This
increase primarily reflected the relatively higher salaries and benefits
associated with increased participation in the Georgia Pre-K Program in 1996.
Rent expense for 1996 was 4.5% of revenues compared to 3.1% of revenues in 1995
reflecting the full year impact of the rental expense related to the seven
schools acquired in June 1995.
21
<PAGE> 23
Selling, general and administrative expenses increased $120,000, or 24.2%,
to $616,000 in 1996 from $496,000 in 1995. This increase related primarily to
increased salaries and accounting costs. Selling, general and administrative
expenses as a percentage of revenues decreased to 5.1% in 1996 from 5.4% in
1995.
Depreciation and amortization expense increased $184,000, or 36.7%, to
$684,000 in 1996 from $501,000 in 1995. This increase related primarily to the
depreciation of assets and amortization of goodwill of the seven schools
acquired in June 1995. Depreciation and amortization expense as a percentage of
revenues increased to 5.6% in 1996 from 5.4% in 1995.
Income from operations increased $451,000, or 31.1%, to $1.9 million in
1996 from $1.5 million in 1995. Income from operations as a percentage of
revenues decreased to 15.6% in 1996 from 15.8% in 1995 as a result of the
factors discussed above.
Interest expense, net, decreased by $34,000, or 10.9%, to $277,000 in 1996
from $311,000 in 1995. The decrease is primarily related to a decline in average
outstanding debt.
QUARTERLY RESULTS AND SEASONALITY
The following table sets forth certain unaudited quarterly results of
operations of the Company for the ten quarters ended June 26, 1998. The data has
been prepared on the same basis as the audited financial statements contained
elsewhere herein and includes all adjustments, consisting only of normal,
recurring adjustments necessary for a fair presentation of this information for
the periods presented, when read in conjunction with the Company's financial
statements and notes thereto contained elsewhere herein. The operating results
for any previous quarter are not necessarily indicative of results of any future
period.
<TABLE>
<CAPTION>
1996 1997 1998
------------------------------------- ------------------------------------- -----------------
1ST QTR 2ND QTR 3RD QTR 4TH QTR 1ST QTR 2ND QTR 3RD QTR 4TH QTR 1ST QTR 2ND QTR
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $3,211 $3,103 $2,698 $3,172 $3,480 $3,648 $3,397 $5,806 $6,421 $7,153
Cost of services.............. 2,367 2,272 2,040 2,302 2,488 2,550 2,453 4,758 4,865 5,310
Selling, general and
administrative expenses..... 160 146 134 176 182 179 201 326 312 290
Depreciation and amortization
expense..................... 134 170 166 215 183 183 188 300 293 329
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from operations........ 550 515 358 479 627 736 555 422 951 1,224
Interest expense, net......... 84 71 66 56 49 38 27 76 91 122
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes.... 466 444 292 423 578 698 528 346 860 1,102
Pro forma provision for income
taxes....................... 177 169 111 161 220 265 200 132 327 419
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Pro forma net income.......... $ 289 $ 275 $ 181 $ 262 $ 358 $ 433 $ 328 $ 214 $ 533 $ 683
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Pro forma net income per basic
and diluted share........... $ 0.06 $ 0.06 $ 0.04 $ 0.05 $ 0.07 $ 0.09 $ 0.07 $ 0.04 $ 0.11 $ 0.14
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The Company's business is subject to seasonal and quarterly fluctuations.
The Company's experience has been that the demand for child care decreases
during the summer months. During this season, families are often on vacation or
have alternative child care arrangements. In addition, children who will begin
elementary school in the fall often leave the Company's programs over the
summer. Demand for the Company's services generally increases in September upon
the beginning of the new school year and remains relatively stable throughout
the rest of the year. The decline in summer enrollment generally results in
lower revenue in the third quarter of the Company's fiscal year. During the
summer, to address such decline, the Company reduces staffing levels and offers
summer programs to retain and attract new students. The Company's results of
operations may also fluctuate from quarter to quarter as a result of, among
other things, the performance of existing schools, the number and timing of
acquisitions, the length of time required to improve the operating results of
acquired schools, competitive factors and general economic conditions.
22
<PAGE> 24
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are the ongoing operations of its
existing schools and the addition of new schools through acquisitions. The
Company's primary source of liquidity has been cash flow from operations,
borrowings under its bank credit agreements and seller financing related to
acquisitions.
Cash flow from operations of $1.4 million for the period January 1, 1998
through June 26, 1998 included net income of $2.0 million and noncash charges of
$562,000 less changes in operating assets and liabilities of $1.1 million. The
increase in operating assets (principally accounts receivable and prepaid
expenses) was attributable to an increased level of operations and prepaid rent
related to the 1997 Acquisitions. The decrease in accounts payable is the result
of accelerating payments to vendors. Cash flow from operations and $1.4 million
of borrowings under the Company's bank credit agreement were used to purchase
four schools for $240,000, purchase property and equipment of $1.0 million and
pay dividends of $954,000. This resulted in an increase of cash of $587,000.
Shortly after June 26, 1998, the Company repaid $570,000 under its bank credit
agreement.
Cash flow from operations of $3.0 million for 1997 includes net income of
$2.2 million, noncash charges of $711,000 plus changes in operating assets and
liabilities of $151,000. The increase in operating assets and liabilities was
attributable to the Company's expanded operations. Cash flow from operations of
$1.7 million was used to purchase property and equipment of $927,000 and pay
dividends of $813,000. Cash flow from operations of $1.3 million, seller
financing of $1.7 million and borrowings under its bank credit agreement
provided funds for the Company's acquisitions aggregating $3.5 million in 1997.
On June 19, 1998, the Company entered into an amended and restated credit
agreement with its bank which provides for aggregate borrowings of $15 million.
The new bank credit agreement consists of a line of credit of $2 million which
matures in two years and a revolving line of credit of $13 million which matures
in five years. Interest will accrue at the bank's prime interest rate, LIBOR
plus a margin of 1.75% to 2.375%, or the secondary C/D rate plus 1.75% to 2.375%
at the option of the Company. The credit agreement contains restrictive
provisions which, among other things, require the Company to maintain a minimum
net worth, certain financial ratios and certain insurance coverage limits. The
credit agreement is secured by substantially all of the existing and hereafter
acquired assets of the Company. At June 19, 1998, retained earnings available
for the payment of dividends was approximately $615,000.
The Company's capital expenditure budget for 1998 totals approximately $1.2
million and will be used primarily for the purchase of vehicles and furniture
and fixtures for its schools.
In connection with the Offering, the Company will terminate its S
corporation status and will pay a dividend to its shareholders to be used for
payment of taxes on 1998 S corporation earnings. It is estimated that this
dividend will be $200,000 and will be funded from additional borrowings under
the Company's bank credit agreement. In addition, as a result of the termination
of its S corporation status, the Company will record a charge of $100,000 to
income for temporary differences related to the tax and book bases of its
assets.
The Company intends to use a portion of the proceeds from the Offering to
repay indebtedness under the Company's bank credit agreement and certain
acquisition indebtedness. At June 26, 1998, $1,517,200 under the line of credit
was outstanding, and $4,166,700 under the revolving line of credit was
outstanding. Borrowings under the bank credit agreement bear interest at the
bank's prime rate, LIBOR plus 1.75% to 2.375% or the secondary C/D rate plus
1.75% to 2.375%. Such debt had an interest rate of approximately 7.6% as of June
26, 1998. Acquisition indebtedness was $833,333 at June 26, 1998 and bears
interest at 8.5%. The Company intends to defease this indebtedness by payment of
the principal amount plus the present value of future interest. The Company
currently has no specific plan for the remaining estimated net offering proceeds
of approximately $13.3 million.
The Company believes that the net proceeds from the Offering, together with
cash flow from operations and availability under the Company's bank credit
agreement, will be adequate to meet planned operating and capital needs and
enable the Company to achieve its growth program for at least the next 18
months.
23
<PAGE> 25
INFLATION
The Company does not believe that inflation has had a material effect on
its results of operations. There can be no assurance, however, that the
Company's business will not be materially affected by inflation in the future.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Proper functioning of
computer systems requires that these date code fields accept four-digit entries
to distinguish twenty-first century dates from twentieth century dates.
Consequently, computer systems and software used by many companies may need to
be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance. While the Company believes its computer systems
are designed to be Year 2000 compliant, there can be no assurance that such
systems contain all necessary upgrades and modifications. There can be no
assurance that third parties, including governmental agencies that provide
funding to the Company, will adequately address the Year 2000 problem in such a
way as to cause no disruption to the Company's business.
24
<PAGE> 26
BUSINESS
GENERAL
The Company provides affordable, high quality developmental education and
child care to families through 67 private schools, located predominantly in
smaller and mid-sized cities ranging in population from 60,000 to 400,000 in the
southeastern United States. The Company's schools provide age-appropriate
training and care to infants, toddlers and children aged six weeks to 12 years
through a combination of contemporary curricula, computer programs, field trips,
and parent/student activities, designed to promote both the student's academic
and social development. The Company's schools are principally free-standing
sites in suburban communities and generally operate five days a week throughout
the year. A majority of the schools are operated under the "Childcare Network"
name although 14 recently acquired schools operate under the "Young World" name.
As of June 26, 1998, the Company's 67 schools had an aggregate licensed capacity
of approximately 8,400 and served over 7,000 children in seven states.
INDUSTRY OVERVIEW
The Company believes that the market for child care services is growing
rapidly and that demand for high quality child care will continue to increase as
a result of the following factors: a growing number of young children; an
increasing percentage of mothers in the workforce; a shift toward the more
structured and education-based environment of center-based child care; and the
effects of federal and state policy initiatives which make child care accessible
to a larger number of families. Further, events such as The White House
Conference on Early Learning and Brain Development, as well as increasing
evidence that a high quality preschool experience promotes later achievement and
social adjustment, have highlighted the importance of early childhood education
for the development of children.
Over the last two decades, there has been a dramatic increase in
participation by women in the workforce, which is likely to continue. Families
are increasingly dependent upon two incomes to maintain a middle-class standard
of living, and nationwide welfare reform continues to encourage mothers to enter
the workforce. Approximately 62.0% of women with children under age six were in
the labor force in 1997, compared to only 39.0% in 1975. Further, almost 88.0%
of children whose mothers work full-time and 75.0% of mothers who work part-time
regularly receive care and education from a nonparent caregiver. In addition to
an increase in working mothers, there has also been an increase in the number of
children being born. The United States Census Bureau reports that the number of
births in the United States during the 1990s represented the highest levels
since the "baby boom" of the early 1960s and projects that births will continue
at these levels through 2005. Moreover, an increasing number of working women of
child-bearing age, coupled with over half of new mothers returning to work
within one year of their babies' births, will contribute to the growing demand
for child care and education.
According to the National Center for Education Statistics, the percentage
of children participating in child care programs has increased to a level such
that most children now receive some form of nonparental care and education prior
to starting the first grade. In addition, such child care and education is
increasingly being provided by nonrelatives in a formal group setting. The 1995
National Household Education Survey indicated that participation rates in both
relative and nonrelative home-based arrangements are significantly lower than
participation rates in center-based programs. In 1995, 31.0% of children under
six years of age participated in center-based care, versus only 6.0% in 1965.
Among three- and four-year olds, the percentage enrolled in nursery schools has
increased from approximately 11.0% to 48.0% over the last three decades. Of the
approximately 23.3 million children under age six in the United States, an
estimated 13.0 million preschoolers, including six million infants and toddlers,
are in child care each day.
In January 1998, President Clinton proposed a child care initiative which
would also benefit the child care industry by assisting families in paying for
child care. The President's proposal, which introduced $21.7 billion in spending
and tax incentives over the next five years, would represent the largest single
investment in child care in the nation's history. In addition, a number of state
agencies and legislative bodies are seeking to
25
<PAGE> 27
implement programs designed to promote accessibility to child care, making
government-assisted child care available to a larger number of families in these
states.
The child care industry is highly fragmented. There are more than 96,000
licensed centers in the United States, and the Company estimates that
approximately 25,000 of such centers are located in the southeast. Within the
United States, for-profit chains, including national and regional chains and
operators of four or more centers, represent only 7.0% of total market share.
Substantially all of the industry's licensed centers are owned or operated
individually or by small providers, many of which lack the financial,
technological and managerial resources to operate their centers profitably in an
increasingly regulated and competitive environment. As a result, the Company
believes that the number of providers seeking to exit the industry is likely to
grow, leading to an increase in the number of potential centers available to the
Company for acquisition.
BUSINESS STRATEGY
The Company's goal is to be the leading provider of affordable, high
quality developmental education and child care services in each of the markets
in which it operates. The Company believes that child care providers compete
based on accessibility, price and quality and breadth of services. The Company
believes its focus on directly serving a large number of families rather than a
smaller number of corporate clients, coupled with its emphasis on the efficient
operation of its schools, has allowed it to achieve an operating margin which
exceeds those of other child care providers for which public data is available.
The key elements of the Company's business strategy, which the Company believes
positions it for continued growth, are:
- High Quality Services at Competitive Prices. The Company's schools are
focused on providing affordable and convenient services through programs
which emphasize the child's development rather than mere supervision. The
Company attempts to price its services competitively relative to other
providers in each of the markets it serves. Central to the Company's
services are innovative and age-appropriate curricula. In order to
promote parents' understanding and appreciation of the Company's child
development programs, teachers and staff seek to actively partner with
parents through meetings, newsletters and written progress reports. In
addition, for the convenience of working parents, the Company provides
transportation to and from area elementary schools.
- Focus on Families. The Company believes it realizes benefits in pricing,
brand awareness, operating autonomy and flexibility to attract customers
from many sources by directly serving a large number of families rather
than focusing on a smaller number of corporate clients. The Company's
schools are principally free-standing sites in suburban communities
located in proximity to residences, elementary schools and major
transportation arteries. As such, the Company's schools are well
positioned to conveniently provide services to parents and children in
these areas.
- Enhanced Utilization and Efficient Staff-to-Child Ratios. The Company
configures its schools to maximize licensed capacity while preserving an
attractive and inviting environment for students. The Company believes
that offering affordable, high quality developmental education and child
care at convenient locations leads to increased enrollment, thus enabling
the Company to enhance its capacity utilization. In addition, the Company
monitors staff-to-child ratios to ensure that schools are efficiently
staffed in accordance with regulatory guidelines, and that changes in
staff requirements due to shifts in enrollment levels are addressed in a
timely manner. By clustering schools and maintaining a balance of
full-time and part-time personnel, the Company is able to manage staff
deployment between schools more efficiently, thereby minimizing overall
payroll expenses.
- Decentralized School Operations. Each of the Company's schools is
managed by a director who is responsible for its operation and
profitability. Administrative functions performed by a director include
marketing, tuition and accounts receivable collection, regulatory
compliance, recruiting, purchasing, parent relations and corporate
reporting. Each director prepares profit and loss information for weekly
review by management and is incentivized through quarterly and annual
bonuses to maximize school-level profitability while maintaining the
Company's standards of quality. In addition, a team of four district
managers provides training and guidance to directors and makes regular
visits to the schools to
26
<PAGE> 28
monitor and, as necessary, assist with operations. The Company believes
that the decentralization of school operations, together with support
from district managers and senior management, leads to a sense of
entrepreneurship in each director and a spirit of teamwork throughout the
Company. In addition, decentralization enables each school to respond to
the cultural, economic and regulatory differences which exist in its
respective market.
- Participation in Government Assistance Programs. The Company derives
several benefits from its active participation in federal and state
programs which provide funding for child care assistance. While most of
these programs provide funding designed only to cover the cost of the
Company's services, certain of these programs provide reimbursement to
the Company of an allocable portion of its overhead or permit the Company
to increase the utilization of its facilities. Further, the Company
believes that participation in such programs enhances recognition of the
Company.
- Expansion Through Acquisitions. The Company seeks to acquire child care
centers that present it with opportunities to increase utilization and
improve profitability through implementation of enhanced operating and
financial controls. Acquiring existing child care centers allows the
Company access to an established customer base and an experienced staff
with acceptance in the local community. In addition, by avoiding the cost
and time associated with constructing new facilities, the Company is able
to expand more rapidly and realize a return on its investment more
quickly.
GROWTH STRATEGY
The Company's significant growth over the past five years has occurred
primarily from the acquisition of child care centers and the improved operation
of such centers following acquisition. In March 1993, the Company acquired 20
centers, expanding its operations in Georgia and extending its operations into
Alabama and South Carolina. During 1995 and 1996, the Company acquired nine
centers, which added schools in Georgia and extended its operations into
Tennessee. Between 1993 and 1997, the Company invested in management and
infrastructure to support its expanded operations and future expansion. In 1997,
the Company accelerated its expansion, nearly doubling its school base from 34
schools to 63 schools. The acquisition of two regional chains by the Company
added 29 schools located in Alabama, Florida, Georgia, North Carolina, South
Carolina and Virginia in September 1997. In March 1998, the Company acquired
four additional centers in South Carolina.
The Company anticipates that future growth will come from acquiring
individual centers in existing markets and acquiring groups of centers in
existing and new markets. The Company generally seeks either to acquire child
care centers in areas close to the Company's existing schools and district
managers or to acquire a provider which has a sufficient number of schools to
justify the employment of an additional district manager. The Company targets
facilities in cities with populations of 60,000 to 400,000 in the southeastern
United States. Within this target market, the Company believes that there are
numerous centers which could provide attractive locations for its schools, thus
enabling the Company to continue to acquire facilities on terms which compare
favorably to the costs and risks of establishing new facilities.
The Company's management actively pursues acquisition opportunities. In
evaluating an acquisition candidate, the Company considers, among other things,
location, the local regulatory environment, demographic trends, competition,
existing community image and adequacy of the facility. In addition, the Company
analyzes the financial aspects of an acquisition with respect to pricing
policies, cost control, utilization and profitability in order to identify areas
for immediate and long-term improvement. The Company has generally structured
its acquisitions of child care centers as asset purchases and has relied
principally on bank borrowings to fund acquisitions. In most cases, the Company
does not purchase the land or buildings of the schools acquired but, where
possible, seeks to lease the acquired facilities on a long-term basis through
the exercise of renewal options.
Acquiring existing child care centers allows the Company access to an
established customer base and an experienced staff with acceptance in the local
community. In addition, by avoiding the cost and time associated with
constructing new facilities, the Company is able to expand more rapidly and
realize a return on its investment more quickly.
27
<PAGE> 29
Subsequent to their acquisition, centers are quickly converted to the
Company's management information and control system through a mentor program
with existing directors and district managers, supplemented by detailed,
transitional training and orientation meetings related to the Company's
operating procedures. The Company also introduces its high quality,
age-appropriate curricula at such centers.
OPERATIONS
Overview
The Company's schools are principally free-standing sites in suburban
communities, located in proximity to residences, elementary schools and major
transportation arteries. In addition, the Company presently operates two
worksite-based schools for corporations and partners with other companies
through referral programs which offer employers the opportunity to provide a
reduced cost program to their employees through volume discounts and cafeteria
plans.
The Company provides age-appropriate training and care to infants, toddlers
and children aged six weeks to 12 years through a combination of contemporary
curricula, computer programs, field trips and parent/student activities designed
to promote both the student's academic and social development. The Company's
programs range from after school educational and entertainment activities to a
full-time, five-day plan. Breakfast, two snacks and a hot lunch are served daily
to children who are one year of age and over for no additional charge. Menus are
prepared to comply with nutritional guidelines and are posted weekly. To
accommodate working parents, the schools are generally open from 6:30 a.m. to
6:30 p.m. Additionally, the Company provides transportation to and from
elementary schools for students aged five through 12.
Tuition for programs varies depending upon location of the school, the age
of the child and the funding source and is proportionally higher for children
attending part-time. Tuition is generally collected on a weekly basis in
advance. In addition to tuition, an annual registration fee is typically charged
for each child.
To promote flexibility in responding to cultural, regulatory and economic
differences in the markets which the Company serves, the Company maintains
decentralized management for the day-to-day operations of the schools. However,
the Company centrally develops new programs and negotiates certain supply
contracts for its schools. The Company also employs central cash management to
permit optimal use of its financial resources. In addition, the Company uses a
customized management information system to monitor the financial and operating
activities of each school in order to more effectively deploy its resources in a
given region.
School Operations
Typical school employees include a director, an assistant director and
full-time and part-time teaching, caregiving and other staff. Each of the
Company's schools is managed by a director who is responsible for its operation
and profitability. Administrative functions performed by a director include
marketing, tuition and accounts receivable collection, regulatory compliance,
recruiting, purchasing, parent relations and corporate reporting. Each director
prepares profit and loss information for weekly review by management and is
incentivized through quarterly and annual bonuses to maximize school-level
profitability while maintaining the Company's standards of quality. Directors
are trained and supervised by district managers, who generally supervise between
12 and 20 schools in geographical areas sufficiently compact to permit the
district managers to visit the schools under their supervision frequently. There
are currently four district managers who report to the Company's Vice President
of Operations. As part of an ongoing review process, district managers or the
Vice President of Operations, on an alternating basis, visit each school every
60 days to prepare a formal assessment of the school's compliance with the
Company's quality standards.
Each state in which the Company's schools are located has regulations
and/or guidelines establishing minimum staff-to-child ratios based upon the age
group of the children under supervision. Generally, the number of staff that the
Company is required to employ varies by state from (i) one staff member for each
five to six infants under the age of 13 months, (ii) one staff member for each
four to six children between the ages
28
<PAGE> 30
of 13 and 36 months, (iii) one staff member for each eight to twenty children
three to five years of age and (iv) one staff member for each 20 to 25 children
over five years of age.
Training
The Company considers staff training to be an essential component of its
child development and care programs and a significant contributor to the quality
of the Company's services. In addition to training all new staff members to
implement the Company's curricula and administrative procedures, the Company
offers employees the opportunity to participate in Company-sponsored college
programs and industry seminars. Further, experienced directors are assigned as
mentors to directors of newly acquired schools.
Facilities
The Company's schools contain classrooms, recreational areas, kitchens and
bathroom facilities. The schools are configured to accommodate the grouping of
children by age. All schools have outdoor playgrounds, often with separate areas
for toddlers. Each school is equipped with a variety of audio and visual aids,
educational supplies, games, toys, and indoor and outdoor play equipment. In
addition, the schools are equipped with personal computers which feature
age-appropriate interactive software. All schools are equipped with
Company-owned or leased vehicles for the transportation of children to and from
area elementary schools and for field trips. The Company's schools are located
in Alabama, Florida, Georgia, North Carolina, South Carolina, Tennessee and
Virginia. Licensed capacity of the Company's individual schools ranges from 48
to 255 students.
Worksite-Based Schools
The Company operates two worksite-based schools for corporate sponsors.
These schools provide services exclusively or on a priority basis for the
benefit of the employees of the corporate sponsor. Each of these schools is
managed by the Company pursuant to an operating agreement which specifies the
services provided, hours of operation and rates payable by the sponsor's
employees. While the Company is responsible for certain maintenance and repairs,
the corporate sponsor pays for capital maintenance projects and heating and
cooling systems.
Management Information Systems
The Company has implemented a management information and control system
which, management believes, has been an important factor in the Company's
ability to achieve superior operating margins and efficiently integrate newly
acquired schools. As part of this system, the Company has installed in each of
its schools a personal computer with customized software which enables each
school director to prepare and submit directly to the corporate office automated
weekly reports containing financial and operational data, including labor costs
and utilization information, enrollment and tuition data by age groups, prepaid
tuition and accounts receivable data and cash receipts. This information is
compiled in the corporate office and compared to weekly, month-to-date, and
year-to-date budget data. Detailed operating reports which are e-mailed to the
district managers by midweek provide the basis for weekly telephonic meetings
between senior management and district managers. The management information
system also enables central monitoring of staff-to-child ratios to plan
efficient staffing in response to shifts in enrollment levels in order to
control overall payroll expenses.
DEVELOPMENTAL CURRICULA AND PROGRAMS
A critical element of the Company's business strategy is the delivery of
innovative, age-appropriate programs which emphasize a child's academic and
social development rather than mere supervision. The Company believes that
parents desire a sound educational foundation for their children and considers
this a factor which differentiates the Company from traditional child care
providers. The school staff actively seeks a partnership role with parents in
the child's development. Parent meetings, newsletters and frequent progress
reports are used to enhance parents' awareness of and involvement in school
activities. In addition, the
29
<PAGE> 31
Company engaged consultants in Columbus, Georgia to conduct focus group
interviews with parents and intends to engage consultants for such purposes from
time to time in the future.
Substantially all of the Company's schools currently utilize A-BEKA(R)
curricula, which provide teaching guidelines tailored to the educational needs
of students at each of the ages two, three and four years. In August 1998, the
Company will convert all of its schools to the nationally recognized
HighReach(R) Learning curricula. HighReach Learning is designed to promote the
development of school readiness skills, instill a love of learning and promote
parental involvement through age-appropriate teaching materials. In addition,
the HighReach Learning program features an active learning component for infants
as well as standardized lesson plans, which are designed to build upon one
another, for children aged two through four years.
The organization and characteristics of the Company's classrooms vary
according to age group and are designed to stimulate learning. Although students
are grouped in classrooms primarily according to age, special consideration is
given to students who demonstrate unique emotional, physical or intellectual
needs. A description of typical classrooms by age group follows:
Infants (Six weeks to 18 months)
Within the infant classroom, emphasis is placed on the child's
physical needs, such as feeding and diapering, as well as interpersonal
interaction. The school uses several techniques, including the display of
family pictures in the child's crib, to emulate the child's home
environment. Caregivers provide mats in the classroom to encourage
crawling, standing and the development of gross motor skills. In addition,
mirrors are placed at floor level to encourage children to pull themselves
up at the sight of their reflections. Music is played in the classroom to
provide additional stimulation for the infants. Staff members prepare daily
summaries of the child's activities to inform parents.
Toddlers (18 months to two years)
This classroom emphasizes fine motor as well as gross motor skills
development. Children are encouraged to stand and walk, and finger play and
other exercises are used to encourage grasping, pushing and pulling.
Children are stimulated through play activities to develop communication
skills and initiate speech. Cognitive skills are enhanced through flash
cards, picture books and music. Repetition becomes an important means of
reinforcing the child's learning. Staff members prepare frequent progress
reports to inform parents.
Two to three years
The two to three year classroom encourages use of gross and fine motor
skills in tandem through activities such as standing and picking up small
objects. Manipulative toys are used to promote eye-hand coordination.
Outdoor games are introduced to enable the child to master gross motor
coordination. The classroom emphasizes daily routines and social
interaction through family style meals and other small group activities. A
variety of flash cards, picture books, songs and skits are used to promote
recognition of colors, shapes and numbers. Children listen to stories to
build listening skills and foster imagination and are often asked to repeat
the stories to develop memory recognition. To facilitate parental
involvement, staff members provide weekly progress reports.
Three to four years
For students three to four years old, more emphasis is placed on
academic readiness skills than in the earlier years. Children learn to
recognize an expanded range of shapes and begin counting. In addition,
techniques are used to enhance the child's ability to associate groups of
letters with spoken words, and children are encouraged to tell stories
through figures and symbols. Staff members stimulate the child's
understanding of cause and effect and inquisitiveness through activities
that present real-world situations. Age-appropriate, interactive computer
programs are introduced for the first time. Support and involvement of
parents are developed through weekly progress reports.
30
<PAGE> 32
Preschoolers (Four to five years)
The preschooler classroom features a writing area to support the
child's increasing ability to understand written letters and to foster an
interest in writing. In addition, phonics are emphasized. Sand and water
tables, art centers and manipulative toys are made available without
teacher permission to promote hands-on exploration as well as foster the
child's sense of responsibility. In addition, allowing children to choose
their own play activities promotes social interaction. The school also
organizes indoor and outdoor group activities designed to teach children to
take turns, share and follow instructions and arranges field trips. Support
and involvement of parents are developed through weekly progress reports.
After schoolers (Six to twelve years)
Elementary school students six to twelve years of age participate in
an after school program which is centered around fun activities but also
provides tutoring. Areas within the classroom provide computers,
construction play, art, imaginative play, reading, board games, and
electronic games, and a quiet area staffed with a tutor is made available.
For the convenience of working parents, transportation is provided to and
from elementary schools, and during school vacation periods full day
activities, including arts and crafts, field trips and athletic events, are
scheduled.
MARKETING
The director of each school has primary responsibility for marketing and
promoting the school. The Company's principal source of new enrollees is
recommendations from customers in the communities in which it operates. The
Company also markets its services through display advertisements and listings in
the Yellow Pages, newspaper advertisements and distribution of fliers at schools
and community functions. In addition, the Company markets its services to
employer-sponsored schools on a direct contact basis.
The Company believes that it can best increase initial and continued
enrollment in its schools by encouraging parents to visit the schools. Through
the maintenance of an attractive and inviting environment for students and
emphasis of its high quality curricula and programs, the Company is able to
provide parents with meaningful reasons to choose its schools over other
alternatives. Once a child is enrolled, the director encourages parental
involvement through monthly newsletters and reports to parents as well as
parent-teacher conferences and parental visits to the school. Schools use
promotional events, such as "grandparents' day," holiday activities, graduation
and open houses in support of the Company's effort to maintain enrollments. The
Company evaluates other opportunities to increase community awareness of its
schools and may employ additional marketing strategies in the future,
particularly in connection with acquisitions.
COMPETITION
Competition for attracting and maintaining student enrollment among child
care facilities is significant. In most of the geographic areas in which the
Company operates, the Company competes with centers owned by larger, national
chains, work-site based child care centers, centers affiliated with churches and
nonprofit organizations, individually owned proprietary child care centers,
licensed child care homes and in-home individual child care providers. According
to Child Care Information Exchange, an industry publication, the Company is the
14th largest for-profit provider of child care services in the United States
measured in terms of licensed capacity.
Competition within the child care industry is based largely upon the
accessibility, price and quality and breadth of services. The Company believes
that it competes effectively in its markets by maintaining conveniently located
facilities in a clean, healthy, safe and well-equipped manner, affordably
pricing its services and providing high quality curricula and recreational
programs as well as other services.
INSURANCE
The Company maintains comprehensive general liability insurance, which
provides coverage for both bodily injury and property damage claims up to a
total of $2 million. The Company maintains a primary
31
<PAGE> 33
liability policy with a limit of $2 million and an excess umbrella liability
policy which provides coverage for an additional $25 million. The Company
believes such insurance coverage is adequate.
As is true for all providers of child care services, the Company may become
subject to claims regarding child abuse. The Company has implemented protective
measures in its facility and classroom design to minimize the occurrence of such
incidents and provides a proactive training program to employees. In addition,
the Company has procured limited coverage for child physical and sexual abuse
claims, subject to a $500,000 annual aggregate limitation.
GOVERNMENT REGULATION
The Company's facilities are subject to regulation by the states in which
they operate. In addition, the Company is subject to federal and state
regulation of certain programs in which it participates. In addition, the
Company's business is impacted by certain tax and other laws.
Regulation of Child Care Centers. Child care centers are subject to
numerous state and local regulations and licensing requirements. Although these
regulations vary by jurisdiction and are revised periodically, government
agencies typically regulate and review, among other things, the fitness and
adequacy of buildings and equipment, licensed capacity, the ratio of staff to
enrolled children, the dietary program, the daily curriculum, staff training,
the adequacy and operation of vehicles used for the transportation of children,
transportation plans and compliance with health and safety standards. In most
jurisdictions, these agencies conduct both scheduled and unscheduled inspections
of the centers and licenses must be renewed periodically. In a few jurisdictions
in which the Company operates centers, legislation or regulations have been
enacted or are being considered which establish requirements for employee
background checks or other clearance procedures for new employees of child care
centers. The Company's centers are also subject to various state and local
building codes and other ordinances, including safety codes.
The Company has obtained a license to operate each of its centers as a
child care or day care facility. Licenses for certain of the Company's centers
are in the process of renewal or, in the case of recent acquisitions, have been
issued on a temporary basis pending final licensing. There is no assurance that
final licenses will be obtained for such schools. In the ordinary course of the
license renewal and inspection process, the Company's centers receive notices
from licensing agencies of deficiencies or corrective action to comply with
various regulatory requirements. The Company reviews such notices and takes
appropriate corrective action. Repeated failures by a child care center to
comply with applicable regulations can subject it to state imposed sanctions,
which might include fines, corrective orders, probation, or, in more serious
cases, suspension or revocation of the center's license to operate. Any failure
by the Company to comply with applicable requirements could have a material
adverse effect on the Company's business, financial condition or results of
operations. The Company has never experienced a license revocation and believes
it is in substantial compliance with all material regulations applicable to its
business.
Regulation of Programs. The Company participates in certain federal and
state funded child care and food service programs. A substantial portion of the
Company's net revenues are derived from such programs.
The Company participates, as a sponsoring organization for certain of its
centers in Alabama, Georgia and North Carolina, in the Child and Adult Care Food
Program (the "Food Program"), a food service program sponsored by the United
States Department of Agriculture (the "USDA") and administered through state
agencies. The Food Program reimburses participating nonresidential child care
centers on a monthly basis for providing nutritious meals to children.
Participating centers provide meals to children on a free, reduced price or paid
meal basis according to pricing programs adopted by the centers and regulated by
the state agency. The amount of reimbursement paid to a center is determined
according to payment rates established by federal law, and is based on the types
of meals served and the number of enrolled children who meet the eligibility
requirements for the free, reduced price or paid meal categories. Receipt of
funds from the Food Program has no impact on the tuition charged by
participating centers. Revenues from the Food Program represented slightly over
4.0% of the Company's total annual revenue in each of the three years ended
December 31, 1997. The number of Company centers participating in the Food
Program in the states of Georgia, Alabama and North Carolina were (i) 16, one
and zero, respectively, for the year ended
32
<PAGE> 34
December 31, 1995; (ii) 17, one and zero, respectively, for the year ended
December 31, 1996; and (iii) 19, one and ten, respectively, for the year ended
December 31, 1997 and the six month period ended June 26, 1998. The Company has
applied for participation in the Food Program for certain of its centers located
in South Carolina and Virginia.
In order to participate in the Food Program, a proprietary child care
center such as those operated by the Company must, among other things, meet
applicable state licensure requirements, verify that it provides nonresidential
day care services for which it receives compensation under Title XX of the
Social Security Act (the federal law providing block grants to states for social
services programs) and verify that not less than 25.0% of the children enrolled
in the child care center or 25.0% of the center's licensed capacity, whichever
is less, were beneficiaries under Title XX of the Social Security Act during the
most recent calendar month. The Company participates in the Food Program through
agreements with the appropriate state agencies. Agreements for the Food Program
are renewed on a periodic basis, and there is no assurance that the Company will
be awarded agreements in the future. The agreements contain provisions that,
among other things, require the Company to ensure that meals served meet Food
Program meal pattern requirements, comply with requirements related to record
keeping and financial management of the Food Program, provide adequate
supervisory and operational personnel, and not claim reimbursement for a center
in any month in which less than 25.0% of the center's enrolled children or 25.0%
of licensed capacity, whichever is less, are Title XX beneficiaries. Certain of
the Company's centers currently do not have enough eligible enrolled children to
participate in the Food Program.
Centers participating in the Food Program are subject to periodic federal
and state compliance reviews and audits. Any participating center or sponsoring
organization determined to be "seriously deficient" in the operation of the Food
Program at its center may not participate in the Food Program unless the state
agency and the USDA determine that necessary action has been taken to correct
the deficiency and prevent its recurrence. None of the Company's centers has
been subject to such a determination.
The Company also participates in certain child care assistance programs
funded through federal block grants to states for aid and services to low-income
families (the "Assistance Programs"). The Assistance Programs are administered
by state and local agencies, and are designed to provide child care assistance
to eligible, economically disadvantaged parents who work or participate in
schooling or work training programs. Eligible participants are approved by the
administering state or local agency, and are entitled to select the child care
center that their child will attend. The amount of the subsidy provided by the
Assistance Programs typically is determined by the administering agency as a
percentage of the market rate for child care in a given area and often is less
than the Company's normal fee. The child care center typically bills the portion
(determined by the agency) of such fee directly to the participant, and submits
a claim for the remainder to the administering agency on a monthly basis for
reimbursement under the Assistance Programs. Revenues from the Assistance
Programs represented approximately 19.9%, 21.5% and 28.6% of the Company's total
revenues for the years ended December 31, 1995, 1996 and 1997, respectively.
The Company has a contract with the Office of School Readiness of the State
of Georgia, which requires the Company to coordinate and provide services and
programs for four-year-old children and their families served under the state's
prekindergarten program, which is fully funded from the proceeds of the state
lottery (the "Georgia Pre-K Program"). The Georgia Pre-K program contains
provisions which, among other things, require specific qualifications of lead
teachers, maintenance of student/teacher ratios, use of an approved curriculum,
certain minimum amounts of expenditures on children's supplies and the return of
unutilized funds at the end of each contract year. All but one of the Company's
centers in Georgia participate in the Georgia Pre-K Program. The Company
received $3.9 million under the Georgia Pre-K Program for the 1997-1998 school
year. The Company has executed a contract with the Office of School Readiness
for the 1998-1999 school year providing for funding in the amount of up to $4.1
million. Revenues from the Georgia Pre-K Program represented approximately
19.8%, 31.6% and 24.0% of the Company's total revenues for the years ended
December 31, 1995, 1996 and 1997, respectively. Contracts for the Georgia Pre-K
Program are renewed on an annual basis, and there is no assurance that the
Company will receive renewal contracts in the future, or that the Georgia Pre-K
Program will not be changed or eliminated at some point in the future. In
33
<PAGE> 35
addition, due to funding limitations, the Company does not expect that it will
be able to obtain funding for additional Georgia Pre-K Programs in its existing
centers or centers acquired in the future.
The failure of the Company to continue to qualify for participation in such
programs, the elimination of any of such programs, or changes in the
reimbursement policies of such programs as a result of budget cuts by federal or
state governments or other legislative or regulatory actions, could have a
material adverse effect on the Company's financial position, results of
operations and cash flows.
Regulation of Motor Vehicles. The Company presently operates approximately
150 passenger vans, each with a capacity of 15 passengers, for the
transportation of students. Recently, safety concerns over the use of passenger
vans by child care providers have caused, or are expected to cause, federal
authorities and many state agencies to reevaluate whether children should be
transported in passenger vans, as opposed to school buses which meet more
stringent safety requirements. One of the means by which both federal
authorities and state agencies may seek to increase the safety of children
riding in passenger vans, such as those operated by the Company, is to define
such vans as "school buses" under their respective regulations. For example, the
United States Department of Transportation, through the National Highway Traffic
Safety Administration ("NHTSA"), currently defines a "school bus" as a motor
vehicle designed to carry more than ten persons that is sold or introduced into
interstate commerce for purposes that include carrying students to and from
school or related events. Federal Motor Vehicle Safety Standards ("FMVSS") are
applied to motor vehicle manufacturers and any persons selling or offering for
sale or lease a new motor vehicle. Based upon FMVSS, it is a violation of
federal law for any person knowingly to sell or lease a new motor vehicle for
use as a school bus that does not comply with all FMVSS applicable to school
buses. However, FMVSS regulate the manufacture and sale of new motor vehicles
but not the use thereof. FMVSS do not apply to purchasers of motor vehicles, who
currently are regulated by state law, if at all. According to the NHTSA, the
federal school bus requirements do not apply to the sale of new vehicles to
custodial facilities such as child care centers. However, NHTSA looks to the
nature of the particular institution to determine whether the rules are
applicable to the manufacturer and seller of the vehicles. If the central
purpose of the institution is the education of preprimary, primary or secondary
school students, whether public or private, new vehicles sold to that
institution for their transportation must comply with FMVSS applicable to school
buses.
Each state promulgates its own laws, rules and regulations governing the
transportation of children to and from school and determines the applicability
of such rules and regulations to child care centers. Some states have adopted
NHTSA's definition of a school bus or a variation thereof. While NHTSA deems
child care centers to be primarily custodial in nature and not educational, the
exact nature of a child care center under state law may be viewed differently.
Certain states are now vigorously enforcing their school bus and safety
regulations. In addition, one or more states are enforcing such regulations
against child care centers. Certain states have enacted or may enact new
legislation or have changed their interpretation and enforcement of existing
rules and regulations to discourage the use of passenger vans by child care
centers in transporting children. In addition, owners of child care centers,
including the Company, are providing their students with more educational
opportunities, which may lead a state to determine that a particular child care
facility is educational in nature. The result is that the application of state
rules as to whether child care providers must comply with the school bus laws
and regulations is unclear and may be subject to change.
Although the Company believes that it is in compliance with all applicable
state laws, rules and regulations governing transportation of children in motor
vehicles in all states in which it operates, a court or administrative agency
may determine that child care providers generally, or the Company in particular,
are not in compliance with such laws, rules or regulations. Any such
determination could result in the imposition of fines or sanctions against the
Company, require the Company's drivers to be licensed as "school bus" operator,
and/or require the Company to retrofit or replace its passenger vans with
vehicles which comply with applicable standards, any of which could have a
material adverse effect on the Company's financial condition or results of
operations. In addition, while the Company maintains liability insurance
concerning the operation of these motor vehicles, the Company could incur a
claim resulting from such operation which may have a material adverse effect on
its financial condition or results of operation. See "Risk Factors -- Insurance"
and "-- Insurance."
34
<PAGE> 36
Income Tax Provisions. The United States Internal Revenue Code (the
"Code") provides for an income tax credit ranging from 20.0% to 30.0% of certain
child care expenses, subject to certain maximum limitations. The tuition paid to
the Company for child care services qualifies for the federal tax credit under
the Code, provided that various requirements under the Code are met.
Other. The Company must also comply with the Americans with Disabilities
Act ("ADA"), which prohibits discrimination on the basis of disability in public
accommodations and employment. Costs incurred to date by the Company to comply
with the ADA have not been significant. A determination that the Company is not
in compliance with the ADA, however, could result in the imposition of fines or
an award of damages to private litigants and could require significant
expenditures by the Company to bring the Company's schools into compliance with
the ADA.
EMPLOYEES
At April 3, 1998, the Company employed over 1,200 persons (including
part-time employees). Thirteen of such employees, including four district
managers, are employed in administrative capacities and the remainder are
employed at the Company's schools. Typical school employees include a director,
an assistant director and full-time and part-time teaching, care giving and
other staff. All center directors and corporate supervisory personnel are
salaried, while all other employees are paid on an hourly basis. The Company
does not have an agreement with any labor union and believes that its relations
with its employees are good.
PROPERTIES
The Company's corporate headquarters are located in approximately 3,300
square feet of office space in Columbus, Georgia under a lease expiring in March
2000. Annual lease payments are $18,000. The Company considers this space for
its corporate offices to be in good condition and adequate for its current
operating needs. In addition, management believes additional space would be
available on reasonable terms if required.
The Company owns the property and buildings for 17 of its schools and
leases the land and buildings for 50 of its schools, typically under "triple
net" leases that require the Company to pay real estate taxes, maintenance costs
and insurance premiums. The terms of the leases range from month-to-month to 14
years and typically provide for renewal. The Company believes that each of its
schools is well maintained and in good condition and, accordingly, does not
anticipate significant expenditures for the maintenance thereof for the
forseeable future.
The Company's schools contain classrooms, recreational areas, kitchens and
bathroom facilities. The schools are configured to accommodate the grouping of
children by age. All schools have outdoor playgrounds, often with separate areas
for toddlers. The following table sets forth information regarding the Company's
schools in the indicated states as of June 26, 1998:
<TABLE>
<CAPTION>
NUMBER OF SCHOOLS
---------------------- AGGREGATE LICENSED
STATE LEASED OWNED TOTAL ENROLLMENT(1) CAPACITY
----- ------ ----- ----- ------------- --------
<S> <C> <C> <C> <C> <C>
Alabama...................................... 10 1 11 1,189 1,133
Florida...................................... 4 0 4 445 535
Georgia...................................... 16 15 31 3,105 3,324
North Carolina............................... 10 0 10 1,211 1,752
South Carolina............................... 5 1 6 461 843
Tennessee.................................... 1 0 1 102 100
Virginia..................................... 4 0 4 524 744
-- -- -- ----- -----
Total.............................. 50 17 67 7,037 8,431
== == == ===== =====
</TABLE>
- ---------------
(1) In certain circumstances, actual enrollment exceeds licensed capacity due to
part-time students enrolled for different portions of the day or week.
LEGAL PROCEEDINGS
The Company is involved from time to time in routine litigation arising out
of the ordinary course of its business, most of which is covered by insurance.
In the opinion of management, the ultimate disposition of such matters presently
outstanding will not have a material adverse effect upon the Company's financial
position or results of operations.
35
<PAGE> 37
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table and biographies set forth information concerning the
individuals who serve as directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ray E. Crowley......................... 65 Chairman and Chief Executive Officer
James F. Loudermilk.................... 51 President and Director
Lanier Merritt......................... 61 Senior Vice President, Chief Financial
Officer and Director
Conway Tucker.......................... 44 Vice President of Operations
Joseph G. Slaughter, III............... 42 Controller and Secretary
Richard Y. Bradley..................... 60 Director
Albert Ernest, Jr...................... 68 Director
Murray D. Gray, Jr..................... 64 Director
Calvin J. Martin, Jr................... 47 Director
Noll A. Van Cleave, Jr................. 41 Director
</TABLE>
Ray E. Crowley has served as Chairman and Chief Executive Officer of the
Company since August 1997 and has been a director since 1991. Since 1992, Mr.
Crowley has served as Chairman of Eastern Service Corporation, a transportation
services corporation. From 1989 to 1992, Mr. Crowley served as Chief Executive
Officer of Corporate Capital Resources, Inc., an investment corporation. From
1974 through 1989, Mr. Crowley was Chairman and Chief Executive Officer of
Burnham Services Corporation, a trucking and logistics company.
James F. Loudermilk has served as President and a director of the Company
since March 1991. From 1990 until joining the Company, Mr. Loudermilk was a
private health care consultant. Mr. Loudermilk served as Chairman and Chief
Executive Officer of Healthcare Management Corporation, a health care company
from 1980 until 1989. From 1976 to 1980, Mr. Loudermilk was Vice President and
Treasurer of the Medical Center in Columbus, Georgia. Mr. Loudermilk is a member
of the Office of School Readiness Advisory Council of the State of Georgia, the
Georgia Child Care Council and the Georgia Childcare Leadership Forum.
Lanier Merritt has served as Senior Vice President, Chief Financial Officer
and a director of the Company since May 1998. He was a private investor from
April 1996 to May 1998. From 1982 to 1996, Mr. Merritt was the Managing Partner
of the Columbus, Georgia office of Ernst & Young LLP.
Conway Tucker has served as Vice President of Operations since January
1997. Prior to 1997, Mr. Tucker was employed for over seven years at KinderCare
Learning Centers, Inc. where he served from July 1995 to December 1996 as a
Division Vice President and from October 1992 to July 1995 as a Vice President
of Training.
Joseph G. Slaughter, III has served as Controller of the Company since June
1996 and Secretary since June 1998. From 1994 to 1996, Mr. Slaughter served as a
senior accountant with Fountain, Arrington, Hoffman & Co., P.C. From 1984 to
1994, Mr. Slaughter was a principal in Preston & Slaughter, a Columbus, Georgia
accounting firm.
Murray D. Gray, Jr., a founder of the Company, has served as a director of
the Company since the Company's inception and served as Secretary from inception
through May 1998. Since 1987, Mr. Gray has been Executive Vice President of
United Oil Company. From 1980 to 1986, Mr. Gray owned Georgia Printing Service
and from 1958 through 1979 he was Vice President and Trust Officer of Columbus
Bank and Trust Company.
Richard Y. Bradley has served as a director of the Company since 1991. Mr.
Bradley has been in the active practice of law in the law firm of Bradley and
Hatcher since 1995 and, from 1962 to 1990 with the law
36
<PAGE> 38
firm of Hatcher, Stubbs, Land, Hollis and Rothschild. From 1991 to 1995, Mr.
Bradley served as President of Bickerstaff Clay Products, Inc. Mr. Bradley
serves as a director of Synovus Financial Corp. and Total System Services, Inc.
Albert Ernest, Jr. has served as a director of the Company since 1996. Mr.
Ernest has also served as Chairman of Albert Ernest Enterprises, an investment
and consulting firm, since before 1993. Mr. Ernest previously served as a
director of Barnett Banks, Inc. from 1982 to 1992, President and Chief Operating
Officer from 1988 until his retirement in 1991 and Vice Chairman from 1984 to
1988. Mr. Ernest also serves as a director of Florida Rock Industries, Inc., FRP
Properties, Inc., Regency Realty Corporation, Stein Mart, Inc., Wickes Lumber
Company and Emerald Funds.
Calvin Jay Martin, Jr. has served as a director of the Company since May
1998. Since 1996, Mr. Martin has served as Executive Vice President and Chief
Financial Officer of W.C. Bradley Co., a company engaged in manufacturing, real
estate development and retail and served in various other positions with the
Company from 1992 to 1996. From 1990 to 1992, Mr. Martin was President of
Computer Transport, Inc., a company providing transportation and distribution
services. From 1989 to 1990, he served as Executive Vice President and General
Manager of North American Van Lines. Prior thereto, from 1987 to 1989, Mr.
Martin served as President and Chief Operating Officer of Burnham Services
Corporation, a trucking and logistics company.
Noll A. Van Cleave, Jr. has served as a director of the Company since 1996.
Mr. Van Cleave has been the Chairman and Chief Executive Officer of both Valley
Wood, Inc. and Van Cleave, Hatcher, land and timber consultants, since before
1993.
BOARD OF DIRECTORS
The Company's Bylaws provide that the Board of Directors shall consist of
one or more directors, comprised of three classes of similar size, each elected
in a different year, so that only approximately one-third of the Board of
Directors is elected in any single year. The number of directors is currently
fixed at eight, and Messrs. Martin and Merritt are designated Class I directors
and have been elected for a term expiring in 1999 and until their successors are
elected and qualified; Messrs. Bradley, Loudermilk and Ernest are designated
Class II directors and have been elected for a term expiring in 2000 and until
their successors are elected and qualified; and Messrs. Crowley, Van Cleave and
Gray are designated Class III directors and have been elected for a term
expiring in 2001 and until their successors are elected and qualified. Executive
officers of the Company are elected by the Board of Directors and serve at the
discretion of the Board.
The Board of Directors has a Compensation Committee and an Audit Committee.
The Compensation Committee, consisting of Messrs. Van Cleave and Gray, has the
authority to approve salaries and bonuses and other compensation matters for the
executive officers of the Company and to administer the Company's stock option
plan. The Audit Committee, consisting of Messrs. Ernest and Martin, has the
authority to recommend the appointment of the Company's independent auditors and
review the results and scope of audits, internal accounting controls and tax and
other accounting related matters. The Company does not have a Nominating
Committee.
DIRECTOR COMPENSATION
Members of the Board of Directors receive annual fees of $7,800 for their
services as directors, including service on committees of the Board.
The Company has authority under its stock option plan to grant options to
directors and has granted options to purchase 15,000 shares to each of Messrs.
Bradley, Ernest, Gray and Van Cleave and an option to purchase 7,500 shares to
Mr. Martin, who joined the Company as a director in May 1998. See "-- 1998 Stock
Option Plan."
37
<PAGE> 39
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Messrs. Van Cleave and Gray. Neither
of these individuals was at any time during 1997, or any other time, a paid
officer or employee of the Company. Mr. Gray served as Secretary of the Company
(without compensation) from inception of the Company through May 1998.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation of the Company's Chairman and Chief Executive Officer and the only
executive officer whose salary and bonus exceeded $100,000 for the year ended
December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
FISCAL ------------------
NAMES AND POSITION YEAR SALARY BONUS
- ------------------ ------ -------- -------
<S> <C> <C> <C>
Ray E. Crowley(1)........................................... 1997 $ -- $ --
Chairman and Chief Executive Officer
James F. Loudermilk......................................... 1997 $100,000 $15,000
President
</TABLE>
- ---------------
(1) While Mr. Crowley received no salary or bonus from the Company in 1997, he
received approximately $14,000 in consulting and director fees from the
Company.
OPTION GRANTS
In May 1998, the Company adopted a stock option plan and granted options to
the following executive officers to purchase the indicated number of shares of
Common Stock at an exercise price of $10.00 per share; Mr. Crowley -- 135,000
shares; Mr. Loudermilk -- 90,000 shares; Mr. Merritt -- 75,000 shares; Mr.
Tucker -- 18,000 shares; and Mr. Slaughter -- 2,250 shares. The Company also
granted options to Mr. Crowley to purchase 30,000 shares at an exercise price of
$11.00 per share. The options vest ratably over three years.
1998 STOCK OPTION PLAN
On May 11, 1998 and July 6, 1998, the Board of Directors and the Company's
shareholders, respectively, approved the Company's 1998 Stock Option Plan (the
"Plan"). The purpose of the Plan is to promote share ownership by key employees
and directors of the Company, thereby reinforcing a mutuality of interest with
other shareholders and to enable the Company to attract, retain and motivate key
employees and directors by permitting them to share in its growth.
The maximum number of shares of Common Stock that may be issued pursuant to
options granted under the Plan may not exceed 750,000 shares. Awards under the
Plan are granted by the Board of Directors (or a committee as designated by the
Board of Directors) and may include options that are intended to qualify as
"incentive stock options" under Section 422 of the Code ("ISOs") and/or options
that are not intended to so qualify under the Code. The Compensation Committee
will administer the Plan and generally has discretion to determine the terms of
an option grant, including the number of option shares, option price, term and
vesting schedule. Notwithstanding this discretion, (i) no individual shall be
granted options under the Plan for more than 300,000 shares, (ii) the term of
any option may not exceed 10 years and (iii) the aggregate number of shares of
Common Stock actually issued or transferred by the Company upon exercise of the
ISOs shall not exceed 750,000 shares of Common Stock. Each grant shall specify
an option price per share which may not be less than the fair market value on
the date of grant.
For purposes of the Plan, fair market value means the closing price of a
share on the Nasdaq Stock Market on the day preceding the date of grant or if
the shares are not admitted to trading thereon, the amount determined by the
Board of Directors to be the fair market value per share.
38
<PAGE> 40
No option may be granted pursuant to the Plan on or after May 11, 2008. The
Plan may be amended by the Board of Directors without the consent of the
shareholders of the Company, except that any amendment, although effective when
made, will be subject to shareholder approval within one year after approval by
the Board of Directors if (i) the amendment increases the total number of shares
issuable pursuant to the Plan, (ii) extends the maximum option period applicable
under the Plan or (iii) is required by applicable law or the principal national
securities exchange upon which the shares of Common Stock are traded or quoted.
Subject to shareholder approval, the Company has issued options to purchase
424,500 shares pursuant to the Plan.
CERTAIN TRANSACTIONS
Richard Y. Bradley, a director of the Company, is a partner in the law firm
of Bradley and Hatcher, which provided legal services for the Company during the
three years ended December 31, 1997 and continues to provide such services.
39
<PAGE> 41
PRINCIPAL AND SELLING SHAREHOLDERS
The following tables set forth certain information regarding the beneficial
ownership of the Company's Common Stock as of June 1, 1998, and as adjusted to
reflect the sale of the shares offered by this Prospectus, by (i) each person
who owns beneficially more than 5% of the Company's Common Stock, (ii) each
director of the Company, (iii) each Selling Shareholder and (iv) all directors
and executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AFTER
SHARES BENEFICIALLY OFFERING(2)
OWNED PRIOR TO ----------------------------------
OFFERING(2)
------------------- SHARES PERCENT
BEING OF TOTAL
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENT OFFERED(3) NUMBER PERCENT VOTING POWER
--------------------------- --------- ------- ---------- --------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------------------
Ray E. Crowley(4)........................... 1,207,725 24.5% -- 1,087,725 16.6% 27.4%
Noll A. Van Cleave, Jr. .................... 543,063 11.0 -- 543,063 8.3 13.7
James F. Loudermilk(5)...................... 371,610 7.5 -- 311,610 4.8 7.8
Murray D. Gray, Jr. ........................ 185,805 3.8 100,000 85,805 1.3 2.2
Richard Y. Bradley.......................... 185,805 3.8 41,187 144,618 2.2 3.6
Albert Ernest, Jr. ......................... 30,000 * 15,000 15,000 * *
Lanier Merritt.............................. -- -- -- -- -- --
Calvin J. Martin, Jr. ...................... -- -- -- -- -- --
Joseph G. Slaughter, III.................... -- -- -- -- -- --
Conway Tucker............................... -- -- -- -- -- --
All directors and executive officers as a
group (10 persons)........................ 2,524,008 51.1% 156,187 2,187,821 33.5% 55.1%
OTHER 5% SHAREHOLDERS AND SELLING
SHAREHOLDERS
- --------------------------------------------
Sundari Raju(6)............................. 603,864 12.2% 503,864 100,000 1.5% 2.5%
Devery Van Cleave Wright(7)................. 357,258 7.2 140,000 217,258 3.3 5.5
Elizabeth Van Cleave Harp(8)................ 355,758 7.2 -- 355,758 5.4 9.0
Estate of Noll A. Van Cleave(9)............. 321,762 6.5 100,000 221,762 3.4 5.6
Jack Wright(10)............................. 278,706 5.6 -- 278,706 4.3 7.0
Ernie Wright(10)............................ 278,706 5.6 -- 278,706 4.3 7.0
Joyce L. Curry(11).......................... 120,000 2.4 110,000 10,000 * *
Bernice Horne............................... 99,489 2.0 90,000 9,489 * *
Louise Lewis................................ 52,500 1.2 40,000 12,500 * *
Murray D. Gray, III......................... 46,449 * 36,449 10,000 * *
Lara Loudermilk Hughes(12).................. 30,000 * 30,000 -- -- --
Jennifer and Stephen Marcontell(13)......... 30,000 * 30,000 -- -- --
Russell D. Horne............................ 15,000 * 13,500 1,500 * *
Total shares offered hereby........ 1,250,000
</TABLE>
- ---------------
* Represents less than 1.0%.
(1) Except as otherwise indicated in the notes below, the business address of
each director beneficially owning more than 5.0% of the outstanding shares
of Common Stock is c/o Childcare Network, Inc., 3025 University Avenue,
Suite B-2, Columbus, Georgia 31907.
(2) Beneficial ownership includes shares for which an individual, directly or
indirectly, has or shares voting or investment power or both and also
includes options which are exercisable within 60 days of June 1, 1998. All
of the listed persons have sole voting or investment power over the shares
listed opposite their names unless otherwise indicated in the notes below.
(3) If the Underwriters' over-allotment option is exercised, Mr. Van Cleave,
Jr., Mr. Loudermilk, Mr. Ernie Wright and Mr. Bradley will sell up to
50,000, 60,000, 50,000 and 58,813 shares of Common Stock, respectively.
(4) Includes 120,000 shares owned by Joyce L. Curry. See note 11. Also includes
55,000 shares owned by Mr. Crowley's children and grandchildren with
respect to which he has been granted irrevocable proxies.
40
<PAGE> 42
(5) Includes 60,000 shares owned by Lara Loudermilk Hughes and Jennifer and
Stephen Marcontell. See notes 12 and 13.
(6) The address for Sundari Raju is 62 West Broad Street, Richland, Georgia
31825.
(7) The address for Devery Van Cleave Wright is 9705 Bent Brook Drive,
Montgomery, Alabama 36117.
(8) The address for Elizabeth Van Cleave Harp is 5074 Sedona Court, Columbus,
Georgia 31907.
(9) The executor of the Estate of Noll A. Van Cleave is Elizabeth Jane Van
Cleave. The address of the Estate of Noll Van Cleave is 2406 Downing Drive,
Columbus, Georgia 31906.
(10) The address for Ernie Wright and Jack Wright is 6400 Bradley Park Drive,
Columbus, Georgia 31904.
(11) Mr. Crowley has the sole voting and investment power over these shares
pursuant to an irrevocable power of attorney.
(12) Mr. Loudermilk has the sole voting and investment power of these shares
pursuant to an irrevocable proxy.
(13) Mr. Loudermilk has sole voting and investment power over these shares
pursuant to a special power of attorney.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, no par value per share.
COMMON STOCK
There were 4,935,000 shares of Common Stock outstanding held by 30
shareholders of record as of June 1, 1998. There will be 6,535,000 shares of
Common Stock outstanding after giving effect to the sale of Common Stock offered
hereby (6,743,687 shares if the Underwriters' over-allotment option is exercised
in full) and excluding shares of Common Stock reserved for issuance upon the
exercise of options granted under the Company's Plan.
In accordance with the Company's Restated Articles of Incorporation (the
"Restated Articles"), shares of Common Stock are entitled to one vote per share
unless (i) they have been held by the same beneficial owner since July 16, 1998,
or (ii) they have been held by the same beneficial owner for a continuous period
of greater than 48 months prior to the record date as to which these shares are
to be voted, in which event they are entitled to 10 votes per share. Any
transferee of a share of Common Stock where such share was transferred to the
transferee by gift, devise or bequest or otherwise through the laws of
inheritance, descent or distribution from the estate of the transferor, or by a
distribution to a beneficiary of shares held in trust for such beneficiary, is
deemed to be the same beneficial owner as the transferor. Shares acquired as a
direct result of a stock split, stock dividend or other distribution with
respect to existing shares ("Dividend Shares") are deemed to have been acquired
and held continuously from the date on which the shares with regard to which the
issued Dividend Shares were acquired. Holders of Common Stock do not have
cumulative voting rights.
Holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor. Although the Company does not anticipate paying any cash dividends in
the foreseeable future, any future payment of dividends will depend upon the
Company's results of operations, financial condition, cash requirements,
contractual restrictions, requirements of applicable law and other factors
deemed relevant by the Board of Directors. See "Dividend Policy." In the event
of a liquidation, dissolution or winding up of the Company, holders of Common
Stock are entitled to share ratably in all assets remaining after payment of the
Company's debts and other liabilities. Holders of Common Stock have no
preemptive rights or other subscription rights and no rights to convert their
Common Stock into any other securities, and there are no redemption or sinking
fund provisions applicable to the Common Stock.
GEORGIA LAW AND CERTAIN CHARTER PROVISIONS
The Company has elected in its Bylaws to be subject to the "fair price"
provisions of the Georgia Business Corporation Code (the "GBCC"). These
provisions require that certain business combinations
41
<PAGE> 43
between a Georgia corporation and an "interested shareholder" or its affiliates
be (a) unanimously approved by "continuing directors" who must constitute at
least three members of the board of directors at the time of such approval, or
(b) recommended by at least two-thirds of the continuing directors and approved
by a majority of votes entitled to be cast by holders of voting shares other
than voting shares beneficially owned by the interested shareholder, unless
certain fair price criteria are met. Subject to certain exceptions, for the
purposes of these provisions a "business combination" includes: (i) any merger
of the corporation or any of its subsidiaries; (ii) any share exchange; (iii)
any sale, lease, transfer, or other disposition of assets of the corporation or
any of its subsidiaries in a transaction or series of transactions occurring
within a 12-month period and having an aggregate book value equal to 10% or more
of the net assets of the corporation; (iv) other than in the ordinary course of
business, the issuance or transfer by the corporation or any of its subsidiaries
of any equity securities of the corporation or subsidiary in a transaction or
series of transactions occurring within a 12-month period and having an
aggregate market value of 5% or more of the total market value of the
outstanding stock of the corporation, except pursuant to the exercise of
warrants or rights offered pro rata to all holders of voting securities; (v) the
adoption of any plan or proposal for the liquidation or dissolution of the
corporation in which anything other than cash will be received by an interested
shareholder or its affiliates; and (vi) any transaction or series of
transactions occurring within a 12-month period which has the effect of
increasing by 5% or more the proportionate amount of shares of any class or
series of equity securities of the corporation or any of its subsidiaries that
is beneficially owned by an interested shareholder or its affiliates. An
"interested shareholder" is defined by the GBCC to include any person that with
its affiliates, beneficially owns or has the right to own 10% or more of the
outstanding voting power of a corporation, or any person that is an affiliate of
the corporation and has, at any time within the preceding two-year period, been
the beneficial owner of 10% or more of the voting power of the corporation. A
"continuing director" includes any director who is not an affiliate or associate
of an interested shareholder or its affiliates and who was a director prior to
the shareholder becoming an interested shareholder and any successor of such a
director who is not an affiliate or associate of an interested shareholder or
its affiliates and who is recommended or elected by a majority of continuing
directors.
The fair price provisions do not restrict a business combination if: (a)
the aggregate amount of the cash and fair market value of any non-cash property,
to be received per share by the shareholders in the business combination is at
least equal to the highest of: (i) the highest per share price, including
brokerage commissions, transfer taxes and soliciting dealers' fees, paid by the
interested shareholder for any shares of the same class or series acquired by it
within two years preceding the public announcement of the business combination
(the "announcement date") or in the transaction in which it became an interested
shareholder; (ii) the higher of the fair market value per share as determined on
the announcement date or the date on which the interested Shareholder first
became an interested shareholder; or (iii) in the case of shares other than
common shares, the highest amount per share to which preferred shareholders are
entitled in the event of liquidation, dissolution, or winding up of the
corporation, but only if the interested shareholder acquired such preferred
shares within the two-year period immediately preceding the announcement date;
and (b) shareholders receive cash or the form of consideration used in the past
by the interested shareholder to purchase the largest number of shares of the
same class or series. Further, subject to certain exceptions, during the period
after the shareholder became an interested shareholder and prior to the
consummation of the business combination, without the approval of a majority of
the continuing directors, there shall have been: (i) no failure to declare and
pay full dividends on the corporation's outstanding preferred shares; (ii) no
reduction in the annual rate of dividends paid on common shares, except as to
reflect any subdivision of the shares; (iii) an increase in the annual rate of
dividends to reflect any reclassification of shares which has the effect of
reducing the number of outstanding shares; and (iv) not more than a 1% increase
in the interested shareholder's ownership of any class or series of the
corporation's shares in any 12-month period. Additionally, an interested
shareholder may not have received a direct or indirect benefit, except
proportionately as a shareholder, of any loans, advances, guarantees, pledges,
or other financial assistance or any tax credits or other tax advantages
provided by the corporation or its subsidiaries, whether in anticipation of or
in connection with such business combination or otherwise. The fair price
provisions do not apply if a shareholder has been an interested shareholder for
three years immediately preceding the consummation of the business combina-
42
<PAGE> 44
tion and has not increased its percentage interest in any class or series of
shares by more than one percent in any 12-month period.
The Company also has elected in its Bylaws to be subject to the "business
combination" provisions of the GBCC. These provisions generally prohibit various
"business combinations" between a Georgia corporation with at least 100
beneficial owners in Georgia and meeting certain other criteria and an
"interested shareholder" or it affiliates for a period of five years after the
shareholder becomes an interested shareholder of the corporation. During such
five-year period, these provisions prohibit any business combination with an
interested shareholder unless: (i) prior to the time the shareholder became an
interested shareholder, the board of directors approved either the business
combination or the transaction by which the shareholder became an interested
shareholder; (ii) in the transaction that resulted in the shareholder becoming
an interested shareholder, the interested shareholder became the beneficial
owner of at least 90% of the outstanding voting stock of the corporation which
was not held by directors, officers, affiliates thereof, subsidiaries or certain
employee stock plans of the corporation; or (iii) subsequent to becoming an
interested shareholder, such shareholder acquired additional shares resulting in
such shareholder owning at least 90% of the outstanding voting stock of the
corporation (excluding certain shares) and the business combination is approved
by a majority of voting stock not held by the interested shareholder, directors,
officers, affiliates thereof, subsidiaries or certain employee stock plans of
the corporation. Under these provisions of the GBCC, an "interested shareholder"
is defined by reference to the fair price provisions of the GBCC. Subject to
certain exceptions, for the purposes of these provisions a "business
combination" includes: (i) any merger or consolidation of the corporation or any
of its subsidiaries; (ii) other than in the ordinary course of business, any
sale, lease, transfer or other disposition of assets of the corporation or any
of its subsidiaries in a transaction or series of transactions having an
aggregate book value of 10% or more of the corporation's net assets; (iii) the
issuance or transfer by the corporation or any of its subsidiaries of any equity
securities of the corporation or subsidiary in a transaction or series of
transactions having an aggregate market value of 5% or more of the total market
value of the outstanding stock of the corporation, except pursuant to the
exercise of warrants or rights offered pro rata to all holders of voting
securities, and except pursuant to the exercise or conversion of securities
outstanding prior to the time the shareholder became an interested shareholder;
(iv) the adoption of any plan or proposal for the liquidation or dissolution of
the corporation; (v) any transaction which has the effect of increasing by 5% or
more the proportionate amount of shares of any class or series of equity
securities of the corporation which is beneficially owned by the interested
shareholder or its affiliates; (vi) other than in the ordinary course of
business, the receipt by an interested shareholder, except proportionally as a
shareholder, of any benefit from any loan, advance, guarantee, pledge, financial
benefit, tax credit or tax advantage from the corporation; and (vii) any share
exchange. The restrictions on business combinations do not apply to any person
who was an interested shareholder before the adoption of the bylaw which made
the provisions applicable to the corporation, nor to any person who becomes an
interested shareholder inadvertently, subsequently divests sufficient shares so
that the shareholder ceases to be an interested shareholder and would not, at
any time within the five-year period immediately before a business combination
involving the shareholder, have been an interested shareholder but for the
inadvertent acquisition.
The Company's Restated Articles and Bylaws contain a number of provisions
relating to corporate governance and to the rights of shareholders. Certain of
these provisions may be deemed to have a potential anti-takeover effect in that
such provisions may delay or prevent a change of control of the Company. These
provisions include: (a) the classification of the Board of Directors into three
classes, each class serving for staggered three-year terms; (b) the requirement
that shareholders may remove directors only for cause and only by the
affirmative vote of at least 66 2/3% of the voting power of the then outstanding
capital stock of the corporation entitled to vote generally in the election of
Directors ("Voting Stock"); (c) a requirement that the affirmative vote of at
least 66 2/3% of the Voting Stock is required to amend provisions of the
Restated Articles and Bylaws relating to the classification of the Board and
removal of Directors; (d) the requirement that shareholder action can be taken
only at an annual or special meeting of shareholders or by the written consent
of the holders of at least 75.0% of the voting power of the then outstanding
Common Stock; (e) an advance notice procedure for shareholders to make
nominations of candidates for election as directors; and (f) the requirement
that a special shareholders meeting may only be called by the Chairman of the
Board or at the direction of the majority of the Board of Directors or by the
holders of at least 75.0% of the voting power of the
43
<PAGE> 45
then outstanding Common Stock. See "Risk Factors -- Potential Impact of
Anti-Takeover Provisions; Substantial Control of Directors and Officers."
These provisions have certain antitakeover effects and may discourage
proposals that could be viewed as favorable to shareholders. The description set
forth above is intended as a summary only and is qualified in its entirety by
reference to the Company's Restated Articles and Bylaws which have been filed
with the Securities and Exchange Commission (the "Commission") as exhibits. See
"Additional Information."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is First Union
National Bank.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
6,535,000 shares of Common Stock, assuming no exercise of the Underwriters'
over-allotment option and no exercise of options outstanding under the Plan. See
"Management -- 1998 Stock Option Plan" and "Underwriting." Of these shares, all
of the 2,850,000 shares of Common Stock sold in the Offering will be freely
transferable without restriction or limitation under the Securities Act except
for any shares purchased by affiliates of the Company within the meaning of Rule
144. The remaining 3,685,000 shares of Common Stock are "restricted" shares
within the meaning of Rule 144 (the "Restricted Shares"). The Restricted Shares
were issued and sold by the Company in private transactions in reliance upon
exemptions from registration under the Securities Act and may not be sold except
in compliance with the registration requirements of the Securities Act or
pursuant to an exemption from registration, such as the exemption provided by
Rule 144.
Beginning 90 days after the date of this Prospectus, all of the Restricted
Shares will be eligible for sale in the public market pursuant to Rule 144. In
general, under Rule 144 as currently in effect, any person (or persons whose
shares are aggregated), including an affiliate of the Company, who has held
Restricted Shares for at least one year (as computed under Rule 144), and any
affiliate of the Company who holds non-Restricted Shares, is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of (i) 1.0% of the then outstanding shares of the Common Stock
(approximately 65,350 shares after giving effect to the Offering) or (ii) the
average weekly trading volume in the Common Stock during the four calendar weeks
immediately preceding the date on which the notice of sale is filed with the
Commission. Sales under Rule 144 are also subject to certain provisions relating
to the manner of sale, the filing of a notice of sale and the availability of
current public information about the Company. A person (or persons whose shares
are aggregated) who is not deemed an affiliate of the Company at any time during
the 90 days immediately preceding a sale, and who has held Restricted Shares for
at least two years (as computed under Rule 144), would be entitled to sell such
shares under Rule 144(k) without regard to the volume limitation and other
conditions described above.
Prior to the Offering, there has been no market for the Common Stock, and
no prediction can be made as to the effect, if any, that market sales of shares
or the availability of a substantial number of such shares for sale will have on
the market price of the Common Stock. Sales of substantial amounts of Common
Stock in the public market may have an adverse impact on such market price.
The Company and its executive officers, directors and shareholders (who
beneficially own in the aggregate 4,935,000 shares of Common Stock), have agreed
not to (i) sell, pledge, offer to sell, solicit an offer to buy, contract to
sell, grant any option, right or warrant to purchase, sell any option or
contract to purchase, or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock (other than the shares offered by the
Company and the Selling Shareholders in the Offering), or any securities
convertible into or exercisable or exchangeable for Common Stock, (ii) enter
into any swap or other arrangement that transfers all or a portion of the
economic consequences associated with the ownership of the Common Stock, or
(iii) make any demand for or exercise any right with respect to the registration
of any shares of Common Stock or any securities convertible into or exercisable
or exchangeable for Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of The Robinson-Humphrey
44
<PAGE> 46
Company, LLC (the "Lock-up Period"). Following the Lock-up Period, the shares of
Common Stock will be eligible for sale in the public market, subject to the
conditions and restrictions of Rule 144, as described above.
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register all shares of Common Stock subject to outstanding
stock options and Common Stock issuable pursuant to the Plan. The Company
expects to file such registration statement following the closing of the
Offering; and such registration statement is expected to become effective upon
filing. Shares covered by the registration statement on Form S-8 will thereupon
be eligible for sale in the public markets, subject to the Lock-up Period, to
the extent applicable.
REGISTRATION RIGHTS
Upon consummation of the Offering, the holders of approximately 3.3 million
shares of Common Stock (the "Registrable Shares") will have certain "piggyback"
registration rights, pursuant to a Registration Rights Agreement with the
Company (the "Agreement"). The Agreement provides that in the event the Company
proposes to register any of its securities under the Securities Act at any time
or times, the holders of the Registrable Shares, subject to certain exceptions,
shall be entitled to include the Registerable Shares in such registration.
However, the managing underwriter of any such offering may exclude for marketing
reasons some or all of such Registerable Shares from such registration. The
Company is generally required to bear the expenses of all such registrations,
except underwriting discounts and commissions. Such registration rights expire
when the number of shares held by a holder does not exceed 3.0% of the then
outstanding shares of Common Stock. See "Risk Factors -- Shares Eligible for
Future Sale."
45
<PAGE> 47
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement"), among the Company, the Selling Shareholders and the
Underwriters named below (the "Underwriters"), the Company and the Selling
Shareholders have agreed to sell to each of the Underwriters, and each of the
Underwriters, for whom The Robinson-Humphrey Company, LLC and Interstate/Johnson
Lane Corporation are acting as representatives (the "Representatives"), have
severally agreed to purchase from the Company and the Selling Shareholders, the
number of shares of Common Stock set forth opposite their respective names. The
Underwriters are committed to purchase all of such shares if any are purchased.
Under certain circumstances, the commitments of non-defaulting Underwriters may
be increased as set forth in the Underwriting Agreement.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
The Robinson-Humphrey Company, LLC..........................
Interstate/Johnson Lane Corporation.........................
---------
Total............................................. 2,850,000
=========
</TABLE>
The Representatives have advised the Company and the Selling Shareholders
that the Underwriters propose to offer the Common Stock directly to the public
at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share in sales to certain other dealers.
After the Offering, the public offering price and other selling terms may be
changed.
The Company and certain of the Selling Shareholders have granted to the
Underwriters an option, exercisable by the Representatives for 30 days after the
date of the Prospectus, to purchase up to an additional 427,500 shares of Common
Stock at the initial public offering price less the underwriting discount. Such
option may be exercised solely to cover over-allotments, if any. To the extent
the Representatives exercise such option, the Underwriters have severally
agreed, subject to certain conditions, to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
each of them as shown in the table above bears to the 2,850,000 shares of Common
Stock offered hereby.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
through negotiations among the Company, the Selling Shareholders and the
Representatives and will not be based upon any independent appraisal or
valuation of the Company. Among the factors which will be considered in making
such determination are prevailing market and general economic conditions, the
market capitalization of publicly-traded companies that the Company, the Selling
Shareholders and the Representatives believe to be comparable to the Company,
the revenues and earnings of the Company in recent periods, the experience of
the Company's management, the economic characteristics of the business in which
the Company competes, estimates of the business potential of the Company, the
present state of the Company's development and other factors deemed relevant.
The Underwriters do not intend to confirm sales of Common Stock to any
account over which they exercise discretionary authority. The Representatives
intend to make a market in the Common Stock after completion of the Offering.
In connection with the Offering, the Company and its executive officers,
directors and shareholders have agreed not to (i) sell, pledge, offer to sell,
solicit an offer to buy, contract to sell, grant any option, right or warrant to
purchase, sell any option or contract to purchase, or otherwise transfer or
dispose of, directly or indirectly, any shares of Common Stock (other than the
shares offered by the Company and the Selling Shareholders in the Offering), or
any securities convertible into or exercisable or exchangeable for Common
46
<PAGE> 48
Stock, (ii) enter into any swap or other arrangement that transfers all or a
portion of the economic consequences associated with the ownership of the Common
Stock, or (iii) make any demand for or exercise any right with respect to the
registration of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock for a period of 180 days after the
date of this Prospectus without the prior written consent of The
Robinson-Humphrey Company, LLC.
The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act, or to contribute to payments the Underwriters may be
required to make in respect thereof.
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
Common Stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the
Representatives to reclaim a selling concession from a syndicate member when
shares of Common Stock originally sold by such syndicate member are purchased in
a syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the Common Stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Jones, Day, Reavis & Pogue, Atlanta, Georgia. Certain
legal matters relating to the Offering will be passed upon for the Underwriters
by Smith, Gambrell & Russell, LLP, Atlanta, Georgia.
EXPERTS
The financial statements and schedule of Childcare Network, Inc. at
December 31, 1996 and 1997, and for each of the three years in the period ended
December 31, 1997 and the statements of operations and cash flows of Young
World, Inc. for the period of January 1, 1997 through September 29, 1997
appearing in this Prospectus and the registration statement of which it is a
part have been audited by Ernst & Young LLP, independent auditors, as set forth
in their reports thereon appearing elsewhere herein and are included in reliance
upon such reports given upon the authority of such firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, to which reference is hereby made. Statements made in
this Prospectus as to the contents of any contract, agreement or other document
referred to above are necessarily incomplete. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is hereby made to the exhibit for a more complete
description of the matter involved, and each statement shall be deemed qualified
in its entirety by such reference. The Registration Statement, including
exhibits and schedules thereto, may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at the Commission's Regional Offices at
Seven World Trade Center, Thirteenth Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
and copies may be obtained at the prescribed rates from the Public Reference
Section of the Commission at its principal office in Washington, D.C. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding the Company; the address of such site
is http://www.sec.gov.
47
<PAGE> 49
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CHILDCARE NETWORK, INC.
Report of Independent Auditors.............................. F-2
Balance Sheets as of December 31, 1996 and 1997 and June 26,
1998 (unaudited).......................................... F-3
Statements of Income for the Years ended December 31, 1995,
1996 and 1997 and for the Periods January 1, 1997 through
June 27, 1997 and January 1, 1998 through June 26, 1998
(unaudited)............................................... F-4
Statements of Shareholders' Equity for the Years ended
December 31, 1995, 1996 and 1997 and for the Period
January 1, 1998 through June 26, 1998 (unaudited)......... F-5
Statements of Cash Flows for the Years ended December 31,
1995, 1996 and 1997 and for the Periods January 1, 1997
through June 27, 1997 and January 1, 1998 through June 26,
1998 (unaudited).......................................... F-6
Notes to Financial Statements............................... F-7
YOUNG WORLD, INC.
Report of Independent Auditors.............................. F-18
Statement of Operations for the Period January 1, 1997
through September 29, 1997................................ F-19
Statement of Cash Flows for the Period January 1, 1997
through September 29, 1997................................ F-20
Notes to Financial Statements............................... F-21
</TABLE>
F-1
<PAGE> 50
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Childcare Network, Inc.
We have audited the accompanying balance sheets of Childcare Network, Inc.
as of December 31, 1996 and 1997, and the related statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Childcare Network, Inc. at
December 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Columbus, Georgia
April 2, 1998, except for Note 3 as to
which the date is June 19, 1998 and Note 10,
as to which the date is July 6, 1998
F-2
<PAGE> 51
CHILDCARE NETWORK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 26,
1996 1997 1998
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 947,512 $ 859,075 $ 1,446,107
Accounts receivable, less allowances of $79,000,
$76,000 and $96,000, respectively................... 370,583 1,050,166 1,230,832
Prepaid expenses and other current assets.............. 67,281 120,429 468,800
---------- ----------- -----------
Total current assets........................... 1,385,376 2,029,670 3,145,739
Property and equipment (Notes 2 and 3):
Land................................................... 398,751 398,751 398,751
Buildings.............................................. 3,337,363 3,386,714 3,402,846
Equipment.............................................. 1,927,273 4,362,382 5,296,908
Automobiles............................................ 818,685 1,292,579 1,592,248
---------- ----------- -----------
6,482,072 9,440,426 10,690,753
Accumulated depreciation and amortization.............. (1,911,058) (2,712,542) (3,269,647)
---------- ----------- -----------
4,571,014 6,727,884 7,421,106
Other assets:
Goodwill............................................... 282,616 2,028,810 1,980,084
Other assets........................................... 46,132 124,545 254,180
---------- ----------- -----------
328,748 2,153,355 2,234,264
---------- ----------- -----------
$6,285,138 $10,910,909 $12,801,109
========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 160,145 $ 750,312 $ 370,607
Accrued salaries and wages............................. 306,210 569,253 696,271
Other accrued expenses................................. 96,674 283,175 104,443
Deferred revenues (Note 6)............................. 187,634 59,702 -0-
Current portion of deferred liabilities................ -0- 48,492 59,914
Current portion of long-term debt (Note 3)............. 374,400 253,333 -0-
---------- ----------- -----------
Total current liabilities...................... 1,125,063 1,964,267 1,231,235
Long-term debt, less current portion (Note 3)............ 2,617,560 4,869,024 6,517,229
Other long-term liabilities, less current portion........ -0- 181,822 148,479
Commitments (Notes 6, 7, 8, and 9)
Shareholders' equity (Notes 4 and 10):
Common stock, no par value; 20,000,000 shares
authorized; 4,905,000, 4,935,000 and 4,935,000
shares issued and outstanding, respectively......... 515,000 531,800 531,800
Retained earnings...................................... 2,027,515 3,363,996 4,372,366
---------- ----------- -----------
Total shareholders' equity..................... 2,542,515 3,895,796 4,904,166
---------- ----------- -----------
$6,285,138 $10,910,909 $12,801,109
========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 52
CHILDCARE NETWORK, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 1,
1997 1998
YEAR ENDED DECEMBER 31, THROUGH THROUGH
-------------------------------------- JUNE 27, JUNE 26,
1995 1996 1997 1997 1998
---------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues (Notes 6 and 7).......... $9,209,278 $12,183,318 $16,330,758 $7,128,331 $13,574,091
Operating expenses:
Cost of services................ $6,761,277 8,980,864 12,249,202 5,038,133 10,175,128
Selling, general and
administrative expenses...... 495,594 615,508 888,197 362,014 601,733
Depreciation and amortization
expense...................... 501,342 684,471 853,545 365,749 621,644
---------- ----------- ----------- ---------- -----------
Total operating
expenses.............. 7,758,213 10,280,843 13,990,944 5,765,896 11,398,505
---------- ----------- ----------- ---------- -----------
Income from operations............ 1,451,065 1,902,475 2,339,814 1,362,435 2,175,586
Interest expense, net............. (311,142) (277,098) (190,223) (86,487) (213,087)
---------- ----------- ----------- ---------- -----------
Net income.............. $1,139,923 $ 1,625,377 $ 2,149,591 $1,275,948 $ 1,962,499
========== =========== =========== ========== ===========
Supplemental unaudited pro forma
information:
Net income, as above............ $1,139,923 $ 1,625,377 $ 2,149,591 $1,275,948 $ 1,962,499
Pro forma provision for income
taxes (Note 5)............... (433,170) (617,640) (816,840) (484,860) (745,750)
---------- ----------- ----------- ---------- -----------
Pro forma net income............ $ 706,753 $ 1,007,737 $ 1,332,751 $ 791,088 $ 1,216,749
========== =========== =========== ========== ===========
Basic shares outstanding........ 4,905,000 4,905,000 4,932,000 4,931,000 4,935,000
========== =========== =========== ========== ===========
Diluted shares outstanding...... 4,905,000 4,905,000 4,932,000 4,931,000 4,955,293
========== =========== =========== ========== ===========
Pro forma net income per basic
share........................ $ 0.14 $ 0.21 $ 0.27 $ 0.16 $ 0.25
========== =========== =========== ========== ===========
Pro forma net income per diluted
share........................ $ 0.14 $ 0.21 $ 0.27 $ 0.16 $ 0.25
========== =========== =========== ========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 53
CHILDCARE NETWORK, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1994..................... 1,515,000 $515,000 $ 706,445 $1,221,445
Stock splits (Notes 4 and 10).................... 3,030,000 -0- -0- -0-
--------- -------- ----------- ----------
Balance at December 31, 1994, as restated........ 4,545,000 515,000 706,445 1,221,445
Net income....................................... -0- -0- 1,139,923 1,139,923
Dividends........................................ -0- -0- (362,623) (362,623)
Exercise of stock options (Note 4)............... 360,000 -0- -0- -0-
--------- -------- ----------- ----------
Balance at December 31, 1995..................... 4,905,000 515,000 1,483,745 1,998,745
Net income....................................... -0- -0- 1,625,377 1,625,377
Dividends........................................ -0- -0- (1,081,607) (1,081,607)
--------- -------- ----------- ----------
Balance at December 31, 1996..................... 4,905,000 515,000 2,027,515 2,542,515
Net income....................................... -0- -0- 2,149,591 2,149,591
Dividends........................................ -0- -0- (813,110) (813,110)
Issuance of common stock (Note 4)................ 30,000 16,800 -0- 16,800
--------- -------- ----------- ----------
Balance at December 31, 1997..................... 4,935,000 531,800 3,363,996 3,895,796
Net income (Unaudited)........................... -0- -0- 1,962,499 1,962,499
Dividends (Unaudited)............................ -0- -0- (954,129) (954,129)
--------- -------- ----------- ----------
Balance at June 26, 1998 (Unaudited)............. 4,935,000 $531,800 $ 4,372,366 $4,904,166
========= ======== =========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 54
CHILDCARE NETWORK, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 1,
1997 1998
YEAR ENDED DECEMBER 31, THROUGH THROUGH
--------------------------------------- JUNE 27, JUNE 26,
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income......................... $ 1,139,923 $ 1,625,377 $ 2,149,591 $ 1,275,948 $ 1,962,499
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization.... 501,342 684,471 853,545 365,749 621,644
Amortization of deferred
revenues...................... (38,010) (113,893) (140,054) (75,847) (59,702)
Other............................ -0- 32,883 (2,932) -0- -0-
Changes in operating assets and
liabilities:
Accounts receivable........... (204,022) 92,545 (679,583) (23,682) (180,666)
Prepaid expenses and other
current and noncurrent
assets...................... (130,891) 105,120 (54,860) (147,566) (493,818)
Accounts payable.............. 376,344 (293,096) 440,167 (85,444) (379,705)
Accrued salaries and wages.... 175,450 8,960 263,043 103,790 127,018
Other accrued expenses........ (11,525) 32,639 182,463 45,581 (200,654)
----------- ----------- ----------- ----------- -----------
Net cash provided by
operating activities...... 1,808,611 2,175,006 3,011,380 1,458,529 1,396,616
INVESTING ACTIVITIES
Acquisition of child development
and learning centers............. (1,393,397) (95,825) (1,840,476) -0- (240,000)
Purchases of property and
equipment........................ (532,809) (455,850) (926,762) (112,728) (1,010,327)
Proceeds from sales of property and
equipment........................ -0- 7,447 -0- -0- -0-
Equipment purchase reimbursement... 341,681 -0- -0- -0- -0-
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities................ (1,584,525) (544,228) (2,767,238) (112,728) (1,250,327)
FINANCING ACTIVITIES
Bank credit agreement
Borrowings....................... 1,250,000 -0- 3,497,000 -0- 10,124,080
Repayments....................... (405,100) (654,341) (3,033,269) (637,200) (7,895,875)
Repayments of other long-term
debt............................. (21,031) (122,371) -0- -0- (833,333)
Proceeds from issuance of common
stock............................ -0- -0- 16,800 16,800 -0-
Dividends paid..................... (466,223) (1,081,607) (813,110) (471,315) (954,129)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used
in) financing
activities................ 357,646 (1,858,319) (332,579) (1,091,715) 440,743
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents................... 581,732 (227,541) (88,437) 254,086 587,032
Cash and cash equivalents at
beginning of period................ 593,321 1,175,053 947,512 947,512 859,075
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at
end of period............. $ 1,175,053 $ 947,512 $ 859,075 $ 1,201,598 $ 1,446,107
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 55
CHILDCARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company offers child care and developmental services through
contractual arrangements to employees of certain corporations and to the general
public. The Company also provides services under contractual arrangements with
certain federal and state governmental agencies. The child development and
learning centers used in the Company's operations are located in Georgia,
Alabama, Florida, North Carolina, Tennessee, South Carolina and Virginia.
REVENUE AND EXPENSE RECOGNITION
Tuition revenues are recognized over the period that services are provided,
including amounts received under Assistance Programs and the Georgia Pre-K
Program. Food Program revenues are recognized in the periods that schools
qualify to receive such revenues. Management contract revenues are recognized
ratably over the contract period. Annual registration fees are recognized on a
cash basis and costs associated with the registration process are expensed as
incurred. Operating expenses are recognized when incurred. Revenues are recorded
net of employee and other discounts of approximately $1,080,000, $1,164,000 and
$1,581,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Cash equivalents are
stated at cost which represents the deposit amount plus interest credited to the
account. The Company maintains cash, cash equivalents, investments and certain
other financial instruments with various major financial institutions. The
Company performs periodic evaluations of the relative credit standing of these
institutions and limits the amount of credit exposure with any one institution.
Total cash balances are generally federally insured up to $100,000 per bank. The
Company had cash balances on deposit at December 31, 1997 and June 26, 1998 that
exceeded the federally insured amounts in the amounts of approximately $513,000
and $1,097,000, respectively.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets include prepaid rent, insurance,
supplies and food.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed by the
straight-line method for financial reporting purposes and accelerated methods
for income tax purposes. The estimated useful lives of assets used to compute
depreciation expense range from 20 to 30 years for buildings, 6 to 10 years for
equipment and 5 to 7 years for automobiles.
GOODWILL
Goodwill is stated at cost and is amortized over 25 years under the
straight-line method. Accumulated amortization of goodwill was approximately
$31,400 and $58,600 as of December 31, 1996 and 1997, respectively.
In the event that facts and circumstances indicate that the goodwill or
other long-lived assets may be impaired, the Company would make an evaluation of
continuing value of assets at a center level. If such an evaluation is required,
the estimated future undiscounted cash flows associated with this asset would be
F-7
<PAGE> 56
CHILDCARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
compared to its carrying amount to determine if a write down to fair market
value or a discounted cash flow value is required.
INCOME TAXES
The shareholders of the Company have elected to include the Company's
income in their own income for income tax purposes, under an election privilege
afforded by provisions of the Internal Revenue Code of 1986, as amended (the
"Code"). Consequently, the Company is not subject to federal and certain state
income taxes.
Pro forma federal and state income taxes for the Company are calculated on
a pro forma, taxable corporation basis. See Note 5 "Pro Forma Income Taxes" for
the calculation of pro forma federal and state income taxes.
EMPLOYEE BONUS PLANS
The Company has employee bonus plans covering certain of its employees.
Amounts paid under these plans are either discretionary or based upon defined
operating results and are approved by the Board of Directors. Bonuses based on
operating results are generally earned after the achievement of a combination of
operating profit compared to budget and utilization at a center level or region
level. Compensation expense under these plans was approximately $85,000, $86,000
and $133,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
ADVERTISING
The Company expenses advertising costs when incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company has adopted FASB Statement No. 107, Disclosure about Fair Value
of Financial Instruments, which requires disclosure of fair value, to the extent
practical, of certain of the Company's financial instruments. The fair value
amounts do not necessarily represent the amount that could be realized in a sale
or settlement. The Company's financial instruments are comprised principally of
long-term debt.
The estimated fair value of long-term bank debt at December 31, 1997
approximates book value since, in management's opinion, such obligations are
subject to fluctuating market rates of interest and can be settled at their face
amounts. The Company does not anticipate settlement of long-term debt at other
than book value and currently intends to hold such financial instruments through
maturity.
The fair value of other financial instruments classified as current assets
or liabilities approximate their carrying values due to the short-term
maturities of these instruments.
LONG-LIVED ASSETS
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of ("Statement 121"), requires
impairment losses to be recorded on long-lived assets
F-8
<PAGE> 57
CHILDCARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the asset's carrying amount. Statement 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. Statement 121 did not
have any impact on the Company's financial position or operating results at
December 31, 1997 or during the three year period then ended.
STOCK BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its stock options. Under APB 25, if the
exercise price of the stock options granted by the Company equals the market
price of the underlying stock on the date of the grant, no compensation expense
is recognized.
INTERIM FINANCIAL DATA (UNAUDITED)
The accompanying balance sheet as of June 26, 1998, and the related
statements of income, shareholders' equity and cash flows for the period January
1, 1998 through June 26, 1998 and the period January 1, 1997 through June 27,
1997, have been prepared by the Company without audit. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation for such periods have been made.
The results for interim periods are not necessarily indicative of results to be
expected for a full year.
Footnote disclosures normally included in annual financial statements
prepared in accordance with generally accepted accounting principles have been
omitted herein with respect to the interim financial data. The interim
information herein should be read in conjunction with the annual audited
financial statements and notes presented herein.
FISCAL YEAR
Effective January 1, 1998, the Company changed its fiscal year end from
December 31 to the last Friday in December and began reporting its quarterly
results in 13 week periods. For comparison purposes, quarterly results for 1997
have been restated to as nearly as possible reflect the Company's current
reporting period.
COMMON STOCK
As more fully discussed in Note 4 "Shareholders' Equity" and Note 10
"Subsequent Events," the Company has had stock splits of its common stock. All
references to number of shares in the accompanying financial statements, except
shares authorized, have been adjusted to reflect all stock splits on a
retroactive basis.
RECLASSIFICATIONS
Certain amounts in the accompanying financial statements have been
reclassified to be consistent with the 1997 presentation.
NEW ACCOUNTING POLICIES
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, Reporting Comprehensive Income, and Statement No. 131,
Disclosures About Segments of an Enterprise and Related Information. Statement
No. 130 establishes standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
Statement No. 131 generally
F-9
<PAGE> 58
CHILDCARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
requires that companies report segment information for operating segments which
are revenue producing components and for which separate financial information is
produced internally. In June 1998, the FASB issued Statement No. 133, Accounting
for Derivative Instruments and for Hedging Activities. Statement No. 133
provides a comprehensive standard for the recognition and measurement of
derivatives and hedging activities.
The Company's adoption of Statement No. 130 and Statement No. 131 in 1998
had no impact on the Company's interim operating results or financial position.
The Company will adopt Statement No. 133 in 1999 and it is anticipated that the
adoption will not materially impact the Company's operating results or financial
position.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, Reporting on the Costs of Start-up Activities. The
SOP requires the costs of start-up activities to be expensed as incurred. The
Company will adopt this SOP in 1999 and it is anticipated that the adoption will
not materially impact the Company's operating results or financial position.
2. ACQUISITIONS
1995 Acquisition
In June 1995, the Company purchased the assets and operations of seven
child care centers located in Georgia and Tennessee (the "1995 Acquisition") for
an aggregate purchase price of approximately $1.3 million. The 1995 Acquisition
was accounted for using the purchase method and, accordingly, the purchase price
was allocated to the tangible assets acquired based on their estimated fair
values at the date of acquisition. The excess of the purchase price over the
fair value of net tangible assets acquired was approximately $314,000 and is
being amortized over a 25 year period.
1996 Acquisition
In May 1996, the Company purchased the operations and certain assets of two
child development and learning centers located in Georgia (the "1996
Acquisition") for an aggregate cash purchase price of approximately $96,000. The
acquisition was accounted for using the purchase method and, accordingly, the
purchase price was allocated to the tangible assets acquired based on their
estimated fair values at the date of acquisition.
1997 Acquisitions
On September 22, 1997, the Company purchased from Academe Child Development
Centers, Ltd. (the "Academe Acquisition") substantially all of the assets and
assumed certain liabilities of thirteen child development and learning centers
located in Alabama and Florida for an aggregate purchase price of approximately
$1,085,000, subject to final adjustments in September 1998. At closing, the
Company assumed net liabilities of approximately $15,000 and paid approximately
$920,000 in cash. At December 31, 1997 and June 26, 1998, $150,000 remained
unpaid and is included in accounts payable in the accompanying balance sheets.
The Academe Acquisition was accounted for using the purchase method and,
accordingly, the purchase price was allocated to the net tangible assets
acquired based on their estimated fair values at the date of acquisition. The
excess of the purchase price over the net tangible assets acquired was
approximately $432,000 and is being amortized over a 25 year period.
On September 29, 1997, the Company purchased from Young World, Inc. (the
"Young World Acquisition") substantially all of the assets of sixteen child
development and learning centers located in Georgia, North Carolina, South
Carolina and Virginia for approximately $833,000 in cash and notes payable
F-10
<PAGE> 59
CHILDCARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS -- (CONTINUED)
of $1,666,666 (see Note 3). The Young World Acquisition was accounted for using
the purchase method and, accordingly, the purchase price was allocated to the
net tangible assets acquired based on their estimated fair values at the date of
acquisition. The excess of the purchase price over the net tangible assets
acquired was approximately $1,341,000 and is being amortized over a 25 year
period.
The operating results of the acquisitions are included in the accompanying
financial statements from their respective date of acquisition.
Pro forma results of the 1995 Acquisition, the 1996 Acquisition and the
Academe Acquisition have not been presented as the effect on prior periods is
not significant.
Unaudited pro forma operating data for the years ended December 31, 1996
and 1997 and the period January 1, 1997 through June 27, 1997 is presented below
and assumes that the Young World Acquisition occurred on January 1, 1996. The
unaudited pro forma operating data does not purport to represent the Company's
actual results of operations had the Young World Acquisition occurred on January
1, 1996, and should not serve as a forecast of the Company's operating results
for any future periods. The pro forma adjustments are based solely upon certain
assumptions that management believes are reasonable under the circumstances at
this time.
Pro forma operating data for the year ended December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
YOUNG
WORLD PRO FORMA PRO FORMA
COMPANY ACQUISITION ADJUSTMENTS COMPANY
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.............................. $12,183,318 $5,817,860 $ -0- $18,001,178
=========== ========== ========= ===========
Net income (loss) before pro forma
provision for income taxes.......... $ 1,625,377 $ (79,499) $(458,951) $ 1,086,927
=========== ========== ========= ===========
Pro forma net income (loss)........... $ 1,007,737 $ (79,499) $(254,343) $ 673,895
=========== ========== ========= ===========
Pro forma net income per basic and
diluted share....................... $ 0.21 $ 0.14
=========== ===========
</TABLE>
Pro forma operating data for the year ended December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
YOUNG
WORLD PRO FORMA PRO FORMA
COMPANY ACQUISITION ADJUSTMENTS COMPANY
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.............................. $16,330,758 $4,721,563 $ -0- $21,052,321
=========== ========== ========= ===========
Net income (loss) before pro forma
provision for income taxes.......... $ 2,149,591 $ (215,583) $(279,111) $ 1,654,897
=========== ========== ========= ===========
Pro forma net income (loss)........... $ 1,332,751 $ (215,583) $ (91,132) $ 1,026,036
=========== ========== ========= ===========
Pro forma net income per basic and
diluted share....................... $ 0.27 $ 0.21
=========== ===========
</TABLE>
F-11
<PAGE> 60
CHILDCARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS -- (CONTINUED)
Pro forma operating data for the period January 1, 1997 through June 27,
1997 are as follows:
<TABLE>
<CAPTION>
YOUNG
WORLD PRO FORMA PRO FORMA
COMPANY ACQUISITION ADJUSTMENTS COMPANY
---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................... $7,128,331 $3,031,487 $ -0- $10,159,818
========== ========== ========= ===========
Net income (loss) before pro forma
provision for income taxes........... $1,275,948 $ (60,557) $(188,574) $ 1,026,817
========== ========== ========= ===========
Pro forma net income (loss)............ $ 791,088 $ (60,557) $ (93,904) $ 636,627
========== ========== ========= ===========
Pro forma net income per basic and
diluted share........................ $ 0.16 $ 0.13
========== ===========
</TABLE>
The pro forma results presented above include adjustments to reflect (i)
the incurrence of interest expense to fund the Young World Acquisition and (ii)
additional depreciation and amortization relative to the assets acquired.
3. INDEBTEDNESS
Indebtedness is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997 JUNE 26, 1998
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Bank Credit Agreement............................. $2,991,960 $3,455,691 $5,683,896
Acquisition Note.................................. -0- 1,666,666 833,333
---------- ---------- ----------
2,991,960 5,122,357 6,517,229
Less current portion.............................. (374,400) (253,333) -0-
---------- ---------- ----------
$2,617,560 $4,869,024 $6,517,229
========== ========== ==========
</TABLE>
BANK CREDIT AGREEMENT
The Company has a Term Loan and Revolving Credit Agreement with a bank, as
amended through June 26, 1997 (the "Bank Credit Agreement"), which provides for
a revolving line of credit for maximum borrowings of $2 million through July 1,
1999 (the "Line of Credit") and term loans up to an aggregate maximum of $5
million (the "Term Loans"). The Bank Credit Agreement contains certain
restrictive provisions which, among other things, require the Company to
maintain a minimum net worth, certain financial ratios and certain insurance
coverage limits. The Bank Credit Agreement is secured by substantially all of
the existing and hereafter acquired assets of the Company.
Interest on the Line of Credit is due and payable monthly, in arrears.
Interest accrues at the bank prime rate (8.5% at December 31, 1997), at LIBOR
plus the Applicable Margin or the Secondary C/D Rate plus the Applicable Margin
(as defined in the Bank Credit Agreement, as amended) depending on the option
chosen by the Company, subject to certain restrictions as described in the Bank
Credit Agreement. The Applicable Margin ranges from 2.00% to 2.50% based on the
Company's maintenance of certain operating ratios as defined in the Bank Credit
Agreement. At December 31, 1997 approximately $798,000 was outstanding under the
Line of Credit.
The Term Loans bear interest the same as that of the Line of Credit and
mature on June 1, 2002. At December 31, 1997, the principal amount outstanding
under the Term Loans was approximately $2,657,800
F-12
<PAGE> 61
CHILDCARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. INDEBTEDNESS -- (CONTINUED)
and is due and payable in 55 monthly installments of $21,111. A final
installment of approximately $1,496,700 plus accrued interest is due and payable
on June 1, 2002. The Term Loan proceeds were used to retire certain loans which
were outstanding at December 31, 1996 under the predecessor bank agreement.
AMENDED AND RESTATED BANK CREDIT AGREEMENT
On June 19, 1998, the Company entered into an amended and restated credit
agreement with its bank which provides for aggregate borrowings of $15 million.
The new bank agreement consists of a line of credit of $2 million which matures
in two years and a revolving line of credit of $13 million which matures in five
years. Interest will accrue at the bank's prime rate, LIBOR plus a margin of
1.75% to 2.375%, or the secondary C/D rate plus 1.75% to 2.375%, at the option
of the Company. The agreement contains restrictive provisions which, among other
things, require the Company to maintain a minimum net worth, certain financial
ratios and certain insurance coverage limits. The agreement is secured by
substantially all of the existing and hereafter acquired assets of the Company.
On June 26, 1998, retained earnings available for the payment of dividends was
approximately $615,000.
NOTES PAYABLE
In connection with the Young World Acquisition, the Company executed a
promissory note (the "Acquisition Note") payable to the seller in the principal
amount of $1,666,666. The Acquisition Note is due in two annual installments of
approximately $833,333 plus accrued interest beginning January 1, 1998 and bears
interest at 8 1/2% per annum. The Acquisition Note is secured by a letter of
credit drawn on behalf of the Company. In January 1998, the original letter of
credit was replaced with a substitute letter of credit of $833,333. All amounts
outstanding under the letter of credit reduce the Company's availability under
its Bank Credit Agreement.
The Company paid the $833,333 installment of the Acquisition Note due
January 1, 1998 with borrowings under the Line of Credit. The Company has
classified all amounts outstanding under the Line of Credit at December 31, 1997
and the $833,333 installment of the Acquisition Note paid in January 1998 as
long-term in the accompanying financial statements because management intends
that at least that amount would remain outstanding during 1998.
Maturities of long-term debt at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 253,333
1999........................................................ 2,717,912
2000........................................................ 253,333
2001........................................................ 253,333
2002 and thereafter......................................... 1,644,446
----------
$5,122,357
==========
</TABLE>
Interest payments of approximately $343,000, $269,000 and $156,000 were
made during the years ended December 31, 1995, 1996 and 1997, respectively.
4. SHAREHOLDERS' EQUITY
On September 22, 1997, the Board of Directors declared a two-for-one split
of the Company's common stock, effected in the form of a stock dividend payable
on December 15, 1997 to shareholders of record. Also see Note 10, Subsequent
Events.
F-13
<PAGE> 62
CHILDCARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. SHAREHOLDERS' EQUITY -- (CONTINUED)
On January 26, 1997, the Company sold 30,000 shares of its common stock to
a member of the Company's Board of Directors. The offering price per share of
$0.56 was based on the Board of Directors' best estimate of fair market value
per share at the transaction date.
The Company's President was awarded 360,000 non-qualified stock options
during 1993. The stock options were fully vested at the date of grant and
exercisable, at no cost, at the option of the holder. The fair market value of
these stock options at the date of award, approximately $10,000, was recorded as
an increase in capital during 1993. These non-qualified stock options were
exercised during the year ended December 31, 1995.
Each shareholder of the Company is a party to a stock restriction agreement
(the "Cross-Purchase Agreement") which restricts the transfer of the Company's
Common Stock and provides existing shareholders, and/or the Company, the right
of first refusal for the purchase of the Company's Common Stock under certain
circumstances as defined in the Cross-Purchase Agreement. Also see Note 10
"Subsequent Events."
Dividends of approximately $466,000 (includes $103,000 of amount declared
and unpaid at December 31, 1994), $1,082,000 and $813,000 were declared and paid
during the years ended December 31, 1995, 1996 and 1997, respectively. At
December 31, 1997, retained earnings of approximately $601,000 were available
for dividends.
5. PRO FORMA INCOME TAXES
Pro forma income tax expense differed from the amounts computed by applying
the statutory federal income tax rate of a 34% as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, JANUARY 1, 1997 JANUARY 1, 1998
------------------------------ THROUGH THROUGH
1995 1996 1997 JUNE 27, 1997 JUNE 26, 1998
-------- -------- -------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Computed using a 34% tax
rate..................... $387,574 $552,628 $730,861 $433,822 $667,250
State income taxes, net of
federal tax.............. 45,596 65,012 85,979 51,038 78,500
-------- -------- -------- -------- --------
$433,170 $617,640 $816,840 $484,860 $745,750
======== ======== ======== ======== ========
</TABLE>
6. FEDERAL AND STATE CONTRACTS
PREKINDERGARTEN PROGRAMS
The Company has a contract with the Office of School Readiness ("School
Readiness"), an agency of the State of Georgia. The contract requires the
Company to coordinate and provide services and programs for qualified four-year
old children and their families served by the Prekindergarten Program (the
"Pre-K Program") which is fully funded from proceeds of the Georgia state
lottery. The Pre-K Program contains provisions which, among other things,
require maintenance of student/teacher ratios, limit expenditures for capital
purchases, and require the transfer of funds back to School Readiness in the
event that all funds are not utilized by the end of the contract year. The Pre-K
Program contract value for the 1995-96 school year was approximately $4,195,000
for the period September 1995 through June 1996. The Pre-K Program contract
value for the 1996-97 school year was approximately $3,662,000 for the period of
August 1996 through June 1997. The Pre-K Program contract value for the 1997-98
school year is approximately $3,806,000 for the period of August 1997 through
June 1998. During 1995, 1996 and 1997, the Company recognized revenues of
approximately $1,824,000, $3,849,000 and $3,913,000, respectively, under the
Pre-K Program contracts.
F-14
<PAGE> 63
CHILDCARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. FEDERAL AND STATE CONTRACTS -- (CONTINUED)
In October 1995, the Company expended $660,000 of Pre-K Program contract
funds for equipment and expendable items for sixty classrooms operated under the
Pre-K Program contracts. The Company recognizes the revenue associated with the
equipment funding in direct proportion to the straight-line depreciation of the
equipment acquired through this program funding. At December 31, 1997,
approximately $60,000 has been recorded as deferred revenue which approximates
the December 31, 1997 net book value of the equipment acquired with these
contract funds.
CHILD AND ADULT CARE FOOD PROGRAM
The Company participates in the Child and Adult Care Food Program (the
"Food Program"), a non-residential food service program sponsored by the United
States Department of Agriculture and administered by the various state
departments in Alabama, Georgia and North Carolina. The Food Program agreements
contain certain provisions which, among other things, require attendance at
various training and educational classes related to the operation of the Food
Program. Revenues recognized under the Food Program were approximately $387,000,
$519,000 and $683,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
CHILD CARE ASSISTANCE PROGRAM
The Company participates in the child care assistance programs sponsored
and administered through the various state departments in Alabama, Florida,
Georgia, North Carolina, South Carolina, Tennessee and Virginia. The child care
assistance programs are "low income" support programs that provide funding for
childcare assistance to economically disadvantaged families and require family
participation in schooling and certain work training programs. Eligible
participants are approved by appropriate state department. The Company
recognized childcare assistance program revenues of approximately $1,831,000,
$2,619,000 and $4,676,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
7. MANAGEMENT CONTRACTS
The Company has agreements with two corporations to manage, staff and
operate two child care centers. These agreements are each for a one year period
and contain renewal provisions which are subject to mutual agreement. The
Company expects these contracts to be renewed in 1998. Tuition revenues and fees
generated under these agreements equaled approximately $947,000, $1,325,000 and
$1,376,000 in 1995, 1996 and 1997, respectively. Management fees in 1995, 1996
and 1997 were approximately $87,000, $262,000 and $262,000, respectively.
8. LEASES
The Company leases certain child development and learning center facilities
under operating leases that expire in various years. Certain of these leases may
be renewed for periods ranging from two to five years. The Company is generally
responsible for taxes, licenses, insurance and repairs and maintenance for each
leased location.
F-15
<PAGE> 64
CHILDCARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. LEASES -- (CONTINUED)
Future minimum payments at December 31, 1997 under operating leases with
initial or remaining terms of one year or more are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 1,285,680
1999........................................................ 1,211,442
2000........................................................ 1,147,200
2001........................................................ 1,009,955
2002 and thereafter......................................... 8,131,298
-----------
Total minimum lease payments................................ $12,785,575
===========
</TABLE>
The Company leases the facilities used for its management contracts (see
Note 7) under lease agreements which are renewable annually. Lease expense in
1995, 1996 and 1997 for these facilities was approximately $87,000, $262,000 and
$262,000, respectively.
Aggregate rental expense was approximately $287,000, $553,000 and $837,000
for the years ended December 31, 1995, 1996 and 1997, respectively.
9. COMMITMENTS AND CONTINGENCIES
The Company is subject to various claims and lawsuits arising in the
ordinary course of business. In the opinion of management, the ultimate
resolution of these matters will not have a material effect on the financial
statements of the Company.
10. SUBSEQUENT EVENTS
STOCK SPLIT
On June 1, 1998, the Board of Directors declared a three-for-two split of
the Company's common stock, effected in the form of a stock dividend to
shareholders of record on June 1, 1998. This stock split has been reflected in
the accompanying financial statements at January 1, 1995. All references to
number of shares, except shares authorized, in the accompanying financial
statements have been adjusted to reflect the stock split on a retroactive basis.
1998 STOCK OPTION PLAN
On May 11, 1998, the Board of Directors, subject to shareholder approval,
approved the Company's 1998 Stock Option Plan (the "Option Plan"). The maximum
number of shares of Common Stock that may be issued pursuant to options granted
under the Option Plan may not exceed 750,000 shares. The Board of Directors also
approved the grant of options for 424,500 shares to key members of management
and the Company's directors at an exercise price of $10.00 to $11.00 per share
which the Board feels approximates fair market value of the Company's stock at
May 11, 1998. The shares vest ratably over three years.
Awards under the Option Plan are granted by the Board of Directors (or a
committee as designated by the Board) and may include options that are intended
to qualify as "incentive stock options" under Section 422 of the Code ("ISOs"),
and/or options that are not intended to so qualify under the Code. The Board of
Directors will administer the Option Plan and generally has discretion to
determine the terms of an option grant, including the number of option shares,
option price, term and vesting schedule. Notwithstanding this discretion, (i) no
individual shall be granted options under the Option Plan for more than 300,000
shares, (ii) the term of any option may not exceed 10 years, and (iii) the
aggregate number of shares of Common Stock actually issued or transferred by the
Company upon exercise of the ISOs shall not exceed 750,000 shares of Common
Stock.
F-16
<PAGE> 65
CHILDCARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. SUBSEQUENT EVENTS -- (CONTINUED)
1998 STOCK OPTION PLAN -- (CONTINUED)
No option may be granted pursuant to the Option Plan on or after May 11,
2008. The Option Plan may be amended by the Board of Directors without the
consent of the shareholders of the Company, except that any amendment, although
effective when made, will be subject to shareholder approval within one year
after approval by the Board of Directors if (i) the amendment increases the
total number of shares issuable pursuant to the Plan, (ii) extends the maximum
option period applicable under the Option Plan or (iii) is required by
applicable law or the principal national securities exchange upon which the
shares of Common Stock are traded or quoted.
SPECIAL MEETING OF SHAREHOLDERS
At a special meeting of shareholders on July 6, 1998, (i) the Company and
the shareholders terminated the Cross-Purchase Agreement (see Note 4), (ii) the
shareholders approved the Option Plan and (iii) the shareholders approved the
restated articles of incorporation, which among other things, increased the
authorized common stock to 20 million shares.
F-17
<PAGE> 66
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Young World, Inc.
We have audited the accompanying statements of operations and cash flows of
Young World, Inc. for the period of January 1, 1997 through September 29, 1997
(date of disposition). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Young
World, Inc. for the period of January 1, 1997 through September 29, 1997 (date
of disposition) in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Columbus, Georgia
May 29, 1998
F-18
<PAGE> 67
YOUNG WORLD, INC.
STATEMENT OF OPERATIONS
JANUARY 1, 1997 THROUGH SEPTEMBER 29, 1997
(DATE OF DISPOSITION)
<TABLE>
<S> <C>
Revenues.................................................... $4,721,563
Operating expenses:
Employee salaries and benefits............................ 2,975,578
Depreciation and amortization............................. 61,532
Lease expense (Note 5).................................... 441,000
Other cost of services.................................... 1,459,036
----------
Total operating expenses.......................... 4,937,146
----------
Net loss.................................................... $ (215,583)
==========
</TABLE>
See accompanying notes.
F-19
<PAGE> 68
YOUNG WORLD, INC.
STATEMENT OF CASH FLOWS
JANUARY 1, 1997 THROUGH SEPTEMBER 29, 1997
(DATE OF DISPOSITION)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net (loss)................................................ $ (215,583)
Adjustments to reconcile net (loss) to net cash provided
by operating activities:
Depreciation and amortization.......................... 61,532
Changes in operating assets and liabilities:
Accounts receivable.................................. (36,000)
Prepaid expenses..................................... 8,532
Accounts payable..................................... 356,626
Accrued salaries and wages........................... 118,836
----------
Net cash provided by operating activities......... 293,943
INVESTING ACTIVITIES
Purchases of property and equipment....................... (38,256)
----------
Net cash used in investing activities............. (38,256)
FINANCING ACTIVITIES
Repayment of note payable to shareholder.................. (69,000)
----------
Net cash used in financing activities............. (69,000)
----------
Net increase in cash.............................. 186,687
Cash at beginning of period............................... -0-
----------
Cash at end of period............................. $ 186,687
==========
</TABLE>
See accompanying notes.
F-20
<PAGE> 69
YOUNG WORLD, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 1, 1997 THROUGH
SEPTEMBER 29, 1997 (DATE OF DISPOSITION)
1. BASIS OF PRESENTATION
Pursuant to an asset sale agreement dated August 28, 1997 (the "Sale
Agreement"), Childcare Network, Inc. ("Childcare") purchased substantially all
of the operations and assets of Young World, Inc. (the "Company"). The
accompanying financial statements include the accounts of the Company for the
period of January 1, 1997 through September 29, 1997, the effective date of
sale. The Company's liabilities at September 29, 1997 were not assumed by
Childcare and certain of the Company's non-operating assets, which are not
material, were not acquired by Childcare.
The accompanying financial statements are derived from the historical books
and records of the Company and do not give effect to any purchase accounting
adjustments that Childcare may record as a result of its acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company offers child care and developmental services through
contractual arrangements to the general public. The Company also provides
services under contractual arrangements with certain federal and state
governmental agencies. The child development and learning centers used in the
Company's operations are located in Georgia, South Carolina, North Carolina and
Virginia.
REVENUE AND EXPENSE RECOGNITION
The Company recognizes revenues from services rendered as of the date
earned and expenses are recognized when incurred. Revenues are recorded net of
employee and other discounts.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated by
various straight-line and accelerated methods. The estimated useful lives of
assets used to compute depreciation expense range from five to seven years for
equipment and five years for automobiles.
INCOME TAXES
The shareholders of the Company have elected to include the Company's
income in their own income for income tax purposes, under an election privilege
afforded by provisions of the Internal Revenue Code. Consequently, the Company
is not subject to federal and certain state income taxes.
EMPLOYEE BONUS PLANS
The Company paid discretionary bonuses as approved by executive management.
Compensation expense for these bonuses includes approximately $172,000 paid
subsequent to September 29, 1997.
ADVERTISING
The Company expenses advertising costs when incurred.
F-21
<PAGE> 70
YOUNG WORLD, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
LONG-LIVED ASSETS
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of ("Statement 121"), requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the asset's carrying amount.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. Statement 121 did not have any impact on the
Company's financial position or operating results.
3. INDEBTEDNESS
The Company had a $69,000 non-interest bearing demand loan due to a
shareholder which was outstanding at December 31, 1996. The loan was repaid
during March 1997.
4. CONTRACTS
The Company participates in the Child and Adult Care Food Program (the
"Food Program"), a non-residential food service program sponsored by the United
States Department of Agriculture. The Food Program agreement contains certain
provisions which, among other things, require attendance at various training and
educational classes related to the operation of the Food Program.
The Company participates in the child care assistance programs sponsored
and administered by the various state departments in North Carolina, Virginia,
South Carolina, and Georgia. The child care assistance programs are "low income"
support programs that provides funding for child care assistance to economically
disadvantaged families and require family participation in schooling and certain
work training programs. Eligible participants are approved by the appropriate
governmental department. The Company recognized revenues of approximately
$2,032,000 during the period ended September 29, 1997 under the various state
child care assistance programs.
5. LEASES
The Company leases all of its child development and learning center
facilities under a verbal operating lease agreement with its shareholders. The
Company is generally responsible for taxes, licenses, insurance and repairs and
maintenance for each leased location. Rental expense was approximately $441,000
during the period ended September 29, 1997 (approximately $49,000 per month).
Approximately $196,000 was accrued and unpaid at September 29, 1997.
The Company believes that the lease expense paid to its shareholders
approximates a fair market value rate which could be obtained in an arm's length
transaction with an independent third party for similar facilities under a
short-term, month-to-month lease.
6. COMMITMENTS AND CONTINGENCIES
The Company is subject to various claims and lawsuits arising in the
ordinary course of business. In the opinion of management, the ultimate
resolution of these matters will not have a material effect on the financial
statements of the Company.
F-22
<PAGE> 71
YOUNG WORLD, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. CAPITALIZATION
The Company has 5,000 shares of $1.00 par value common stock authorized of
which 4,700 shares were issued and outstanding at September 29, 1997.
F-23
<PAGE> 72
[PICTURES OF CHILDREN ENGAGED IN VARIOUS ACTIVITIES AT THE COMPANY'S SCHOOLS]
<PAGE> 73
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING SHAREHOLDERS OR ANY UNDERWRITER. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR A SOLICITATION OF ANY PERSON IN ANY CIRCUMSTANCES IN WHICH SUCH AN OFFER
OR SOLICITATION IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
Use of Proceeds....................... 13
Dividend Policy....................... 13
Dilution.............................. 14
Capitalization........................ 15
Selected Financial and Operating
Data................................ 16
Pro Forma Financial Information....... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 25
Management............................ 36
Certain Transactions.................. 39
Principal and Selling Shareholders.... 40
Description of Capital Stock.......... 41
Shares Eligible for Future Sale....... 44
Underwriting.......................... 46
Legal Matters......................... 47
Experts............................... 47
Additional Information................ 47
Index to Financial Statements......... F-1
</TABLE>
UNTIL , 1998 (THE 25TH DAY AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,850,000 SHARES
CHILDCARE
NETWORK, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
THE ROBINSON-HUMPHREY
COMPANY
INTERSTATE/JOHNSON LANE
CORPORATION
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 74
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than the
underwriting discounts and commissions. All amounts shown are estimates except
for the Securities and Exchange Commission registration fee and the NASD filing
fee. All of these fees are being paid by the Company.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $14,503
NASD Filing Fee............................................. 5,417
Nasdaq National Market Listing Fee.......................... 66,875
Printing and Engraving Expenses............................. *
Legal Fees and Expenses..................................... *
Accounting Fees and Expenses................................ *
Transfer Agent and Registrar Fee............................ *
Miscellaneous............................................... *
-------
Total............................................. $ *
=======
</TABLE>
- ---------------
* To be supplied by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of Section 14-2-851 of the Georgia Business Corporation Code
provides that a corporation may indemnify or obligate itself to indemnify an
individual made a party to a proceeding because he or she is or was a director
against liability incurred in the proceeding if (1) such individual conducted
himself or herself in good faith; and 2) such individual reasonably believed (A)
in the case of conduct in his or her official capacity, that such conduct was in
the best interests of the corporation, (B) in all other cases, that such conduct
was at least not opposed to the best interests of the corporation; and (C) in
the case of any criminal proceeding, that the individual had no reasonable cause
to believe such conduct was unlawful. Subsection (d) of Section 14-2-851 of the
Georgia Business Corporation Code provides that a corporation may not indemnify
a director in connection with a proceeding by or in the right of the
corporation, except for reasonable expenses incurred in connection with the
proceeding if it is determined that the director has met the relevant standard
of conduct, or in connection with any proceeding with respect to conduct for
which he or she was adjudged liable on the basis that personal benefit was
improperly received by him or her, whether or not involving action in his or her
official capacity. Notwithstanding the foregoing, pursuant to Section 14-2-854 a
court may order a corporation to indemnify a director if such court determines,
in view of all the relevant circumstances, that it is fair and reasonable to
indemnify the director even if the director has not met the relevant standard of
conduct set forth in subsections (a) and (b) of Section 14-2-851 of the Georgia
Business Corporation Code or was adjudged liable in a proceeding referred to in
subsection (d) of Section 14-2-851 of the Georgia Business Corporation Code, but
if the director was adjudged so liable, the indemnification shall be limited to
reasonable expenses incurred in connection with the proceeding.
Section 14-2-852 of the Georgia Business Corporation Code provides that, a
corporation shall indemnify a director who was wholly successful, on the merits
or otherwise, in the defense of any proceeding to which a he or she was a party
because he or she was a director of the corporation against reasonable expenses
incurred by the director in connection with the proceeding.
Section 14-2-857 of the Georgia Business Corporation Code provides that a
corporation may indemnify an officer of the corporation who is a party to a
proceeding because he or she is an officer of the corporation to the same extent
as a director. If the officer is not a director (or if the officer is a director
but the sole basis on which he or she is made a party to the proceeding is an
act or omission solely as an officer), to such further extent as may be provided
by the articles of incorporation, the bylaws, a resolution of the board of
directors, or
II-1
<PAGE> 75
contract except for liability arising out of conduct that constitutes (1)
appropriation, in violation of his or her duties, of any business opportunity of
the corporation, (2) acts or omissions which involve intentional misconduct or a
knowing violation of law, (3) the types of liability set forth in Section
14-2-832 of the Georgia Business Corporation Code or, (4) receipt of an improper
personal benefit. An officer of a corporation who is not a director is entitled
to mandatory indemnification under Section 14-2-852 of the Georgia Business
Corporation Code and may apply to a court under Section 14-2-854 of the Georgia
Business corporation Code for indemnification, in each case to the same extent
to which a director may be entitled to indemnification under those provisions.
Finally, a corporation may also indemnify an employee or agent who is not a
director to the extent, consistent with public policy, that may be provided by
its articles of incorporation, bylaws, general or specific action by its board
of directors, or contract.
The Company's Restated Articles of Incorporation ("Articles") and Bylaws
provide that each person who is or was or had agreed to become a director or
officer of the Company, or each such person who is or was serving or who had
agreed to serve at the request of the Board of Directors or an officer of the
Company as an employee or agent of the Company or as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise (including the heirs, executors, administrators or estate of
such person), shall be indemnified by the Company to the fullest extent
permitted by the Georgia Business Corporation Code or any other applicable laws
as presently or hereafter in effect. The right to indemnification granted by the
Articles and Bylaws includes the right to be paid in advance expenses incurred
in defending a proceeding. The right of indemnification will not be exclusive or
any other rights to which any person seeking indemnification may otherwise be
entitled, and shall be applicable to matters otherwise within its scope.
The Company's directors and officers are insured against certain
liabilities which they may incur in their capacity under a liability insurance
policy carried by the Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Company has issued the following
securities without registration under the Securities Act of 1933, as amended
(the "Securities Act"):
On January 26, 1997, the Company issued 30,000 shares to Albert Ernest, Jr.
at a price of $0.56 per share in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act.
II-2
<PAGE> 76
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S> <C>
1.1* -- Form of Underwriting Agreement
3.1 -- Restated Articles of Incorporation of the Company
3.2 -- Restated Bylaws of the Company
4.1 -- Specimen certificate for Common Stock of the Company
4.2 -- Registration Rights Agreement between the Company and the
shareholders listed on the signature page thereto, dated May
31, 1998
5.1* -- Opinion of Jones, Day, Reavis & Pogue with respect to the
legality of the securities being registered
10.1 -- 1998 Stock Option Plan, dated May 11, 1998
10.2 -- Fourth Amended and Fully Restated Loan and Revolving Line of
Credit Agreement, dated as of June 19, 1998 by and between
the Company and SunTrust Bank, West Georgia, N.A.
10.3+ -- 1998-99 School Year Contract dated March 23, 1998 by and
between the Company and the Office of School Readiness
23.1* -- Consent of Jones, Day, Reavis & Pogue (included in Exhibit
5.1)
23.2 -- Consent of Ernst & Young LLP
24.1+ -- Power of Attorney (included on the signature page hereof)
27.1 -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
+ Previously filed
* To be filed by amendment
(b) Financial Statement Schedules
Report of Independent Auditors
Schedule II. Valuation and Qualifying Accounts
All other schedules are omitted as the required information is inapplicable
or is presented in the financial statement or related notes.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and
II-3
<PAGE> 77
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 78
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Columbus, State of
Georgia, on July 16, 1998.
CHILDCARE NETWORK, INC.
By: /s/ RAY E. CROWLEY
------------------------------------
Ray E. Crowley
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RAY E. CROWLEY Chairman and Chief Executive July 16, 1998
- ----------------------------------------------------- Officer
Ray E. Crowley (Principal Executive Officer)
* President and Director July 16, 1998
- -----------------------------------------------------
James F. Loudermilk
/s/ LANIER MERRITT Executive Vice President, Chief July 16, 1998
- ----------------------------------------------------- Financial Officer and Director
Lanier Merritt (Principal Financial Officer)
* Controller (Principal Accounting July 16, 1998
- ----------------------------------------------------- Officer)
Joseph G. Slaughter, III
* Director July 16, 1998
- -----------------------------------------------------
Murray D. Gray, Jr.
* Director July 16, 1998
- -----------------------------------------------------
Noll A. Van Cleave, Jr.
* Director July 16, 1998
- -----------------------------------------------------
Albert Ernest, Jr.
</TABLE>
II-5
<PAGE> 79
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Director July 16, 1998
- -----------------------------------------------------
Calvin J. Martin, Jr.
* Director July 16, 1998
- -----------------------------------------------------
Richard Y. Bradley
*By: /s/ LANIER MERRITT
------------------------------------------------
Lanier Merritt
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 80
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Childcare Network, Inc.
We have audited the financial statements of Childcare Network, Inc. as of
December 31, 1996 and 1997, and for each of the three years in the period ended
December 31, 1997, and have issued our report thereon dated April 2, 1998,
except as to Note 3, as to which the date is June 19, 1998 and Note 10, as to
which the date is July 6, 1998 (included elsewhere in this Registration
Statement). Our audits also included the financial statement schedule listed in
Item 16(b) of this Registration Statement. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Columbus, GA
April 2, 1998, except for Note 3,
as to which the date is June 19, 1998
and Note 10 as to which the date is July 6, 1998
II-7
<PAGE> 81
SCHEDULE II
CHILDCARE NETWORK, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- ------------ ------------------------------ ------------- ----------
ADDITIONS
------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COST AND OTHER ACCOUNTS -- DEDUCTIONS -- END OF
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ----------- ------------ ---------- ----------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
Deduction from asset account:
Allowance for doubtful
accounts.................. $ 0 $162,456 $88,756(1) $73,700
YEAR ENDED DECEMBER 31, 1996:
Deduction from asset account:
Allowance for doubtful
accounts.................. 73,700 55,271 49,819(1) 79,152
YEAR ENDED DECEMBER 31, 1997:
Deduction from asset account:
Allowance for doubtful
accounts.................. 79,152 94,421 97,421(1) 76,152
PERIOD ENDED JUNE 26, 1998:
Deduction from asset account:
Allowance for doubtful
accounts.................. 76,152 112,074 92,074(1) 96,152
</TABLE>
- ---------------
(1) Accounts charged off to reserve.
<PAGE> 1
EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION
OF
CHILDCARE NETWORK, INC.
I
The name of the corporation is Childcare Network, Inc. (the
"Corporation").
II
SECTION 1. Authorized Capital Stock. The Corporation shall have
authority to issue not more than twenty million (20,000,000) shares of capital
stock, to be designated as Common Stock, having no par value.
SECTION 2. Voting Entitlement. The Common Stock shall have the
following voting rights:
(a) Except as otherwise provided in paragraph (b) of this
Section 2, a holder of Common Stock shall be entitled to one (1) vote
on each matter submitted to a vote at a meeting of shareholders for
each share of the Common Stock held of record by such holder as of the
record date for such meeting.
(b) Notwithstanding paragraph (a) of this Section 2, a holder
of a share of Common Stock, which share meets one or both of the
following criteria, shall be entitled to ten (10) votes on each matter
submitted to a vote at a meeting of shareholders for each share of the
Common Stock so held of record by such holder as of the record date for
such meeting:
(1) such share of the Common Stock has had the same
beneficial owner since July 16, 1998; or
(2) such share of the Common Stock has had the same
beneficial owner for a continuous period of greater than 48
months prior to the record date of such meeting.
(c) For purposes of paragraphs (b) and (e) of this Section 2,
any transferee of a share of the Common Stock where such share of the
Common Stock was transferred by gift, devise, bequest or otherwise
through the law of inheritance, descent or distribution from the estate
of the transferor or to a trust beneficiary or beneficiaries by a
trustee holding such share of the Common Stock for said beneficiary or
benefit of the beneficiaries of said trust shall be deemed to be the
same "beneficial owner" as the transferor. Additionally, any shares of
Common Stock
<PAGE> 2
acquired by the beneficial owner as a direct result of a stock split,
stock dividend or other type of distribution of shares with respect to
existing shares ("Dividend Shares") will be deemed to have been
acquired and held continuously from the date on which the shares with
regard to which the Dividend Shares were issued were acquired.
(d) For purposes of paragraph (b) of this Section 2, shares of
Common Stock acquired pursuant to a stock option shall be deemed to
have been acquired on the date the option was granted.
(e) For purposes of paragraph (b) of this Section 2, any share
of the Common Stock held in "street" or "nominee" name shall be
presumed to have been acquired by the beneficial owner subsequent to
July 16, 1998 and to have had the same beneficial owner for a
continuous period of less than 48 months prior to the record date of
the meeting in question. This presumption shall be rebuttable by
presentation to the Company by such beneficial owner of satisfactory
evidence that such share has had the same beneficial owner continuously
since July 16, 1998 or such share has had the same beneficial owner for
a period greater than 48 months prior to the record date of the meeting
in question. Any disputes arising pursuant to this paragraph (e) of
this Section 2 shall be definitively resolved by a determination of the
Board of Directors made in good faith.
(f) No holder of shares of Common Stock shall have preemptive
rights, and the Corporation shall have the right to issue and to sell
any shares of its Common Stock without first offering such shares to
any holder of shares of Common Stock of the Corporation.
III
The Corporation's registered office shall be in Muscogee County. The
street address of the Corporation's registered office and the name of its
registered agent at that office are:
Joesph G. Slaughter, III
3025 University Avenue
Suite B-2
Columbus, Georgia 31907
IV
The name and address of the Incorporator are:
Noll A. Van Cleave
2406 Downing Drive
Columbus, Georgia 31906
2
<PAGE> 3
V
The mailing address of the principal office of the Corporation is:
3025 University Avenue
Suite B-2
Columbus, Georgia 31907
VI
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Georgia Business
Corporation Code.
VII
The Board of Directors shall have the power to make, amend and repeal
the Bylaws of the Corporation. Any Bylaws made by the Board of Directors under
the powers conferred hereby may be amended or repealed by the Board of Directors
(except as specified in any such Bylaw so made or amended) or by the
shareholders in the manner provided in the Bylaws of the Corporation.
Notwithstanding the foregoing and anything contained in these Articles of
Incorporation to the contrary, unless otherwise required by applicable law,
Sections 2.3 (Special Meetings), 2.10 (Order of Business), 3.2 (Number,
Qualification and Term of Office), 3.3 (Vacancies and Newly Created
Directorships), 3.4 (Removal of Directors), 3.5 (Nominations of Directors;
Election), 8.7 (Fair Price Requirements) and 8.8 (Business Combinations with
Interested Shareholders) of the Bylaws shall not be amended or repealed by the
shareholders, and no provision inconsistent therewith shall be adopted by the
shareholders, without the affirmative vote of the holders of at least 66-2/3% of
the voting power of the then outstanding shares of Common Stock, voting in
accordance with the provisions of Article II, Section 2. The Corporation may in
its Bylaws confer powers upon its Board of Directors in addition to the
foregoing and in addition to the powers and authorities expressly conferred upon
the Board of Directors by applicable law. Notwithstanding anything contained in
these Articles of Incorporation to the contrary, unless otherwise required by
applicable law, the affirmative vote of the holders of at least 66-2/3% of the
voting power of the then outstanding shares of Common Stock, voting in
accordance with the provisions of Article II, Section 2, shall be required to
amend or repeal, or to adopt any provisions inconsistent with, this Article VII.
VIII
Any action required or permitted to be taken by the shareholders of the
Corporation must be effected at a duly called annual or special meeting of
shareholders of the Corporation or by the consent in writing of the holders of
at least 75% of the voting power of the then outstanding shares of Common Stock
entitled to vote on the action. Special meetings of shareholders of the
Corporation may be called only by the Chairman of the Board of Directors, or by
the Chairman of the Board of Directors or the Secretary within
3
<PAGE> 4
10 days after receipt of the written request of a majority of the total number
of Directors which the Corporation would have if there were no vacancies or upon
receipt of the written request of the holders of at least 75% of the voting
power of the then outstanding shares of Common Stock. At any annual meeting or
special meeting of shareholders of the Corporation, only such business shall be
conducted or considered as shall have been brought before such meeting in the
manner provided in the Bylaws of the Corporation. Notwithstanding anything
contained in these Articles of Incorporation to the contrary, unless otherwise
required by applicable law, the affirmative vote of at least 66-2/3% of the
voting power of the then outstanding shares of Common Stock, voting in
accordance with the provisions of Article II, Section 2, shall be required to
amend or repeal, or adopt any provision inconsistent with this Article VIII.
IX
SECTION 1. Number, Election and Terms of Directors. The number of the
Directors of the Corporation shall not be less than 3 nor more than 16 and shall
be fixed from time to time in the manner described in the Bylaws.
The Directors shall be classified with respect to the time for which
they severally hold office into three classes, as nearly equal in number as
possible, designated Class I, Class II and Class III. The Directors first
appointed to Class I shall hold office for a term expiring at the annual meeting
of shareholders to be held in 1999; the Directors first appointed to Class II
shall hold office for a term expiring at the annual meeting of shareholders to
be held in 2000; and the Directors first appointed to Class III shall hold
office for a term expiring at the annual meeting of shareholders to be held in
2001, with the members of each class to hold office until their successors are
elected and qualified. Unless otherwise required by applicable law, at each
succeeding annual meeting of the shareholders of the Corporation, the successors
of the class of Directors whose term expires at that meeting shall be elected by
a plurality vote of all votes cast at such meeting (giving effect to the
provisions of Article II, Section 2) to hold office for a term expiring at the
annual meeting of shareholders held in the third year following the year of
their election. Notwithstanding the foregoing, if at the time of any annual
meeting of shareholders, the Corporation is prohibited by applicable law from
having a classified Board of Directors, all of the Directors shall be elected at
such annual meeting for a one year term only. If at the time of any subsequent
annual meeting of shareholders the Corporation is no longer prohibited by
applicable law from having a classified Board of Directors, the Board of
Directors shall again be classified in accordance with the first sentence of
this paragraph, and at such annual meeting Directors initially shall be elected
to serve in either Class I, Class II or Class III to hold office for a term
expiring at the first, second or third succeeding annual meeting of the
shareholders, respectively; thereafter successors to each Class shall be elected
in accordance with the third sentence of this paragraph; such classified Board
of Directors at all times being subject to the immediately preceding sentence of
this paragraph. Elections of Directors need not be by written ballot unless
requested by the Chairman of the Board of Directors or by the holders of a
majority of the voting power of the then outstanding shares of Common Stock,
voting in accordance with the provisions of Article II, Section 2, present
4
<PAGE> 5
in person or represented by proxy at a meeting of the shareholders at which
Directors are to be elected.
SECTION 2. Nomination of Director Candidates. Advance notice of
shareholder nominations for the election of Directors shall be given in the
manner provided in the Bylaws of the Corporation.
SECTION 3. Newly Created Directorships and Vacancies. Unless otherwise
required by applicable law, newly created directorships resulting from any
increase in the number of Directors and any vacancies on the Board of Directors
resulting from death, resignation, disqualification, removal or other cause
shall be filled solely by the affirmative vote of a majority of the remaining
Directors then in office, even though less than a quorum of the Board of
Directors, or by a sole remaining Director. Any Director elected in accordance
with the preceding sentence shall hold office for the remainder of the full term
of the class of Directors in which the new directorship was created or the
vacancy occurred and until such Director's successor shall have been elected and
qualified. No decrease in the number of Directors constituting the Board of
Directors shall shorten the term of an incumbent Director.
SECTION 4. Removal. Unless otherwise required by applicable law, any
Director may be removed from office by the shareholders only for cause and only
in the manner provided in this Section 4 of Article IX. At any annual meeting or
special meeting of the shareholders of the Corporation, the notice of which
shall state that the removal of a Director or Directors is among the purposes of
the meeting, unless otherwise required by applicable law, the affirmative vote
of the holders of at least 66-2/3% of the voting power of the then outstanding
Common Stock, voting in accordance with the provisions of Article II, Section 2,
may remove such Director or Directors for cause.
SECTION 5. Amendment, Repeal, Etc. Notwithstanding anything contained
in this Certificate of Incorporation to the contrary, unless otherwise required
by applicable law, the affirmative vote of at least 66-2/3% of the voting power
of the then outstanding Common Stock, voting in accordance with the provisions
of Article II, Section 2, shall be required to amend or repeal, or adopt any
provision inconsistent with, this Article IX.
5
<PAGE> 6
X
In discharging the duties of their respective positions and in
determining what is believed to be in the best interests of the Corporation, the
Board of Directors, committees of the Board of Directors, and individual
Directors, in addition to considering the effects of any action on the
Corporation or its shareholders, may consider the interests of employees,
customers, suppliers and creditors of the Corporation and its subsidiaries, the
communities in which offices or other establishments of the Corporation and its
subsidiaries are located, and all other factors such Directors deem pertinent;
provided, however, that this Article X shall be deemed solely to grant
discretionary authority to the Directors and shall not be deemed to provide to
any constituency any right to be considered.
XI
A Director of the Corporation shall not be liable to the Corporation or
its shareholders for or with respect to any acts or omissions in the performance
of his duties as a Director, except to the extent such exemption from liability
or limitation thereof is not permitted under the Georgia Business Corporation
Code as currently in effect or as the same may be hereafter amended or under any
other applicable law currently or hereafter in effect. No amendment,
modification or repeal of this Article shall adversely affect any right or
protection of a Director that exists at the time of such amendment,
modification, or repeal.
XII
Each person who is or was or had agreed to become a Director or officer
of the Corporation, or each such person who is or was serving or who had agreed
to serve at the request of the Board of Directors or an officer of the
Corporation as an employee or agent of the Corporation or as a Director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise (including the heirs, executors, administrators or
estate of such person), shall be indemnified by the Corporation to the fullest
extent permitted by the Georgia Business Corporation Code or any other
applicable laws as presently or hereafter in effect. The right to
indemnification granted by this Article XII shall include the right to be paid
in advance expenses incurred in defending a proceeding. The Corporation may, by
action of the Board of Directors, provide indemnification to other employees and
agents of the Corporation with the same scope and effect as the foregoing
indemnification of Directors and officers. The right of indemnification provided
in this Article XII shall not be exclusive of any other rights to which any
person seeking indemnification may otherwise be entitled, and shall be
applicable to matters otherwise within its scope irrespective of whether such
matters arose or arise before or after the adoption of this Article XII. Without
limiting the generality or the effect of the foregoing, the Corporation may
adopt Bylaws, or enter into one or more agreements with any person, which
provide for indemnification greater or different than that provided in this
Article XII. No amendment, modification or repeal of this Article shall
adversely affect any right or protection of a Director, officer, employee or
agent that exists at the time of such amendment, modification or repeal.
6
<PAGE> 7
XIII
Any issued and outstanding shares of stock of the Corporation which are
repurchased by the Corporation shall become treasury shares which shall be held
in treasury by the Corporation until resold or retired and canceled in the
discretion of the Board of Directors. Any treasury shares which are retired and
canceled shall constitute authorized but unissued shares.
7
<PAGE> 1
EXHIBIT 3.2
RESTATED BYLAWS
OF
CHILDCARE NETWORK, INC.
ARTICLE 1.
OFFICES
The Corporation shall maintain at all times a registered office in the
State of Georgia and a registered agent at that address, but may have other
offices located within or without the State of Georgia as the Board of Directors
may determine.
ARTICLE 2.
MEETINGS OF SHAREHOLDERS
2.1 Place and Time of Meetings. All meetings of the shareholders shall
be held at such time and at such place, within or without the State of Georgia,
as may be designated by the Board of Directors or, in the absence of a
designation by the Board of Directors, by the Chairman of the Board of
Directors, the President or the Secretary, and stated in the notice of the
meeting. The Chairman of the Board of Directors may postpone and reschedule any
previously scheduled annual or special meeting of the shareholders of the
Corporation.
2.2 Annual Meeting. An annual meeting of the shareholders shall be held
at such date, time and place as shall be designated from time to time by the
Board of Directors, at which meeting the shareholders shall elect by a plurality
vote the Directors to succeed those
<PAGE> 2
whose terms expire and shall transact such other business as may be properly
brought before the meeting in accordance with Section 2.10 of these Bylaws.
2.3 Special Meetings. Special meetings of the shareholders may be
called only as provided in this Section 2.3. Special meetings may be called by
the Chairman of the Board of Directors, and shall be called by the Chairman of
the Board of Directors or the Secretary within 10 days after receipt of the
written request of a majority of the total number of Directors which the
Corporation would have if there were no vacancies (the "Whole Board") or upon
receipt of the written request of the holders of at least 75% of the voting
power of the then outstanding shares of Common Stock. Any such request by a
majority of the Whole Board or the holders of at least 75% of the voting power
of the then outstanding shares of Common Stock shall be sent to the Chairman of
the Board of Directors and the Secretary and shall state the purpose or purposes
of the proposed meeting. At a special meeting of shareholders, only such
business shall be conducted or considered as shall have been stated in the
notice of the meeting given by or at the direction of the Board of Directors.
2.4 Notice of Meeting. Written notice of every meeting of the
shareholders, stating the place, day, and hour of the meeting, and, in the case
of a special meeting, the purpose or purposes for which the meeting is called,
shall be given not fewer than ten (10) nor more than sixty (60) days before the
date of the meeting to each shareholder of record entitled to vote at such
meeting. Written notice shall be given personally, by mail, by private courier,
by facsimile transmission, or by telegraph, teletype or other form of wire or
wireless communication. If mailed, notice shall be deemed to be delivered when
deposited in the United States mail with first-class postage thereon prepaid,
addressed to the shareholder at
2
<PAGE> 3
his address as it appears on the stock transfer books of the Corporation. When a
meeting of the shareholders is adjourned to another place, date or time, by the
holders of a majority of the voting power of the voting shares represented at a
meeting, whether or not a quorum is present, notice need not be given of the
adjourned meeting if the date, time, and place to which the meeting is adjourned
are announced at the meeting at which the adjournment is taken; provided,
however, if the Board is required to fix a new record date pursuant to Section
7.5(a) of these Bylaws, notice must be given to persons who are shareholders as
of the new record date. At an adjourned meeting at which a quorum is present or
represented, any business that could have been transacted at the meeting
originally called may be transacted.
2.5 Waiver of Notice. Notice of a meeting need not be given to any
shareholder who signs a waiver of notice, in person or by proxy, either before
or after the date and time stated in the notice. Waiver must be in writing and
delivered to the Corporation for inclusion in the minutes or for filing with the
corporate records. Attendance of a shareholder at a meeting, either in person or
by proxy, shall of itself constitute waiver of notice and waiver of any and all
objections to: (1) lack of notice or defective notice of a meeting, unless the
shareholder at the beginning of the meeting objects to holding the meeting or
transacting business at the meeting; and (2) consideration at the meeting of a
particular matter that is not within the purpose or purposes described in the
meeting notice, unless the shareholder objects to considering the matter when it
is presented. Neither the business transacted nor the purpose of the meeting
need be specified in the waiver, except that any waiver by a shareholder of the
notice of a meeting of shareholders with respect to an amendment of the Articles
of Incorporation, a plan of merger or share exchange, a sale of assets, or any
other
3
<PAGE> 4
action which would entitle the shareholder to dissent and obtain payment for his
shares shall not be effective unless: (a) prior to execution of the waiver, the
shareholder is furnished with the same material required to be sent to the
shareholder in a notice of the meeting, including notice of any applicable
dissenters' rights; or (b) the waiver expressly waives the right to receive the
materials required to be furnished.
2.6 Inspectors. The Board of Directors shall appoint one or more
inspectors of election to act as judges of the voting and to determine those
entitled to vote at any meeting of the shareholders, or any adjournment thereof,
in advance of such meeting, but if the Board of Directors fails to make such
appointment(s) or if an appointee fails to serve, the presiding officer of the
meeting of the shareholders may appoint one or more inspectors (or substitute
inspectors) to act at the meeting.
2.7 Quorum. Except as may be provided in the Articles of Incorporation,
a majority of the votes entitled to be cast on a matter by the voting group,
represented in person or by proxy, shall constitute a quorum of that voting
group for action on that matter. Once a share is represented at a meeting for
any purpose other than solely to object to holding the meeting or transacting
business at the meeting, it is deemed present for quorum purposes for the
remainder of the meeting and for any adjournment of that meeting unless a new
record date is or must be set for the adjourned meeting.
2.8 Voting. Except as provided in the Articles of Incorporation or as
otherwise provided by law, each outstanding share shall be entitled to one vote
on each matter submitted to a vote at a meeting of the shareholders. The vote
upon any question brought before a meeting of the shareholders may be by voice
vote, unless otherwise required by the Articles of Incorporation or these Bylaws
or unless the presiding officer or the holders of a
4
<PAGE> 5
majority of the voting power of the then outstanding shares of all classes of
stock entitled to vote thereon present in person or by proxy at such meeting
shall determine otherwise. Every vote taken by written ballot shall be counted
by the inspector(s) of election. Except as provided in these Bylaws, the
Articles of Incorporation or by law, if a quorum exists, action on a matter
(other than the election of Directors) by a voting group is approved if the
votes cast within the voting group favoring the action exceed the votes cast
opposing the action. Directors shall be elected at the annual meeting by a
plurality of the votes cast by shares entitled to vote in the election.
2.9 Proxies. A shareholder may vote his shares in person or by proxy.
A shareholder may appoint a proxy by executing a writing which authorizes
another person or persons to vote or otherwise act on the shareholder's behalf.
Execution may be accomplished by any reasonable means, including facsimile
transmission. A proxy is effective when received by the inspector of elections
and is valid for eleven (11) months from the date of its execution, unless a
longer period is expressly provided in the appointment form. An appointment of
proxy is revocable by a shareholder unless the appointment form conspicuously
states that it is irrevocable and the appointment is coupled with an interest.
2.10 Order of Business.
(a) The Chairman of the Board of Directors, or such officer of the
Corporation designated by a majority of the Whole Board (as such term is defined
in Section 2.3 of these Bylaws), shall call meetings of the shareholders of the
Corporation to order and shall act as presiding officer thereof. Unless
otherwise determined by the Board of Directors prior to the meeting, the
presiding officer of the meeting of the shareholders shall determine the order
of business and shall have the authority in his discretion to regulate the
conduct of
5
<PAGE> 6
any such meeting, including, without limitation, by imposing restrictions on the
persons (other than shareholders of the Corporation or their duly appointed
proxies) who may attend any such shareholders' meeting; excluding whether any
shareholder or his proxy from any such meeting based upon the determination by
the presiding officer, in his sole discretion, that any such person has unduly
disrupted or is likely to disrupt the proceedings thereat; and by determining
the circumstances in which any person may make a statement or ask questions at
any such meeting.
(b) At an annual meeting of the shareholders, only such business
shall be conducted or considered as shall have been properly brought before the
meeting. To be properly brought before an annual meeting, business must be (i)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, (ii) otherwise properly brought before
the meeting by or at the direction of a majority of the Whole Board, or (iii)
otherwise properly requested to be brought before the meeting by a shareholder
of the Corporation.
(c) For business to be properly requested to be brought before an
annual meeting by a shareholder of the Corporation, the shareholder (i) must be
a shareholder of record at the time of the giving of the notice for such annual
meeting provided for in the Bylaws of this Corporation, (ii) must be entitled to
vote at such meeting, and (iii) must have given timely notice thereof in writing
to the Secretary of the Corporation. To be timely, a shareholder's notice must
be delivered to or mailed and received at the principal executive offices of the
Corporation not fewer than 60 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of the annual meeting is changed by more than 30 days
from such anniversary date,
6
<PAGE> 7
notice by the shareholder to be timely must be so received not later than the
close of business on the 10th day following the day on which public announcement
is first made of the date of the meeting. A shareholder's notice to the
Secretary shall set forth as to each matter the shareholder proposes to bring
before the meeting (i) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (ii) the name and address, as they appear on the Corporation's
books, of the shareholder proposing such business and the beneficial owner, if
any, on whose behalf the proposal is made, (iii) the class and number of shares
of the Corporation that are owned beneficially and of record by the shareholder
proposing such business and by the beneficial owner, if any, on whose behalf the
proposal is made, and (iv) any material interest of such shareholder proposing
such business and the beneficial owner, if any, on whose behalf the proposal is
made, in such business. Notwithstanding anything in this Section 2.10 to the
contrary, no business shall be conducted at an annual meeting except in
accordance with the procedures set forth in this Section 2.10. The presiding
officer of the annual meeting shall, if the facts warrant, determine that
business was not properly brought before the meeting in accordance with the
procedures prescribed in this Section 2.10 and, if he should so determine, he
shall so declare to the meeting and any such business not properly brought
before the meeting shall not be transacted. Notwithstanding the foregoing
provisions of this Section 2.10, a shareholder shall also comply with all
applicable requirements of the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder with respect to the matters set forth in
this Section 2.10. For purposes of this Section 2.10 and Section 3.5 of these
Bylaws, "public announcement" shall mean disclosure in a press release reported
by the Dow Jones News Service, Associated Press or comparable national news
7
<PAGE> 8
service, in a document publicly filed by the Corporation with the Securities and
Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Securities
Exchange Act of 1934, as amended, or in shareholder correspondence or a
shareholder report. Nothing in this Bylaw shall be deemed to affect any rights
of shareholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as
amended, including, but not limited to, the time periods specified to exercise
such rights.
ARTICLE 3.
DIRECTORS
3.1 Powers. The business and affairs of the Corporation shall be
managed under the direction of its Board of Directors, which may exercise all
such powers of the Corporation and do all such lawful acts and things as are not
by law or by the Articles of Incorporation directed or required to be exercised
or done by the shareholders.
3.2 Number, Qualification and Term of Office. The authorized number of
Directors may be determined from time to time only by a vote of a majority of
the Whole Board (as defined in Section 2.3 of these Bylaws) or by the
affirmative vote of the holders of at least 66-2/3% of the voting power of the
then outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of Directors, voting together as a single class, but
in no case shall the number of Directors be fewer than 3 or more than 16. The
Directors shall be natural persons of the age of eighteen (18) years or older,
but need not be residents of the State of Georgia or hold shares of stock in the
Corporation. The Directors shall be classified with respect to the time for
which they severally hold office into three classes, as nearly equal in number
as possible, designated Class I, Class II and Class III. The
8
<PAGE> 9
Directors first appointed to Class I shall hold office for a term expiring at
the annual meeting of shareholders to be held in 1999; the Directors first
appointed to Class II shall hold office for a term expiring at the annual
meeting of shareholders to be held in 2000; and the Directors first appointed to
Class III shall hold office for a term expiring at the annual meeting of
shareholders to be held in 2001, with the members of each class to hold office
until their successors are elected and qualified. At each succeeding annual
meeting of the shareholders of the Corporation, the successors of the class of
Directors whose term expires at that meeting shall be elected by plurality vote
of all votes cast at such meeting to hold office for a term expiring at the
annual meeting of shareholders held in the third year following the year of
their election.
3.3 Vacancies and Newly Created Directorships. Newly created
directorships resulting from any increase in the number of Directors and any
vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal or other cause shall be filled solely by the
affirmative vote of a majority of the remaining Directors then in office, even
though less than a quorum of the Board of Directors, or by a sole remaining
Director. Any Director elected in accordance with the preceding sentence shall
hold office for the remainder of the full term of the class of Directors in
which the new directorship was created or the vacancy occurred and until such
Director's successor shall have been elected and qualified. No decrease in the
number of Directors constituting the Board of Directors shall shorten the term
of an incumbent Director. A vacancy that will occur at a specific later date
(including but not limited to a resignation that specifies a later date) may be
filled before the vacancy occurs, but the new Director may not take office until
the vacancy occurs.
9
<PAGE> 10
3.4 Removal of Directors. Any or all of the Directors of the
Corporation may be removed with cause by the affirmative vote of the holders of
at least 66-2/3% of the voting power of the then outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of
Directors, voting together as a single class. A Director may be removed by the
shareholders only at a meeting called for the purpose of removing him, and the
meeting notice must state that the purpose, or one of the purposes, of the
meeting is removal of the Director.
3.5 Nominations of Directors; Election. Only persons who are nominated
in accordance with the following procedures shall be eligible for election as
Directors of the Corporation. Nominations of persons for election as Directors
of the Corporation may be made by (i) the Board of Directors or a committee
appointed by the Board of Directors, or (ii) any person who is a shareholder of
record at the time of giving of notice for the meeting provided for in these
Bylaws, who is entitled to vote for the election of Directors and who complies
with the procedures set forth in this Section 3.5. All nominations by
shareholders shall be made pursuant to timely notice in proper written form to
the Secretary of the Corporation. To be timely, a shareholder's notice shall be
delivered to or mailed and received at the principal executive offices of the
Corporation: (i) in the case of an annual meeting, not fewer than 60 days nor
more than 90 days prior to the first anniversary of the preceding year's annual
meeting; provided, however, that in the event that the date of the annual
meeting is changed by more than 30 days from such anniversary date, notice by
the shareholder to be timely must be so received not later than the close of
business on the 10th day following the day on which public announcement is first
made of the date of the meeting; and (ii) in the case of a special meeting at
which Directors are to be elected, not later than
10
<PAGE> 11
the close of business on the 10th day following the day on which public
announcement is first made of the date of the meeting. To be in proper written
form, such shareholder's notice shall set forth or include (i) the name and
address, as they appear on the Corporation's books, of the shareholder giving
the notice and of the beneficial owner, if any, on whose behalf the nomination
is made; (ii) a representation that the shareholder giving the notice is a
holder of record of stock of the Corporation entitled to vote at such meeting
and intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice; (iii) the class and number of shares
of stock of the Corporation owned beneficially and of record by the shareholder
giving the notice and by the beneficial owner, if any, on whose behalf the
nomination is made; (iv) a description of all arrangements or understandings
between or among any of (A) the shareholder giving the notice, (B) the
beneficial owner on whose behalf the notice is given, (C) each nominee, and (D)
any other person or persons (naming such person or persons) pursuant to which
the nomination or nominations are to be made by the shareholder giving the
notice; (v) such other information regarding each nominee proposed by the
shareholder giving the notice as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Securities and Exchange
Commission, had the nominee been nominated, or intended to be nominated, by the
Board of Directors; and (vi) the signed consent of each nominee to serve as a
Director of the Corporation if so elected. At the request of the Board of
Directors, any person nominated by the Board of Directors for election as a
Director shall furnish to the Secretary of the Corporation that information
required to be set forth in a shareholder's notice of nomination which pertains
to the nominee. The presiding officer of the meeting for election of Directors
shall, if the facts warrant, determine that a nomination was not made in
accordance with the
11
<PAGE> 12
procedures prescribed by this Section 3.5, and if he should so determine, he
shall so declare to the meeting and the defective nomination shall be
disregarded. Notwithstanding the foregoing provisions of this Section 3.5, a
shareholder shall also comply with all applicable requirements of the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder with
respect to the matters set forth in this Section 3.5.
3.6 Resignation. Any Director may resign at any time by giving written
notice of his resignation to the Board of Directors, the Chairman of the Board
of Directors or the Corporation.
3.7 Compensation. The Board of Directors may establish the compensation
for, and reimbursement of the expenses of, Directors for membership on the Board
of Directors and on committees of the Board of Directors, attendance at meetings
of the Board of Directors or committees of the Board of Directors, and for other
services by Directors to the Corporation.
3.8 Interested Director Transactions. An interested Director is one who
is a party to a contract or transaction with the Corporation or who is an
officer or Director of, or has a financial interest in, another corporation,
partnership, association, or other entity which is a party to a contract or
transaction with the Corporation. Transactions involving such a Director shall
be governed by Section 14-2-860, et seq., of the Georgia Business Corporation
Code, as the same may be amended.
ARTICLE 4.
MEETINGS OF THE BOARD
4.1 Regular Meetings. Regular meetings of the Board of Directors may be
held without notice immediately after the annual meeting of the shareholders and
at such other
12
<PAGE> 13
time and place either within or without the State of Georgia as shall from time
to time be determined by the Board of Directors.
4.2 Special Meetings. Special meetings of the Board of Directors may be
called by the Chairman of the Board of Directors or the President, on one day's
written notice to each Director by whom such notice is not waived. Notice shall
be given personally, by mail, by private courier, by facsimile transmission, or
by telegraph, teletype or other form of wire or wireless communication, and need
not describe the business to be transacted at, or the purpose of, the special
meeting. Special meetings of the Board of Directors may be held at such time and
place either within or without the State of Georgia as is determined by the
Board of Directors or specified in the notice of any such meeting.
4.3 Waiver of Notice. A Director may waive any notice either before or
after the date and time stated in the notice. Such a waiver must be in writing,
signed by the Director and delivered to the Corporation for inclusion in the
minutes or filing with the corporate records. Attendance of a Director at a
meeting shall constitute a waiver of notice of that meeting unless the Director
at the beginning of the meeting (or promptly upon arrival) objects to holding
the meeting or transacting business at the meeting and does not thereafter vote
for or assent to action taken at the meeting.
4.4 Quorum. A quorum of the Board of Directors consists of a majority
of the number of Directors then in office. If a quorum is present, the acts of a
majority of the Directors in attendance shall be the acts of the Board of
Directors. A Director who is present at a meeting of the Board of Directors when
corporate action is taken is deemed to have assented to the action taken unless:
(a) that Director objects at the beginning of the meeting (or promptly upon
arrival) to holding the meeting or to transacting business at the meeting;
13
<PAGE> 14
(b) the dissent or abstention of that Director from the action taken is entered
into the minutes of the meeting; or (c) that Director delivers written notice of
dissent or abstention to the presiding officer of the meeting before, or to the
Corporation immediately after, adjournment of the meeting. The right of dissent
is not available to a Director who votes in favor of an action taken.
4.5 Adjournment. A meeting of the Board of Directors may be adjourned
by a majority of the Directors present, whether or not a quorum exists. Notice
of the time and the place of the adjourned meeting and of the business to be
transacted thereat, other than by announcement at the meeting at which the
adjournment is taken, shall not be necessary. At an adjourned meeting at which a
quorum is present, any business may be transacted which could have been
transacted at the meeting originally called.
4.6 Participation in Meetings Other Than in Person. Members of the
Board of Directors may participate in a meeting of the Board by any means of
communication by which all persons participating in the meeting can hear each
other. Participation in a meeting in such manner shall constitute presence in
person at such meeting.
4.7 Rules. The Board of Directors may adopt rules and regulations that
are not inconsistent with law or these Bylaws for the conduct of their meetings
and the management of the affairs of the Corporation.
14
<PAGE> 15
ARTICLE 5.
COMMITTEES
5.1 Formation and Powers. The Board of Directors, by resolution passed
by a majority of the Whole Board (as defined in Section 2.3 of these Bylaws),
may create one or more committees and appoint members of the Board of Directors
to serve thereon. Each committee shall have such lawfully delegable powers and
duties as the Board of Directors may confer. However, a committee shall not have
the power to: (i) approve or propose to shareholders action that the Georgia
Business Corporation Code requires to be approved by shareholders; (ii) fill
vacancies on the Board of Directors or on any of its committees; (iii) amend the
Articles of Incorporation pursuant to Section 14-2-1002 of the Georgia Business
Corporation Code, as it may hereafter be amended; (iv) adopt, amend or repeal
these Bylaws; or (v) approve a plan of merger not requiring shareholder
approval. Any committee or committees so designated by the Board of Directors
shall have such name or names as may be determined from time to time by
resolution adopted by the Board of Directors. Unless otherwise prescribed by the
Board of Directors, a majority of the members of the committee shall constitute
a quorum for the transaction of business, and the act of a majority of the
members present at a meeting at which there is a quorum shall be the act of such
committee. Each committee shall prescribe its own rules for calling and holding
meetings and its method of procedure, subject to any rules prescribed by the
Board of Directors or by applicable law, and shall keep a written record of all
actions taken by it.
5.2 Removal. The Board of Directors shall have power at any time to
remove any member of any committee, with or without cause, to fill vacancies on
any committee, and to dissolve any committee.
15
<PAGE> 16
ARTICLE 6.
OFFICERS
6.1 Generally. The officers of the Company shall be elected by the
Board of Directors and shall consist of a Chief Executive Officer, a President,
a Secretary, and a Treasurer. The Board of Directors may also choose any or all
of the following: a Controller, one or more Vice Presidents (who may be given
particular designations with respect to authority, function, or seniority), and
such other officers as the Board of Directors may from time to time determine.
Notwithstanding the foregoing, by specific action the Board of Directors may
authorize the Chairman of the Board of Directors to appoint any person to any
office other than Chief Executive Officer, President, Secretary, or Treasurer.
Any number of offices may be held by the same person. Any of the offices may be
left vacant from time to time as the Board of Directors may determine. In the
case of the absence or disability of any officer of the Company or for any other
reason deemed sufficient by a majority of the Board of Directors, the Board of
Directors may delegate the absent or disabled officer's powers or duties to any
other officer or to any Director.
6.2 Compensation. The compensation of all officers and agents of the
Company who are also Directors of the Company shall be fixed by the Board of
Directors or by a committee of the Board of Directors. The Board of Directors
may fix, or delegate the power to fix, the compensation of other officers and
agents of the Company to an officer of the Company.
6.3 Succession. The officers of the Company will hold office until
their successors are elected and qualified. Any officer may be removed at any
time by the
16
<PAGE> 17
affirmative vote of a majority of the Whole Board. Any vacancy occurring in any
office of the Company may be filled by the Board of Directors or by the Chairman
of the Board of Directors as provided in Section 6.1 of these Bylaws.
6.4 Authority and Duties. Each of the officers of the Corporation shall
have such authority and shall perform such duties as are customarily incident to
their respective offices, or as may be specified from time to time by the Board
of Directors.
6.5 Interested Officer Transactions. An interested officer is one who
is a party to a contract or transaction with the Corporation or who is an
officer or Director of, or has a financial interest in, another corporation,
partnership, association, or other entity which is a party to a contract or
transaction with the Corporation. Transactions involving such an officer shall
be governed by Section 14-2-864 of the Georgia Business Corporation Code, as the
same may be amended.
ARTICLE 7.
CAPITAL STOCK
7.1 Certificates. The interest of each shareholder may be evidenced by
a certificate or certificates representing shares of stock of the Corporation,
which shall be in such form as the Board of Directors may from time to time
adopt, shall be numbered and shall be entered in the books of the Corporation as
they are issued. Each share certificate shall state, on its face, the name of
the Corporation and that it is organized under the laws of Georgia, the name of
the person to whom it is issued, and the number and class of shares and the
designation of the series, if any, that the certificate represents. Also, each
certificate may bear the seal of the Corporation or a facsimile thereof and
shall be signed, either manually or in facsimile, by any one of the following:
the President, the Secretary or an Assistant
17
<PAGE> 18
Secretary, or other officer designated by the Board of Directors for such
purpose. If the certificate is signed in facsimile, it must be countersigned by
a transfer agent or registered by a registrar other than the Corporation itself
or an employee of the Corporation. The transfer agent or registrar may sign
either manually or by facsimile.
7.2 Transfers. Upon surrender to the Corporation or the transfer agent
of the Corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, it shall be
the duty of the Corporation to issue, or to cause its transfer agent to issue, a
new certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
7.3 Lost, Stolen or Destroyed Certificates. The Secretary may direct a
new certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact, satisfactory
to the Secretary, by the person claiming the certificate of stock to be lost,
stolen or destroyed. As a condition precedent to the issuance of a new
certificate or certificates, the Secretary may require the owners of such lost,
stolen or destroyed certificate or certificates to give the Corporation a bond
in such sum and with such surety or sureties as the Secretary may direct as
indemnity against any claims that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen or destroyed or the
issuance of the new certificate.
7.4 Certificateless Shares. The Board of Directors of the Corporation
may authorize the issuance of some or all of the shares of stock, of any or all
of its classes or series, without certificates. Within a reasonable time after
the issue or transfer of the shares without certificates, the Corporation shall
send the shareholder to whom a share is to be
18
<PAGE> 19
issued a written statement specifying the name of the Corporation, that the
Corporation is organized under the laws of Georgia, the name of the person to
whom the shares are issued or transferred, the number and class of shares and
the designation of the series, if any, that the certificate represents, and any
applicable restriction on the transfer of such shares.
7.5 Record Dates.
(a) In order that the Corporation may determine the shareholders
entitled to notice of or to vote at any meeting of shareholders or any
adjournment thereof, or to take any other action, the Board of Directors shall
in advance fix a record date, which record date shall not precede the date upon
which the resolution fixing the record date is adopted by the Board of
Directors, and which record date shall not be more than 70 days before the date
of such meeting. If no record date is fixed, the record date for determining
shareholders entitled to notice of or to vote at any meeting of shareholders
shall be the close of business on the day before the first notice is delivered
to shareholders. A determination of shareholders of record entitled to notice of
or to vote at a meeting of the shareholders shall apply to any adjournment of
the meeting; provided, however, if the meeting is adjourned to a date more than
120 days after the date fixed for the original meeting, the Board of Directors
shall fix a new record date for the adjourned meeting.
(b) In order that the Corporation may determine the shareholders
entitled to receive payment of any dividend or other distribution, the Board of
Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted, and which record
date shall not be more than 70 days prior to such payment. If no record date is
fixed, the record date for determining shareholders for any such
19
<PAGE> 20
purpose shall be at the close of business on the day on which the Board of
Directors authorizes the distribution.
(c) The Corporation shall be entitled to treat the person in whose
name any share of its stock is registered as the owner thereof for all purposes,
and shall not be bound to recognize any equitable or other claim to, or interest
in, such share on the part of any other person, whether or not the Corporation
shall have notice thereof, except as expressly provided by applicable law.
ARTICLE 8.
MISCELLANEOUS
8.1 Inspection of Books.
(a) A shareholder may inspect and copy, during regular business
hours at the Corporation's principal office, the following if he gives the
Corporation written notice of his demand at least five (5) business days prior
to the requested date of inspection: (1) the Corporation's Articles of
Incorporation and all amendments to them currently in effect; (2) the
Corporation's Bylaws and all amendments to them currently in effect; (3)
resolutions adopted by either the shareholders or Board of Directors increasing
or decreasing the number of Directors, the classification of Directors, if any,
and the names and residence addresses of all members of the Board of Directors;
(4) resolutions adopted by the Board of Directors creating one or more classes
or series of shares, and fixing their relative rights, preferences, and
limitations, if shares issued pursuant to those resolutions are outstanding, and
any resolutions adopted by the Board of Directors that affect the size of the
board of Directors; (5) the minutes of all shareholders' meetings, executed
waivers of notice of meetings, and executed written consents evidencing all
action taken by shareholders without a meeting, for
20
<PAGE> 21
the previous three years; (6) all written communications to shareholders
generally within the previous three years and the financial statements required
to be made available to the shareholders for the previous three years under
Section 14-2-1620 of the Georgia Business Corporation Code; (7) a list of the
names and business addresses of its current Directors and officers; and (8) the
Corporation's most recent annual registration delivered to the Secretary of
State under Section 14-2-1622 of the Georgia Business Corporation Code.
(b) A shareholder may inspect and copy, during regular business
hours at a reasonable location specified by the Corporation (1) excerpts from
minutes of any meeting of the Board of Directors, records of any action of a
committee of the Board of Directors while acting in place of the Board of
Directors on behalf of the Corporation, minutes of any meeting of the
shareholders, and records of action taken by the shareholders or Board of
Directors without a meeting, to the extent not subject to inspection under
Section 8.1(a); (2) accounting records of the Corporation; and (3) the record of
shareholders. A shareholder may inspect these records of the Corporation only
if: (i) his demand is made in good faith and for a proper purpose that is
reasonably relevant to his legitimate interest as a shareholder; (ii) he
describes with reasonable particularity his purpose and the records he desires
to inspect; (iii) the records are directly connected with his purpose; (iv) the
records are to be used only for the stated purpose; and (v) the shareholder owns
more than two percent (2%) of the outstanding shares of the Corporation.
8.2 Seal. The corporate seal shall be in such form as the Board of
Directors may from time to time determine. In the event that it is inconvenient
at any time to use the corporate seal of the Corporation, the words "Seal" or
"Corporate Seal" enclosed in parentheses or scroll shall be deemed the corporate
seal of the Corporation.
21
<PAGE> 22
8.3 Checks, Notes, Drafts, Etc. Checks, notes, drafts, acceptances,
bills of exchange, and other orders or obligations for the payment of money
shall be signed by such officer or officers or person or persons as the Board of
Directors by resolution shall from time to time designate.
8.4 Fiscal Year. The fiscal year of the Corporation shall be fixed from
time to time by the Board of Directors.
8.5 Reliance upon Books, Reports and Records. Each Director, each
member of a committee designated by the Board of Directors, and each officer of
the Corporation shall, in the performance of his or her duties, be fully
protected in relying in good faith upon such information, opinions, reports or
statements, including financial statements and other financial data, prepared or
presented to the Corporation by: (i) any of the Corporation's officers or
employees who the Director reasonably believes to be reliable and competent in
the matters presented; (ii) legal counsel, public accountants, investment
bankers or other persons as to matters the Director reasonably believes are
within the person's professional or expert competence; or (iii) committees of
the Board of Directors of which he is not a member if the Director reasonably
believes the committee merits confidence.
8.6 Time Periods. In applying any provision of these Bylaws that
requires that an act be done or not be done a specified number of days prior to
an event, or that an act be done during a period of a specified number of days
prior to an event, calendar days shall be used, the day of the doing of the act
shall be excluded, and the day of the event shall be included.
8.7 Fair Price Requirements. The Corporation shall be governed by all
of the requirements of Part 2 of Article 11 of the Georgia Business Corporation
Code.
22
<PAGE> 23
8.8 Business Combinations with Interested Shareholders. The Corporation
shall be governed by all of the requirements of Part 3 of Article 11 of the
Georgia Business Corporation Code.
8.9 Indemnification. Each person who is or was or had agreed to become
a Director or officer of the Corporation, or each such person who is or was
serving or who had agreed to serve at the request of the Board of Directors or
an officer of the Corporation as an employee or agent of the Corporation or as a
Director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise (including the heirs, executors,
administrators or estate of such person), shall be indemnified by the
Corporation to the fullest extent permitted by the Georgia Business Corporation
Code or any other applicable laws as presently or hereafter in effect. The right
to indemnification granted by this Section 8.9 shall include the right to be
paid in advance expenses incurred in defending a proceeding. The Corporation
may, by action of the Board of Directors, provide indemnification to other
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of Directors and officers. The right of
indemnification provided in this Section 8.9 shall not be exclusive of any other
rights to which any person seeking indemnification may otherwise be entitled,
and shall be applicable to matters otherwise within its scope irrespective of
whether such matters arose or arise before or after the adoption of this Section
8.9. Without limiting the generality or the effect of the foregoing, the
Corporation may enter into one or more agreements with any person, which provide
for indemnification greater or different than that provided in this Section 8.9.
No amendment, modification or repeal of this Article shall adversely affect any
right or
23
<PAGE> 24
protection of a Director, officer, employee or agent that exists at the time of
such amendment, modification or repeal.
24
<PAGE> 1
EXHIBIT 4.1
CHILDCARE
CN NETWORK, INC.
(LOGO)
<TABLE>
<S> <C> <C>
COMMON STOCK SEE REVERSE FOR
NO PAR VALUE CERTAIN DEFINITIONS
INCORPORATED UNDER THE LAWS OF THE STATE OF GEORGIA CUSIP 16871P 10 6
THIS CERTIFIES THAT
is the owner of [SPECIMEN]
FULLY-PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
- ---------------------------------------------------- CHILDCARE NETWORK, INC. ----------------------------------------------------
transferable on the books of the Corporation in person or by duly authorized attorney, upon the surrender of this certificate
properly endorsed. This certificate is not valid unless countersigned by the Transfer Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.
Dated:
/s/ Joseph G. Slaughter, III /s/ Ray E. Crowley
SECRETARY (SEAL) CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Countersigned and Registered:
BY FIRST UNION NATIONAL BANK TRANSFER AGENT
(CHARLOTTE, NC) AND REGISTRAR
AUTHORIZED SIGNATURE
</TABLE>
<PAGE> 2
CHILDCARE NETWORK, INC.
The Corporation will furnish without charge to each stockholder who so
requests a statement or summary of the powers, designations, preferences and
relative, participating, optional or other special rights of each class of
stock or series thereof which the Corporation is authorized to issue and of the
qualifications, limitations or restrictions of such preferences and/or rights.
Such request may be made to the office of the Secretary of the Corporation or
the Transfer Agent named on the face of this Certificate.
The following abbreviations, when used in the inscription on the face
of this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- _____________ Custodian ___________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act _______________________________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, __________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_____________________________________________________________________, Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ____________________________________
_______________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
________________________________________
SIGNATURE(S) GUARANTEED: THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-16.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MULTILATED OR
DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
<PAGE> 1
EXHIBIT 4.2
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement"), made as of this
31st day of May, 1998, by and among the shareholders listed on the signature
page hereto (collectively referred to hereinafter as the "Investors") and
Childcare Network, Inc., a Georgia corporation (the "Company");
W I T N E S E T H:
WHEREAS, the Investors own the outstanding shares of the Company's
common stock;
WHEREAS, the Investors are parties to that certain Cross-Purchase
Agreement dated October 17, 1988 (the "Cross-Purchase Agreement");
WHEREAS, the Investors desire to terminate the Cross-Purchase
Agreement and to enter into an agreement providing certain registration rights
and providing for certain lock-up provisions in the event of a public offering
of the Company's common stock; and
WHEREAS, the Company desires to enter into an agreement regulating the
relative rights of the Investors and the Company in the event of a public
offering of the Company's common stock;
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto do agree to enter into the agreements
contained hereinbelow as follows:
1. REGISTRATION RIGHTS.
1.1 Certain Definitions. As used in this Agreement, in addition to
the terms defined above, the following terms shall have the following
respective meanings:
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"Common Stock" shall mean common stock, no par value per share, of the
Company.
"Holders" shall mean the Investors and any other person holding
Registrable Securities to whom these registration rights have been transferred
pursuant to Section 1.9 hereof.
<PAGE> 2
"Initial Public Offering" shall mean the effectiveness of the filing
of the first registration statement under the Securities Act that covers the
offer and sale to the public of Common Stock by the Company.
"Other Shareholders" shall mean persons other than Holders who, by
virtue of agreements with the Company, are entitled to include their securities
in a registration effected pursuant to this Agreement.
The terms "register," "registered" and "registration" refer to the
effectiveness of a registration statement prepared and filed in compliance with
the Securities Act.
"Registrable Securities" shall mean all shares of Common Stock held by
the Holders, together with any shares of Common Stock issued with respect
thereto upon any stock split, stock dividend, recapitalization or similar
event;
"Registration Expenses" shall mean all expenses incurred by the
Company in complying with Section 1.2 hereof, including, without limitation,
all registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, reasonable fees and expenses of a single counsel for
the selling Holders, state "blue sky" fees and expenses, and accountants'
expenses, including without limitation any special audits incident to or
required by any such registration (but excluding the compensation of regular
employees of the Company, which shall be paid in any event by the Company and
any additional disbursements of counsel for the selling Holders, which shall be
paid by such selling Holders).
"Securities Act" shall mean the federal Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Securities Exchange Act" shall mean the federal Securities Exchange
Act of 1934, as amended, or any similar federal statute and the rules and
regulations of the Commission thereunder, all as the same shall be in effect at
the time.
"Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities and any other
securities of the Company being sold in the same registration as the
Registrable Securities by the Company or Other Shareholders.
- 2 -
<PAGE> 3
1.2 Company Registration.
1.2.1 If the Company shall determine to register any of its
securities in connection with the public offering of such securities solely for
cash on a form that would permit the registration of the Registrable Securities
other than on Form S-8, Form S-4 or another form not available for registering
the Registrable Securities for sale to the public, the Company shall promptly
give to each Holder written notice of such registration (a "Piggyback
Registration"), which shall include a list of the jurisdictions in which the
Company intends to attempt to qualify such securities under the applicable blue
sky or other state securities laws; and include in such registration (and any
related qualification under blue sky laws or other compliance), and in any
underwriting involved therein, all the Registrable Securities specified in a
written request or requests, made by any Holder or Holders within fifteen (15)
days after receipt of such written notice from the Company, subject to the
underwriter limitations, if any, described in Subsection 1.2.3 hereof. The
Company shall have the right to withdraw or cease to prepare or file any
registration statement for any offering referred to in this Subsection 1.2.1
without any obligation or liability to any Holder.
1.2.2 Number of Piggyback Registrations. Subject to the
underwriter limitations, if any, described in Subsection 1.2.3 below, each
Holder shall be entitled to have its Registrable Securities included in (i) the
Initial Public Offering and (ii) in an unlimited number of Piggyback
Registrations pursuant to this Section 1.2 until such time as the number of
Registrable Securities held by any such Holder does not exceed three percent
(3%) of the shares outstanding of the Company as shown by the most recent
report or statement published by the Company and filed with the Commission.
1.2.3 Underwriting. If the registration of which the Company
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Subsection 1.2.1 hereof. In such event the right of any Holder to
registration pursuant to Subsection 1.2.1 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting
shall (together with the Company and Other Shareholders distributing their
securities through such underwriting) enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for underwriting
by the Company. Notwithstanding any other provision of this Section 1.2, if the
underwriter reasonably determines that marketing factors require a limitation
on the number of shares to be underwritten, the number of shares that may be
included in the registration shall be allocated among the Holders and Other
Shareholders requesting registration of securities in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities and other
securities that such Holders had requested to be included in such registration.
The Company shall advise all holders of securities requesting registration as
to the number of shares or securities that may be included in the registration
and underwriting as allocated in the foregoing manner. No such reduction shall
be made with respect to securities offered by the Company for its own account.
If any Holder or Other Shareholder disapproves of the terms of any such
underwriting, such person may elect to withdraw therefrom by written notice to
the Company and the underwriter. Any Registrable Securities or other
- 3 -
<PAGE> 4
securities excluded or withdrawn from such underwriting shall also be withdrawn
from such registration.
1.3 Expenses of Registration. All Registration Expenses incurred in
connection with any registration, qualification or compliance pursuant to this
Agreement shall be borne by the Company; and all Selling Expenses shall be
borne by the Holders, the Other Shareholders of the securities so registered
and the Company, to the extent of securities registered on its behalf, pro rata
on the basis of the number of their shares so registered; provided, however,
that if any jurisdiction in which the securities shall be qualified shall
require that expenses incurred in connection with the qualification of the
securities in that jurisdiction be borne by the selling shareholders, then such
expenses shall be payable by the selling shareholders pro rata to the extent
required by such jurisdiction.
1.4 Registration Procedures. In the case of each registration
effected by the Company pursuant to this Agreement, the Company shall keep each
Holder advised in writing as to the initiation of each registration and as to
the completion thereof. At its expense the Company shall use its best efforts
to:
1.4.1 keep such registration effective for a period of one
hundred eighty (180) days or until the distribution described in the
registration statement relating thereto has been completed, whichever first
occurs; and
1.4.2 furnish such number of prospectuses and other documents
incident thereto as a Holder from time to time may reasonably request.
1.5 Indemnification.
1.5.1 With respect to each Holder whose securities have been
registered pursuant to this Agreement, the Company shall indemnify such Holder,
each of such Holder's officers, directors and partners, and each person
controlling (as defined in Subsection 1.5.4 below) such Holder and each of such
controlling person's officers, directors and partners, and shall also indemnify
each underwriter, if any, and each person who controls any underwriter, against
all claims, losses, damages and liabilities (or actions in respect thereof)
arising out of or based on any untrue statement (or alleged untrue statement)
of a material fact contained in any prospectus, offering circular or other
document (including any related registration statement, notification or the
like) incident to any such registration, qualification or compliance, or based
on any omission (or alleged omission) to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, or any violation by the Company of any rule or regulation
promulgated under the Securities Act applicable to the Company and relating to
action or inaction required of the Company in connection with any such
registration, qualification or compliance, and shall reimburse each such Holder
and each person controlling such Holder, and each of such controlling person's
officers, directors and partners, each of its officers, directors and partners,
each such underwriter, and each person who controls such underwriter, for any
legal and other expenses reasonably incurred in connection with investigating
or defending any such claim, loss, damage, liability or action; provided,
however, that the Company shall not be liable in any such case to the extent
that any such claim, loss, damage, liability or expense arises out of
- 4 -
<PAGE> 5
or is based upon written information furnished to the Company by the Holder or
on behalf of the Holder by the officers, directors or partners of the Holder
seeking to be indemnified, where such information is stated to be specifically
for use in such prospectus, offering circular or related document.
1.5.2 Each Holder and Other Shareholder shall, if securities
held by him or it are included among the securities as to which such
registration, qualification or compliance is being effected, indemnify the
Company, each of its directors and officers, each underwriter, if any, of the
Company's securities covered by such a registration statement, each person who
controls (as defined in Subsection 1.5.4 below) the Company or such
underwriter, and each other such Holder and Other Shareholder and each of such
controlling person's officers, directors and partners, and each person
controlling such Holder or Other Shareholder and each of such controlling
person's officers, directors and partners, against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and shall reimburse the Company and such Holders, Other
Shareholders, directors, officers, partners, persons, underwriters and control
persons for any legal or any other expenses reasonably incurred in connection
with investigating or defending any such claim, loss, damage, liability or
action, in each case to the extent, but only to the extent, that such untrue
statement (or alleged untrue statement) or omission (or alleged omission) is
made in such registration statement, prospectus, offering circular or other
document in reliance upon and in conformity with written information furnished
to the Company by such Holder or Other Shareholder specifically for use
therein; provided, however, that the obligations of such Holder or Other
Shareholder hereunder shall be limited to an amount equal to the proceeds to
such Holder or Other Shareholder of securities sold as contemplated herein.
1.5.3 Each party entitled to indemnification under this
Section 1.5 (the "Indemnified Party") shall give notice to the party required
to provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may
be sought and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or any
litigation resulting therefrom, shall be approved by the Indemnified Party
(whose approval shall not be withheld unreasonably), and the Indemnified Party
may participate in such defense at such Indemnified Party's expense. The
failure of any Indemnified Party to give notice as provided herein shall
relieve the Indemnifying Party of its obligations under this Section 1.5 only
if such failure is prejudicial to the ability of the Indemnifying Party to
defend such action, and such failure shall in no event relieve the Indemnifying
Party of any liability that he or it may have to any Indemnified Party
otherwise than under this Section 1.5. No Indemnifying Party, in the defense of
any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any
settlement that does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such Indemnified Party of a release from all
liability with respect to such claim or litigation, provided that such
unconditional release may
- 5 -
<PAGE> 6
be subject to a parallel release of a claimant or plaintiff by such Indemnified
Party from all liability in respect of claims or counterclaims asserted by such
Indemnified Party.
1.5.4 For purposes of this Section 1.5, the term "control" shall
have the meaning assigned thereto under the Securities Act.
1.6 Information by Holders and Other Shareholders. Each Holder or
Other Shareholder of securities included in any registration shall furnish to
the Company such information regarding such Holder or Other Shareholder and the
distribution proposed by such Holder or Other Shareholder as the Company may
request in writing and as shall be required in connection with any
registration, qualification or compliance referred to in this Agreement.
1.7 Limitations on Registration of Issues of Securities. From and
after the date of this Agreement, without the consent of the holders of a
majority of the Registrable Securities then issued and outstanding, the Company
shall not enter into any agreements with any holder or prospective holder of
any securities of the Company that, upon any registration of any of its
securities, the Company will include among the securities that it then
registers securities owned by such holder or prospective holder except to the
extent such agreement could give such holder or prospective holder rights no
greater than those of an Other Shareholder under this Article 1 with respect to
a Piggyback Registration. In any event, any registration rights given by the
Company to any holder or prospective holder of its securities shall be
consistent with the registration and other rights provided in this Agreement.
Notwithstanding the foregoing, the Company may enter into an agreement with any
holder or prospective holder of any securities of the Company giving such
holder or prospective holder the right to require the Company to initiate
registration of any securities of the Company, in which case the rights of such
holder would be superior to the rights of the holders of Registrable
Securities.
1.8 Rule 144 Reporting. With a view to making available the benefits
of certain rules and regulations of the Commission that may permit the sale of
the Common Stock to the public without registration, the Company shall:
1.8.1 make and keep public information available as those terms
are understood and defined in Rule 144 promulgated by the Commission under the
Securities Act ("Rule 144"), at all times after ninety (90) days following the
Initial Public Offering;
1.8.2 file with the Commission in a timely manner all reports
and other documents required of the Company under the Securities Act and the
Securities Exchange Act at any time after it has become subject to the
reporting requirements thereunder; and
1.8.3 so long as any Holder owns any securities constituting or
representing Registrable Securities, furnish to such Holder forthwith upon
request a written statement by the Company as to its compliance with the
reporting requirements of Rule 144 (at any time after ninety (90) days
following the Initial Public Offering), and of the Securities Act and the
Securities Exchange Act (at any time after it has become subject to the
reporting requirements thereunder), a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents so filed
by the Company as such Holder may reasonably request in availing itself of
- 6 -
<PAGE> 7
any rule or regulation of the Commission allowing such Holder to sell any such
securities without registration.
1.9 Transfer of Registration Rights. The rights to cause the Company
to register securities of the Company under Section 1.2 hereof may be assigned
by any Holder to any transferee of Registrable Securities together with the
securities being transferred, provided that in each case the Company is given
written notice, at the time or within a reasonable time after said transfer,
stating the name and address of said transferee and identifying the securities
with respect to which such registration rights are being assigned. No such
assignment shall be effective unless the transferee shall be required, as a
condition to such transfer, to agree in writing that he or it will receive and
hold such securities subject to the provisions of this Article 1.
1.10 "Market Stand-Off" Agreement. If requested by the Company upon
the recommendation of the Board of Directors of the Company and an underwriter
of Common Stock of the Company, the Holders shall not sell or otherwise
transfer or dispose of any Common Stock of the Company held by them during the
one hundred eighty (180)-day period following the effective date of a
registration statement of the Company filed under the Securities Act, provided
that:
(i) Such agreement shall apply only with respect to an
underwritten Initial Public Offering; and
(ii) Other Shareholders selling securities pursuant to such
registration statement and all officers and directors of the Company enter into
similar agreements.
Such agreement shall be in writing in form satisfactory to the Company
and such underwriter. The Company may impose stop-transfer instructions with
respect to the shares (or securities) subject to the foregoing restriction
until the end of said one hundred eighty (180)-day period.
2. MISCELLANEOUS.
2.1 Governing Law. This Agreement shall be governed and construed
under the laws of the State of Georgia, notwithstanding the fact that one or
more parties to this Agreement may be a resident of a different state.
2.2 Successors and Assigns. The rights and obligations set forth in
this Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective legal representatives, successors and assigns.
2.3 Captions. The captions of the several sections and paragraphs of
this Agreement are included for reference only and shall not limit or otherwise
affect the meaning thereof.
2.4 Amendments. Neither this Agreement nor any term of provision
hereof may be amended, waived, discharged or terminated except in writing
signed by all parties to this Agreement.
- 7 -
<PAGE> 8
2.5 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which taken
together shall constitute but one and the same instrument.
[SIGNATURES APPEAR ON SUCCEEDING PAGES]
- 8 -
<PAGE> 9
IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement on the date first written above.
THE COMPANY:
CHILDCARE NETWORK, INC.
By: /s/ Ray E. Crowley
-----------------------------------------
Title: CEO
--------------------------------------
INVESTORS:
/s/ Estate of Noll A. Van Cleave
--------------------------------------------
by Elizabeth Jane Van Cleave (Executix)
--------------------------------------------
EXECUTOR OF THE ESTATE OF
NOLL VAN CLEAVE
/s/ Noll A. Van Cleave, Jr.
--------------------------------------------
NOLL A. VAN CLEAVE, JR.
/s/ Elizabeth Van Cleave Harp
--------------------------------------------
ELIZABETH VAN CLEAVE HARP
/s/ Devery Van Cleave Harp
--------------------------------------------
DEVERY VAN CLEAVE WRIGHT
/s/ John M. Wright
--------------------------------------------
JOHN M. WRIGHT
/s/ Ernest S. Right
--------------------------------------------
ERNEST S. WRIGHT
- 9 -
<PAGE> 10
/s/ Sundari Raju
--------------------------------------------
SUNDARI RAJU
/s/ Murray D. Gray, Jr.
--------------------------------------------
MURRAY D. GRAY, JR.
/s/ Murray D. Gray, III
--------------------------------------------
MURRAY D. GRAY, III
/s/ Bernice Horne
--------------------------------------------
BERNICE HORNE
/s/ Louise Lewis
--------------------------------------------
LOUISE LEWIS
/s/ Richard Y. Bradley
--------------------------------------------
RICHARD Y. BRADLEY
/s/ Ray E. Crowley
--------------------------------------------
RAY E. CROWLEY
/s/ Albert Ernest, Jr.
--------------------------------------------
ALBERT ERNEST, JR.
/s/ James F. Loudermilk
--------------------------------------------
JAMES F. LOUDERMILK
- 10 -
<PAGE> 11
/s/ Steven Marcontell
-----------------------------------------------
by James F. Loudermilk P.O.A
-----------------------------------------------
STEVEN MARCONTELL
/s/ Jennifer L. Marcontell
-----------------------------------------------
by James F. Loudermilk P.O.A.
-----------------------------------------------
JENNIFER L. MARCONTELL
/s/ Lara Lea Loudermilk Hughes
-----------------------------------------------
by James F. Loudermilk P.O.A.
-----------------------------------------------
LARA LEA LOUDERMILK
/s/ Russel D. Horne
-----------------------------------------------
RUSSELL D. HORNE
/s/ John Anderson Harp
-----------------------------------------------
JOHN ANDERSON HARP
- 11 -
<PAGE> 1
EXHIBIT 10.1
CHILDCARE NETWORK, INC.
1998 STOCK OPTION PLAN
1. PURPOSE. The purpose of this Plan is to promote share ownership by key
employees and directors of Childcare Network, Inc., thereby reinforcing a
mutuality of interest with other shareholders, and to enable Childcare Network,
Inc. to attract, retain and motivate key employees and directors by permitting
them to share in its growth.
2. DEFINITIONS. As used in this Plan,
"Affiliate" means (a) a corporation which, for purposes of Section 422
of the Code, is a parent or subsidiary of the Company, and (b) any other entity
in which the Company has a substantial equity investment, as designated by the
Board.
"Board" means the Board of Directors of the Company and, to the extent
of any delegation by the Board to a committee (or subcommittee thereof) pursuant
to Section 11 of this Plan, such committee (or subcommittee).
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.
"Common Shares" means the Common Shares, no par value, of Childcare
Network, Inc.
"Company" means Childcare Network, Inc., a Georgia corporation.
"Date of Grant" means the date specified by the Board on which a grant
of Options shall become effective (which date shall not be earlier than the date
on which the Board takes action with respect thereto).
"Director" means a member of the Board of Directors of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder, as such law, rules and regulations may
be amended from time to time.
"Fair Market Value" means, as of any given day, the per share closing
price of a Common Share on Nasdaq on the day preceding the day such
determination is being made or, if there was no closing price reported on such
day, on the most recently preceding day on which such a closing price was
reported; or if the Common Shares are not listed or admitted to trading on
Nasdaq on the day as of which the determination is being made, the amount
determined by the Board to be the fair market value of a Common Share on such
day.
<PAGE> 2
"Incentive Stock Options" means Options that are intended to qualify as
"incentive stock options" under Section 422 of the Code or any successor
provision.
"Nasdaq" means The Nasdaq Stock Market.
"Optionee" means the optionee named in an agreement evidencing an
outstanding Option.
"Option Price" means the purchase price payable on exercise of an
Option.
"Option" means the right to purchase Common Shares upon exercise of an
option granted pursuant to Section 4 of this Plan.
"Participant" means a person who is selected by the Board to receive
benefits under this Plan and who is at the time a key employee or Director of
the Company or an Affiliate, or who has agreed to commence serving in any of
such capacities within 30 days of the Date of Grant.
"Plan" means this 1998 Stock Option Plan of the Company, as amended from
time to time.
"Rule 16b-3" means Rule 16b-3 under the Exchange Act (or any successor
rule to the same effect) as in effect from time to time.
3. SHARES AVAILABLE.
(a) Subject to adjustment as provided in Section 5 of this Plan, the
total number of Common Shares which may be issued and sold under Options granted
pursuant to this Plan shall not exceed 500,000 Common Shares. Such shares may be
treasury shares or shares of original issue or a combination of the foregoing.
(b) Notwithstanding anything in this Section 3, or elsewhere in this
Plan, to the contrary, and subject to adjustment as provided in Section 5 of
this Plan, (i) the aggregate number of Common Shares actually issued or
transferred by the Company upon the exercise of Incentive Stock Options shall
not exceed 500,000 Common Shares; and (ii) no individual participant shall be
granted Options under this Plan for more than 200,000 Common Shares.
4. OPTIONS. The Board may, from time to time and upon such terms and
conditions as it may determine, authorize the granting of Options to
Participants. Each such grant shall be subject to all of the requirements
contained in the following provisions and such other terms:
(a) Each grant shall specify the number of Common Shares to which it
pertains, subject to the limitations set forth in Section 3 of this Plan.
(b) Each grant shall specify an Option Price per share, which may not be
less than the Fair Market Value on the Date of Grant.
2
<PAGE> 3
(c) The Option Price shall be payable (i) in cash or by other
consideration acceptable to the Company, (ii) by the actual or constructive
transfer to the Company of Common Shares owned by the Optionee for at least 6
months having a value at the time of exercise equal to the total Option Price,
or (iii) by a combination of such methods of payment.
(d) Any grant may provide for deferred payment of the Option Price from
the proceeds of sale through a broker on a date satisfactory to the Company of
some or all of the Common Shares to which such exercise relates.
(e) Successive grants may be made to the same Optionee whether or not
any Options previously granted to such Optionee remains unexercised.
(f) Each grant shall specify the period or periods of continuous service
by the Optionee with the Company or any of its Affiliates that is necessary
before the Options or installments thereof will become exercisable and may
provide for earlier exercise of the Option, including, without limitation, in
the event of a change in control of the Company or similar event.
(g) Options granted under this Plan may be (i) options that are intended
to qualify under particular provisions of the Code, including, without
limitation, Incentive Stock Options, (ii) options that are not intended so to
qualify under the Code, or (iii) combinations of the foregoing.
(h) Except as otherwise determined by the Board, no Option shall be
transferable by the Optionee except by will or the laws of descent and
distribution. Except as otherwise determined by the Board, Options shall be
exercisable during the Optionee's lifetime only by the Optionee or, in the event
of the Optionee's legal incapacity to do so, the Optionee's guardian or legal
representative acting on behalf of the Optionee in a fiduciary capacity under
state law and court supervision.
(i) No Option shall be exercisable more than 10 years from the Date of
Grant.
(j) An Optionee may exercise an Option in whole or in part at any time
and from time to time during the period within which an Option may be exercised.
To exercise an Option, an Optionee shall give written notice to the Company
specifying the number of Common Shares to be purchased and provide payment of
the Option Price and any other documentation that may be required by the
Company.
(k) An Optionee shall be treated for all purposes as the owner of record
of the number of Common Shares purchased pursuant to exercise of the Option (in
whole or in part) as of the date the conditions set forth in Section 4(j) are
satisfied.
(l) To the extent required for "Incentive Stock Option" status under
Section 422 of the Code, the aggregate Fair Market Value (determined as of the
Date of Grant) of the Common Shares with respect to which Incentive Stock
Options are exercisable for the first time by the Optionee during any calendar
year under the Plan and/or any other stock option plan of the Company (within
the meaning of Section 424 of the Code) shall not exceed $100,000.
3
<PAGE> 4
(m) The Board may permit Optionees to elect to defer the issuance of
Common Shares under this Plan pursuant to such rules, procedures or programs as
it may establish for purposes of this Plan. The Board also may provide that
deferred issuances and settlements include the payment or crediting of dividend
equivalents or interest on the deferral amounts.
(n) On receipt of written notice to exercise, the Board may, in its sole
discretion, elect to cash out all or part of the portion of the Option(s) to be
exercised by paying the Optionee an amount, in cash or Common Shares, equal to
the excess of the Fair Market Value of the Common Shares over the Option Price
on the effective date of such cash-out.
5. ADJUSTMENTS. The Board may make or provide for such adjustments in the
Option Price and in the number or kind of shares or other securities covered by
outstanding options as the Board in its sole discretion may in good faith
determine to be equitably required in order to prevent dilution or enlargement
of the rights of Optionees that would otherwise result from any (a) stock
dividend, stock split, combination of shares, recapitalization or other change
in the capital structure of the Company, (b) merger, consolidation, separation,
reorganization, partial or complete liquidation, issuance of rights or warrants
to purchase stock or (c) other corporate transaction or event having an effect
similar to any of the foregoing. Moreover, in the event of any such transaction
or event, the Board, in its discretion, may provide in substitution for any or
all outstanding options under this Plan such alternative consideration as it, in
good faith, may determine to be equitable in the circumstances and may require
in connection therewith the surrender of all options so replaced. The Board may
also make or provide for such adjustments in the number of shares specified in
Section 3 of this Plan as the Board in its sole discretion, exercised in good
faith, may determine is appropriate to reflect any transaction or event
described in this Section 5; provided, however, that any such adjustment to the
number specified in Section 3(b)(i) shall be made only if and to the extent that
such adjustment would not cause any Option intended to qualify as an Incentive
Stock Option to fail so to qualify.
Notwithstanding anything herein to the contrary, the Company may, in its
sole discretion, accelerate the timing of the exercise provisions of any Option
in the event of a tender offer for the Company's Common Shares, the adoption of
a plan of merger or consolidation under which a majority of the Common Shares of
the Company would be eliminated, or a sale of substantially all of the Company's
assets. Alternatively, the Company may, in its sole discretion, cancel any or
all Options upon any of the foregoing events and provide for the payment to
Participants in cash of an amount equal to the value or appreciated value,
whichever is applicable, of the Option, as determined in good faith by the
Board, at the close of business on the date of such event. The preceding two
sentences of this section notwithstanding, the Company shall be required to
accelerate the timing of the exercise provisions of any Option if (i) any such
business combination is to be accounted for as a pooling-of-interests under APB
Opinion 16 and (ii) the timing of such acceleration does not prevent such
pooling-of-interests treatment.
6. STOCK OPTION AGREEMENT. The form of each Stock Option Agreement shall be
prescribed, and any Stock Option Agreement evidencing an outstanding Option may
with the concurrence of the affected Optionee be amended, by the Board, provided
that the terms and conditions of each Stock Option Agreement and amendment are
not inconsistent with this Plan
4
<PAGE> 5
and that no amendment shall adversely affect the rights of the Optionee with
respect to any outstanding Option without the Optionee's consent.
7. CANCELLATION OF OPTIONS. The Board may, with the concurrence of the
affected Optionee, cancel any option granted under this Plan. In the event of
any such cancellation, the Board may authorize the granting of new options
(which may or may not cover the same number of Common Shares that had been the
subject of any prior option) in such manner, at such Option Price and subject to
the same terms, conditions and discretion as would have been applicable under
this Plan had the cancelled options not been granted.
8. WITHHOLDING. No later than the date as of which an amount first becomes
includible in the gross income of the Optionee for applicable income tax
purposes with respect to any Option under the Plan, the Optionee shall pay to
the Company, or make arrangements satisfactory to the Board regarding the
payment of, any Federal, state or local taxes of any kind required by law to be
withheld with respect to such amount. Unless otherwise determined by the Board,
the minimum required withholding obligations may be settled with Common Shares,
including Common Shares that are part of the award that gives rise to the
withholding requirement. The obligations of the Company under this Plan shall be
conditional on such payment or arrangements and the Company shall, to the extent
permitted by law, have the right to deduct any such taxes from any payment of
any kind otherwise due to the Optionee.
9. GOVERNING LAW. The Plan and all Options granted and actions taken
thereunder shall be governed by and construed in accordance with the laws of the
State of Georgia.
10. FRACTIONAL SHARES. The Company shall not be required to issue any
fractional Common Shares pursuant to this Plan. The Board may provide for the
elimination of fractions or for the settlement of fractions for cash.
11. ADMINISTRATION. This Plan shall be administered by the Board, which may
from time to time delegate all or any part of its authority under this Plan to a
committee of not less than two Directors appointed by the Board. The members of
the committee shall be "Non-Employee Directors" within the meaning of Rule 16b-3
and "outside directors" within the meaning of Section 162(m) of the Code. To the
extent of any such delegation, references in this Plan to the Board shall also
refer to the committee. A majority of the members of the committee shall
constitute a quorum, and any action taken by a majority of the members of the
committee who are present at any meeting of the committee at which a quorum is
present, or any actions of the committee that are unanimously approved by the
members of the committee in writing, shall be the acts of the committee. The
Board shall have the authority to delegate responsibility and authority for the
operation and administration of this Plan, appoint employees and officers of the
Company and Affiliates to act on its behalf, and employ persons to assist in
fulfilling its responsibilities under this Plan.
12. AMENDMENT. This Plan may be amended from time to time by the Board;
provided, however, that any amendment which must be approved by the shareholders
of the Company in order to comply with applicable law or the rules of Nasdaq, or
if the Common Shares
5
<PAGE> 6
are not quoted on Nasdaq, the principal national securities exchange upon which
the Common Shares are traded or quoted, shall not be effective unless and until
such approval has been obtained. Presentation of this Plan or any amendment
hereof for shareholder approval shall not be construed to limit the Company's
authority to offer similar or dissimilar benefits under other plans without
shareholder approval. Furthermore, no amendment, alteration or discontinuation
of this Plan shall be made which would impair the rights of an Optionee with
respect to any outstanding Option under this Plan without the Optionee's
consent, or which, without approval of the Company's shareholders, would (a)
except as expressly provided in this Plan, increase the total number of Common
Shares reserved for this Plan or (b) extend the maximum option period applicable
under this Plan.
13. EFFECTIVE DATE. This Plan shall be effective immediately; provided,
however, that the effectiveness of this Plan is conditioned on its approval by
the shareholders of the Company at a meeting duly held in accordance with
Georgia law within 12 months after the date this Plan is adopted by the Board.
All awards under this Plan shall be null and void if the Plan is not approved by
the shareholders within such 12-month period.
14. TERM. No Option shall be granted pursuant to this Plan on or after the
tenth anniversary of the date this Plan is adopted by the Board, but awards
granted prior to such tenth anniversary may extend beyond that. The date this
Plan is adopted by the Board shall be May 11, 1998.
15. AWARDS IN SUBSTITUTION FOR AWARDS GRANTED BY OTHER COMPANIES. To the
extent not otherwise provided in the Plan, Options may be granted under this
Plan in substitution for awards held by employees of a company who become
employees of the Company or an Affiliate as a result of the acquisition, merger
or consolidation of the employer company by or with the Company or an Affiliate.
The terms, provisions and benefits of the substitute awards so granted may vary
from those set forth in or authorized by this Plan to such extent as the Board
at the time of the grant may deem appropriate to conform, in whole or in part,
to the terms, provisions and benefits of awards in substitution for which they
are granted.
6
<PAGE> 1
EXHIBIT 10.2
FOURTH AMENDED AND FULLY RESTATED LOAN
AND REVOLVING LINE OF CREDIT AGREEMENT
THIS FOURTH AMENDED AND FULLY RESTATED LOAN AND REVOLVING LINE OF
CREDIT AGREEMENT, dated as of June 19, 1998, ("Restated Agreement") by and
between CHILDCARE NETWORK, INC., a Georgia corporation ("Borrower"), and
SUNTRUST BANK, WEST GEORGIA, N.A., formerly, Trust Company Bank of Columbus,
N.A., a national banking association ("Lender").
WITNESSETH:
WHEREAS, Borrower and Lender entered into a Term Loan and Revolving
Line of Credit Agreement dated as of March 26, 1993 ("Agreement") which was
modified by a Modification to Term Loan and Revolving Line of Credit Agreement
dated as of May 6, 1994, further modified by the Second Modification to Term
Loan and Revolving Line of Credit Agreement dated as of June 30, 1995, and
further modified by Third Modification to Term Loan and Revolving Line of Credit
Agreement dated as of June 26,1997 (the Agreement, as modified, being herein
referred to as the "Modified Agreement");
WHEREAS, Borrower has requested that Lender extend a revolving line of
credit to Borrower in an aggregate principal amount not to exceed $13,000,000.00
("1998 Revolving Line of Credit") at any one time outstanding; and a line of
credit in the amount of $2,000,000.00 ("1998 Line of Credit") for Borrower's
working capital needs and to finance acquisitions and refinance existing
indebtedness owed by Borrower to Lender; and
WHEREAS, Lender has agreed to extend the 1998 Revolving Line of Credit
and the 1998 Line of Credit to Borrower upon the terms and conditions set forth
and contained herein; and
WHEREAS, Lender and Borrower have agreed to amend and restate the
Agreement dated as of March 26, 1993 as amended by the First, Second and Third
Amendments to the Agreement dated as of May 6, 1994, June 30, 1995 and June 26,
1997 respectively, (the Modified Agreement).
NOW, THEREFORE, for and in consideration of the sum of $10.00 in hand
paid by Lender to Borrower, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree and contract that the Modified Agreement is hereby restated and amended in
its entirely as follows:
1
<PAGE> 2
ARTICLE I
AMOUNT, TERMS OF BORROWINGS AND COLLATERAL
Section 1.1 - 1998 Line of Credit and 1998 Revolving Line of Credit.
Subject to the terms and conditions set forth in this Restated Agreement, Lender
agrees to lend Borrower the aggregate principal amount of $15,000,000.00 to be
evidenced by (i) the 1998 Line of Credit Note in the principal amount of
$2,000,000.00, a copy of which is hereto annexed as Exhibit "A" which shall have
a maturity of two years from date and which may be extended for one year
pursuant to the terms of said Note ("1998 LC Note"); and (ii) the 1998 Revolving
Line of Credit Note in the amount of $13,000,000.00, a copy of which is hereto
annexed as Exhibit "B" which will mature five years from the date hereof ("1998
RLC Note"). Provided, however, that the Lender's obligation to advance funds,
and Borrower's ability to borrow and reborrow, under said 1998 Line of Credit
and the 1998 Revolving Line of Credit is conditioned upon Borrower being in
compliance with the terms of this Agreement and that no Event of Default exists
under the terms hereof or under any other Loan Documents between Lender and
Borrower. Notwithstanding anything to the contrary contained herein or in the
1998 LC Note or the 1998 RLC Note, the interest rate or index chosen by the
Borrower shall always be the same for said Notes and Borrower's Obligations to
the Bank. The proceeds from said Notes are to be used to finance working capital
needs and to finance acquisitions and refinance existing indebtedness owed by
Borrower to Lender.
Section 1.2 - Collateral. The indebtedness evidenced by the 1998 LC
Note, 1998 RLC Note and all Obligations of Borrower shall be secured by (i) the
Borrower's furnishings, furniture, fixture, equipment, machinery, inventories,
supplies and all other personal property of every kind and nature used in
connection with Borrower's childcare centers or hereafter acquired by Borrower,
(ii) security title to and a security interest in all of Borrower's leasehold
interests of leased property whether now existing or hereafter acquired on which
is located Borrower's childcare centers and (iii) security title to and a
security interest in all real estate owned by Borrower or hereafter acquired,
all of which have been assigned or conveyed to the Lender pursuant to the Loan
Documents, including, without limitation, those certain deeds to secure debt
each from Borrower to the Lender: Deed to Secure Debt, Financing Statement and
Security Agreement dated March 26, 1993, filed for record March 26, 1993 and
recorded in Deed Book 3760, page 1 in the Office of the Clerk of the Superior
Court of Muscogee County, Georgia; Deed to Secure Debt, Financing Statement and
Security Agreement dated March 26, 1993, filed for record March 29, 1993 and
recorded in Deed Book 2279, page 55 in the Office of the Clerk of the Superior
Court of Bibb County, Georgia; Deed to Secure Debt, Financing Statement and
Security Agreement dated March 26, 1993, filed for record March 26, 1993 and
recorded in Deed Book 1015, page 337 in the Office of the Clerk of the Superior
Court of Houston County, Georgia; Deed to Secure Debt, Financing Statement and
Security Agreement dated March 26, 1993, filed for record March 29, 1993 and
recorded in Deed Book 1592, page 596 in the Office of the Clerk of the Superior
Court of Chatham County, Georgia; Deed to Secure Debt, Financing Statement and
Security Agreement dated March 26, 1993, filed for record March 29, 1993 and
2
<PAGE> 3
recorded in Deed Book 414, page 2025 in the Office of the Clerk of the Superior
Court of Richmond County, Georgia; Deed to Secure Debt, Financing Statement and
Security Agreement dated March 26, 1993, filed for record March 28, 1993 and
recorded in Deed Book 971, page 113 in the Office of the Clerk of the Superior
Court of Lowndes County, Georgia; Mortgage dated March 26, 1993, filed for
record March 29, 1993 and recorded in Volume 1508, page 57 in the Office of the
Clerk of Court, Aiken County, South Carolina; Deed to Secure Debt and Security
Agreement dated June 30, 1995, filed for record July 21, 1995 and recorded in
Deed Book 8987, page 297 in the Office of the Clerk of the Superior Court of
Cobb County, Georgia; Deed to Secure Debt and Security Agreement dated June 30,
1995, filed for record July 5, 1997 and recorded in Deed Book 1510, page 415 in
the Office of the Clerk of the Superior Court of Clarke County, Georgia; and the
Security Agreement dated June 26, 1997.
Section 1.3 Increased Costs. In the event that the introduction of, or
any change in or in the interpretation of or application of any applicable law,
treaty or governmental regulation, or the compliance by the Lender with any
guideline, request or directive (whether or not having the force of law) from
any central bank or other United States or foreign financial, monetary or other
governmental authority, shall: (a) subject the Lender to any tax of any kind
whatsoever with respect to this Restated Agreement, any Advance or any letter of
Credit or change in the basis of taxation of payments to the Lender of
principal, interest, fees or any other amount payable hereunder (except for
changes in the rate of tax in the overall net income of the Lender); (b) impose,
modify or hold applicable any reserve, special deposit, assessment or similar
requirement against assets held by, or deposits in or for the account of,
advances or loans by, or other credit extended by or committed to be extended by
the lender (other than any change by way of imposition or increase of reserve
requirements under Regulation D of the Board of Governors of the Federal Reserve
System, in the case of LIBOR Advances included in the Reserve percentage); or
(c) impose on the Lender or on the London interbank market any other condition
with respect to this Restated Agreement, the Obligations, or any LIBOR Advance
thereunder, and the result of any of the foregoing to increase the cost to the
Lender of making or committing to make, renewing or maintaining any LIBOR
Advance or to reduce the amount of any payment (whether of principal, interest,
or otherwise) in respect to any LIBOR advance, THEN, IN ANY CASE, Borrower shall
promptly pay from time to time, upon demand of the Lender, such additional
amounts as will compensate the Lender for such additional cost or such
reduction, as the case may be. The Lender shall certify the amount of such
additional cost or reduced amount to the Borrower, including a description of
the calculation thereof in reasonable detail, and such certification shall be
conclusive absent manifest error.
Section 1.4 Indemnity. Borrower hereby agrees to indemnify Lender and
hold Lender harmless from any loss, cost or expense it may sustain or incur as a
consequence of (a) the failure by Borrower to complete any LIBOR Advance after
notice thereof has ben given to the Borrower by the lender or (b) the payment or
prepayment of a LIBOR Advance on a day other than the last day of the Interest
Period applicable thereto, including, without limitation, any loss, cost or
expense incurred by reason of the liquidation or reemployment of deposits or
other funds acquired or deemed acquired by the Lender to fund such Advance when
such Advance, as a result of such
3
<PAGE> 4
failure, is not made on such date. The Lender shall certify the amount of its
loss or expense to the Borrower, and such certification shall be conclusive
absent manifest error.
ARTICLE II.
CONDITIONS TO LOAN CLOSING AND ADVANCES
Section 2.1 - Conditions to Effective Date and Obligations of Lender.
The obligation of Lender to advance, at any time, loan funds to Borrower under
this Restated Agreement is subject to the strict satisfaction by Borrower of the
following conditions (all such conditions hereinafter the "Conditions") and this
Restated Agreement shall become effective on the first date such Conditions are
so satisfied (the "Effective Date"). In the event Borrower at any time fails to
meet the Conditions, Lender shall not have any obligation to advance loan funds
to Borrower, but the terms of this Restated Agreement shall continue in full
force and effect with respect to any prior or subsequent advance of loan funds
made to Borrower hereunder.
(a) Opinion of Borrower's Counsel. If requested by Lender,
Borrower shall have delivered to Lender a favorable written opinion from Counsel
to Borrower, dated as of and delivered on the Effective Date, satisfactory to
Lender, with respect to the matters set forth in Sections 3.1, 3.2, 3.5, 3.7
through 3.12, 3.15, 3.17, and 3.18 of this Restated Agreement.
(b) No Defaults; Certificate. Borrower shall be in full
compliance with all the terms and conditions of this Restated Agreement, and no
Default or Event of Default shall have occurred. The representations and
warranties set forth in this Restated Agreement shall be true and correct in all
material respects. Lender shall have received from Borrower a Certificate of
Borrower, substantially in the form of Exhibit "D" attached hereto and
incorporated herein, dated as of and delivered on the Effective Date, certifying
that the representations and warranties set forth herein are accurate, true and
correct in all material respects on and as of such date, and that the schedules
and exhibits attached hereto are accurate, true and correct in all material
respects on and as of such date, and that no Default or Event of Default exists.
Borrower further certifies that it is in compliance and good standing with all
regulatory bodies and agencies.
(c) Corporate Action and Authority; Incumbency Certificate,
Corporate Documents. Borrower shall have delivered to Lender a copy of the
resolutions passed by the Board of Directors of Borrower authorizing the
execution and delivery of and the performance of the obligations under the Loan
Documents and this Restated Agreement and a copy of the Bylaws of Borrower,
certified by the duly elected, qualified and serving Secretary or Assistant
Secretary of Borrower, on behalf of and under the seal of Borrower, to be true
and correct. Borrower also shall have delivered to Lender (i)a certificate,
dated as of and delivered on the Effective Date and signed on behalf of and
under the seal of Borrower by the duly elected, qualified and serving Secretary
or Assistant Secretary of Borrower, certifying the names of the officers of
Borrower authorized to execute and
4
<PAGE> 5
deliver the Loan Documents and this Restated Agreement and to request borrowings
and Advances under this Restated Agreement, together with the original, not
photocopied, signatures of such officers; (ii) certified copies of such
organizational documents as may be required by Lender, including the by-laws of
the Borrower; and (iii) certificates of good standing issued by the Offices of
the Secretaries of each State in which Borrower is qualified to conduct
business.
(d) Delivery of Notes. Borrower shall have executed and
delivered to Lender the 1998 LC Note, the 1998 RLC Note and any other Loan
Documents as may be required by Lender.
(e) Proceedings. The Loan Documents, upon their execution and
delivery, and all corporate proceedings in connection with the authorization,
execution and delivery of and the performance of the obligations under the Loan
Documents, shall be satisfactory in form and substance to Lender.
Section 2.2 - Conditions to Each Advance. At the time of the making by
Lender of each Advance under the 1998 Revolving Line of Credit and 1998 Line of
Credit(including the initial Advance) the following statements shall be true
(and each of the giving by Borrower of a Notice of Borrowing in accordance with
Section 1.3 hereof and the acceptance by Borrower of the proceeds of such
Advance shall constitute a representation and warranty by Borrower that on the
date of such Advance, before and after giving effect thereto and to the
application of the proceeds therefrom, such statements are true):
(i) The representations and warranties contained in Article
III hereof are true and correct in all material respects on and as of the date
of such Advance as though made on and as of such date, and
(ii) No Default or Event of Default exists or would result
from such Advance or from the application of the proceeds therefrom.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
Borrower represents, warrants and covenants to Lender that:
Section 3.1 - Organization and Qualification. Borrower (i) is a
corporation duly organized, validly existing and in good standing under the laws
of the State of its incorporation, with the power and authority (corporate and
other) to own its properties and to carry on its business as now conducted, (ii)
is qualified to transact business as a foreign corporation and is in good
standing in each jurisdiction in which such qualification is required under
applicable law, and (iii) has the
5
<PAGE> 6
power and authority (corporate and other) to execute, deliver and to perform its
obligations under the Loan Documents and the Restated Agreement.
Section 3.2 - Corporate Authority. The execution and delivery by
Borrower of and the performance by Borrower of its obligations under the Loan
Documents and the Restated Agreement are within Borrower's corporate powers,
have been duly authorized by all requisite shareholder and corporate action on
the part of Borrower and do not and will not (i) violate any provision of any
law, rule or regulation, any judgement, order or ruling of any court or
governmental agency, the organizational papers or Bylaws of Borrower, or any
indenture, agreement or other instrument to which Borrower is a party or by
which Borrower or any of its properties is bound, where any such violation would
materially impair Borrower's ability to meet its obligations under the Loan
Documents or (ii) be in conflict with, result in a breach of, or constitute with
notice or lapse of time or both a default under any such indenture, agreement or
other instrument.
Section 3.3 - Financial Information. All financial information
furnished by Borrower to Lender in connection with the transaction contemplated
by this Restated Agreement is true and correct in all material respects and has
been prepared in accordance with proper accounting principles consistently
applied. Since the date of such financial information, there has been no
material adverse change in the financial condition of Borrower, and, after due
inquiry, there exists no material contingent liability or obligation assertable
against Borrower that is not identified and disclosed to Lender in Exhibit "K"
attached hereto and incorporated herein.
Section 3.4 - Tax Returns; Payment. All federal, state and other tax
returns and reports of Borrower required by law to be filed have been completed
in full and have been duly filed and prepared in good faith with due diligence,
and all taxes, assessments, fees, withholdings and other governmental charges or
levies upon Borrower or its properties, assets and income which are shown on
such returns and reports or which have been billed to Borrower have been paid,
and Borrower maintains adequate reserves and accruals in respect of all such
federal, state and other taxes, assessments, fees, withholdings and other
governmental charges or levies for all fiscal periods. There are no unpaid
assessments pending against Borrower for any taxes, fees, withholdings and other
governmental charges or levies, and Borrower knows of no basis therefor. No
federal, state or other tax return or report of Borrower filed or originally
scheduled to have been filed during any fiscal year of Borrower since its
incorporation currently is or previously has been the subject of a governmental
investigation or audit.
Section 3.5 - Litigation. There are no actions, suits, investigations
or proceedings pending or overtly threatened against or affecting Borrower or
its properties before any court, arbitrator or administrative or governmental
body. Borrower currently is neither in default nor in violation of any
applicable law, statute or ordinance, or of any order of any court which default
or violation might have a material adverse impact on Borrower's assets,
business, operations, prospects, or condition (financial or otherwise).
Section 3.6 - No Defaults. No Default or Event of Default exists under
this Agreement.
6
<PAGE> 7
Section 3.7 - Title to Properties. Borrower owns marketable fee simple
title to all of the property and assets of Borrower including, without
limitation, (i) on the Effective Date, all properties and assets (other than the
Leased Real Property and vehicles), (ii) all properties and assets reflected in
the most recently dated financial statements described in Section 4.1 (other
than properties and assets disposed of in the ordinary course of business),
(iii) the Collateral, and (iv) the Real Property and other assets conveyed by
the Deeds, and said property and assets are free from any Liens or other
encumbrances securing indebtedness which arose through borrowings and from any
other Liens except for those Liens specifically identified and disclosed to
Lender in Exhibit "L" attached hereto and incorporated herein, or defects in
title which are substantial in amount or which affect or impair the operations
of the business of Borrower. Borrower enjoys full and undisturbed possession of
the Leased Real Property and all personal properties held under leases to which
it is a party, none of which contains any unusual or burdensome provision that
might materially affect or impair the operation of such properties and assets.
All leases are valid and in full force and effect. Borrower shall provide
Lender, upon request, with true, correct and complete copies of all leases to
which it is a party.
Section 3.8 - Enforceability. This Restated Agreement, the 1998 RLC
Note, the 1998 LC Note, and the other Loan Documents are legal, valid and
binding agreements of Borrower enforceable against Borrower in accordance with
their terms.
Section 3.9 - Consent. No consent, permission, authorization, order or
license of any governmental authority is necessary in connection with the
execution, delivery, performance or enforcement of the Loan Documents or the
Restated Agreement.
Section 3.10 - ERISA.
(a) Except as shown on Exhibit "M" attached hereto and incorporated
herein, neither Borrower nor any ERISA Affiliate maintains or contributes to, or
has maintained or contributed to, any Plan that is an ERISA Plan, and except as
shown on Exhibit "M" hereto, Borrower does not maintain or contribute to, and
has not maintained or contributed to, any Plan that is an Executive Arrangement.
(b) Each Plan has at all times been maintained, by its terms and in
operation, in accordance with all applicable laws.
(c) Borrower currently is not, nor will become, subject to any
liability (including withdrawal liability), tax or penalty whatsoever to any
person whomsoever with respect to any Plan including, but not limited to, any
tax, penalty or liability arising under Title I or Title IV or ERISA or Chapter
43 of the Code.
(d) Borrower and each ERISA Affiliate has made full and timely payment
of all amounts (i) required to be contributed under the terms of each Plan and
applicable law and (ii) required to
7
<PAGE> 8
be paid as expenses of each Plan. No Plan has an "amount of unfunded benefit
liabilities" (as defined in Section 4001(a)(18) of ERISA).
Section 3.11 - Subsidiaries. Borrower has no Subsidiaries.
Section 3.12 - Affiliates. Borrower has no Affiliates, other than the
shareholders of record as of the date hereof.
Section 3.13 - Indebtedness. Borrower has outstanding no indebtedness,
other than indebtedness under this Agreement, the Subordinated Debt, trade
indebtedness incurred in the ordinary course of business payable within 60 days
of its incurrence and not evidenced by a promissory note, and indebtedness
specifically identified and disclosed to Lender in Exhibit "N" attached hereto
and incorporated herein. There exists no default under the provisions of any
instrument evidencing such indebtedness or of any agreement relating thereto, or
under any other contract or agreement to which Borrower is a party.
Section 3.14 - Insurance. All property and assets owned by Borrower are
insured for the benefit of Borrower and Lender in the amounts required by
Section 4.8 hereof.
Section 3.15 - Conflicting Agreements or Other Matters. Borrower is not
a party to any contract or agreement or subject to any charter or other
corporate restriction which materially and adversely affects its business,
property or assets, or financial condition or prospects. Neither the execution
or delivery of this Agreement or the other Loan Documents, nor fulfillment of or
compliance with the terms and provisions hereof and thereof, will conflict with,
or result in a breach of the terms, conditions or provisions of, or constitute a
default under, or result in any violation of, or result in the creation of any
Lien upon any of the properties or assets of Borrower pursuant to, the charter
or Bylaws of Borrower, any award of any arbitrator or any agreement (including
any agreement with stockholders), instrument, order, judgment, decree, statute,
law, rule or regulation to which Borrower is subject. Borrower is not a party
to, or otherwise subject to any provision contained in, any instrument
evidencing indebtedness of Borrower, any agreement relating thereto or any other
contract or agreement (including its charter) which limits the amount of, or
otherwise imposes restrictions on the incurring of debt of Borrower of the type
to be evidenced by the 1998 RLC Note and the 1998 LC Note.
Section 3.16 - Pollution and Environmental Control. Borrower has
obtained all permits, licenses and other authorizations which are required
under, and is in compliance with, all federal, state, and local laws and
regulations relating to pollution, reclamation, or protection of the
environment, including laws relating to emissions, discharges releases or
threatened releases of pollutants, contaminants, or hazardous or toxic materials
or wastes into air, water, or land, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, including without limitation
underground storage tanks, disposal, transport or handling of pollutants,
contaminants or hazardous or toxic materials or wastes.
8
<PAGE> 9
Section 3.17 - Possession of Franchises, Licenses, Etc. Borrower
possesses all franchises, certificates, licenses, permits, tags, decals and
other authorizations from governmental or political subdivisions or regulatory
authorities relating to the business of Borrower, and all patents, trademarks,
service marks, trade names, copyrights, licenses and other rights, free from
burdensome restrictions, that are necessary for the ownership, maintenance and
operation of any of its properties and assets, and Borrower is not in violation
of any thereof.
Section 3.18 - Disclosure. Neither this Restated Agreement nor any
other document, certificate or statement furnished to Lender by or on behalf of
Borrower in connection herewith contains any untrue statement of a material fact
or omits to state a material fact necessary in order to make the statements
contained herein and therein not misleading. There is no fact peculiar to
Borrower which materially adversely affects or in the future may (so far as
Borrower can now foresee) materially adversely affect the business, property or
assets, or financial condition of Borrower which has not been set forth in this
Restated Agreement or in the other Loan Documents, or in certificates and
statements furnished to Lender by or on behalf of Borrower prior to the date
hereof in connection with the transactions contemplated hereby.
ARTICLE IV.
AFFIRMATIVE COVENANTS
So long as the 1998 RLC Note, 1998 LC Note or any Obligations of
Borrower shall remain unpaid or Lender shall have any commitment hereunder,
Borrower covenants and agrees that:
Section 4.1 - Financial Statements. Borrower shall provide Lender with
notice of any change in the dates of the fiscal year now employed for accounting
and reporting purposes, and Borrower shall deliver to Lender:
(a) Quarterly Statements. As soon as practicable and in any event
within sixty (60) days after each Fiscal Quarter, a Compliance Certificate, an
unaudited income and expense statement and balance sheet and statement of cash
flows for Borrower certified as correct in all material respects and that the
financial reports were prepared according to GAAP by the chief executive officer
and chief financial officer of Borrower and that certain covenants have been met
as may be specified by the Lender from time to time;
(b) Annual Audited Statement. As soon as practicable and in any event
within ninety-five (95) days after the end of each fiscal year, statements of
income, retained earnings and cash flows of Borrower for the just-ended fiscal
year, and a balance sheet of Borrower as of the end of such year, setting forth
in each case in comparative form corresponding figures from the preceding fiscal
year, all in reasonable detail and reasonably satisfactory in scope to Lender
and accompanied by an unqualified opinion from the present independent certified
public accountants of Borrower or by such other firm of independent certified
public accountants as may be designated by Borrower
9
<PAGE> 10
and be satisfactory to Lender, which opinion shall state that such financial
statements (i) fairly present the financial condition and the results of
operations of Borrower, (ii) have been prepared in accordance with generally
accepted accounting principles consistently applied, (iii) result from an
examination by such accountants made in accordance with generally accepted
auditing standards, including such tests of the accounting records and other
auditing procedures as were considered necessary in the circumstances, and (iv)
whether or not an Event of Default exists;
(c) Compliance Certificate. Simultaneously with the delivery of the
financial statements required under subsections (a) and (b) of this Section 4.1,
a certificate from the chief executive officer of Borrower in the form of
Exhibit "O" attached hereto and incorporated herein, stating that the financial
statements are correct in all material respects and that they are aware of no
Default or Event of Default, which certificate shall demonstrate in reasonable
detail satisfactory to Lender the compliance of Borrower with Section 5.4
hereof;
(d) Accountants' Reports. Promptly upon receipt thereof, copies of any
report, excluding work papers, submitted to Borrower by independent accountants
in connection with each annual, interim or special audit of the books of
Borrower made by such accountants that substantiate or detail the figures
reported in such audit and, promptly upon the occurrence thereof, notice of the
resignation or discharge of any independent accountants now or hereafter
employed by Borrower;
(e) Shareholder Reports. Promptly upon the transmission thereof, copies
of all financial statements, proxy statements, and other reports sent by
Borrower to its Shareholders and copies of any and all regular or periodic
reports, registration statements, prospectuses or other written communications
that Borrower is or may be required to file with the Securities and Exchange
Commission or any governmental department, bureau, commission or agency
succeeding to the functions of the Securities and Exchange Commission;
(f) Other Information. With reasonable promptness, such other financial
information as Lender may reasonably request.
Section 4.2 - Maintenance of Books and Inspection of Property and
Records. Borrower shall maintain its books, accounts and records in accordance
with generally accepted accounting principles and shall permit any Person
designated in writing by Lender to visit and inspect any of its properties,
corporate books and financial records, and make copies thereof and take extracts
therefrom, and to discuss the accounts, affairs and finances of Borrower with
the principal officers thereof, all at such times as Lender may reasonably
request. Borrower shall maintain its properties, real and personal, including,
without limitation, the Collateral, in good condition and Borrower shall not
waste or otherwise permit such properties to deteriorate in value, normal wear
and tear excepted.
Section 4.3 - Taxes. Borrower shall pay and discharge all taxes,
assessments, fees, withholdings and other governmental charges or levies imposed
upon it, or upon its income and
10
<PAGE> 11
profits, or upon any property belonging to it, prior to the date the same shall
become delinquent; provided, however, that Borrower shall not be required to pay
and discharge any such tax, assessment, fee, withholding, charge or levy so long
as the legality thereof shall be promptly and actively contested in good faith
and by appropriate proceedings.
Section 4.4 - Corporate Existence and Status. Borrower shall maintain
its corporate existence and good standing in its state of incorporation and its
qualification and good standing as a foreign corporation in all jurisdictions
where such qualification is required under applicable law, and shall conduct its
business in the manner in which it is now conducted subject only to changes in
the ordinary course of business.
Section 4.5 - Compliance with Law and other Agreements. Borrower shall
conduct its business operations and obtain all necessary permits, and licenses
in compliance with (i) all applicable federal, state and local laws, rules and
regulations, and (ii) all agreements, indentures and mortgages to which it is a
party or by which it or any of its properties is bound.
Section 4.6 - Notice of Default. Borrower shall notify Lender of the
occurrence of any Default or Event of Default, and Borrower shall notify Lender
of any default under the Restated Agreement, any Loan Document, or under any
other agreement or obligation with any Person, to which it is a party or by
which it or any of its properties is bound, said notices to be given within five
(5) days of Borrower's obtaining knowledge of the occurrence of the Default,
Event of Default or other default; provided, however, the failure of Borrower to
give such notice shall not affect the right and power of Lender to exercise any
or all of the remedies on default specified herein.
Section 4.7 - Notice of Litigation. Borrower shall promptly notify
Lender of any actions, suits or proceedings instituted by any Person against it
claiming money damages in excess of $50,000 or which otherwise might have a
material adverse impact on Borrower's assets, business, operations, prospects,
or condition (financial or otherwise), said notice to be given within ten (10)
days of the first notice to Borrower of the institution of such action, suit or
proceeding and to specify the amount of damages being claimed or other relief
being sought, the nature of the claim, the Person instituting the action, suit
or proceeding, and any other significant features of the claim.
Section 4.8 - Maintenance of Insurance. Borrower shall maintain
liability and hazard insurance in the amount of $2,000,000.00 per location of
the Leased Real Property and the Real Property and an umbrella insurance policy
in the amount of $9,000,000.00 for the Leased Real Property and the Real
Property, and shall furnish, upon Lender's request, an officer's certificate
specifying the details of such insurance in effect. All policies of insurance
shall name Lender, as an additional insured and loss payee and shall provide for
thirty (30) days' prior written notice to Lender in the event of cancellation,
change, alteration or modification. Borrower shall obtain such policies of
insurance from a company or companies acceptable to Lender.
11
<PAGE> 12
Section 4.9 - ERISA. Borrower shall and shall cause each ERISA
Affiliate to provide to Lender:
(a) Promptly after the occurrence thereof with respect to any existing
or hereafter adopted Plan, established thereunder, notice of (i) a "reportable
event" described in Section 4043 of ERISA and the regulations issued from time
to time thereunder or (ii) any other event which would subject Borrower or any
ERISA Affiliate to any tax, penalty or liability under Title I or Title IV of
ERISA or Chapter 43 of the Code;
(b) At the same time and in the same manner as such notice must be
provided to the PBGC, or to a Plan participant, beneficiary or alternate payee,
any notice required under Section 101(d), 302(f)(4), 303, 4041(b)(1)(A) or
4041(c)(1)(A) of ERISA or under Section 412 of the Code with respect to any
Plan; and
(c) Upon the request of Lender, (I) true and complete copies of any and
all documents, government reports and determination or opinion letters for any
Plan, or (ii) a current statement of withdrawal liability for each Multiemployer
Plan.
Section 4.10 - Perfection of Security Interest. Borrower shall execute
such documents and perform such acts as may be necessary, in the judgement of
Lender, now or in the future to perfect or continue perfection of the security
interest granted to Lender under the Loan Documents. Borrower shall convey to
Lender a valid perfected first security interest in all assets that may be
acquired by Borrower in connection with the purchase of additional child care
facilities and Borrower shall execute all such documents as may be required by
Lender to perfect all such security interests.
Section 4.11 - Related Transactions. Borrower shall enter into
contracts, agreements and transactions with and among Affiliates only if such
contracts, agreements and transactions result from arm's-length negotiations and
contain no preferential term or provision.
Section 4.12 - Additional Collateral. On and after the effective date,
any and all real property, leasehold interests in real property and all personal
property of whatever kind and nature including, without limitation, equipment,
machinery, furniture, inventory and accounts acquired by Borrower in connection
with its acquisition and/or operation of childcare centers shall be subject to a
first priority security interest (other than purchase money security interests)
in favor of Lender, and Borrower shall execute or cause to be executed and
deliver to Lender any security agreement, financing statement, deed to secure
debt, assignment of rents and leases, lessor's estoppel certificate, certificate
of title or other document deemed necessary and proper by Lender to perfect such
security interest in Lender.
Section 4.13 - Deposits. Borrower shall maintain its primary depository
account with Lender.
12
<PAGE> 13
Section 4.15 - Environmental Compliance; Notification.
(a) Compliance. Borrower shall comply with all applicable federal,
state and local laws, rules, regulations and orders relating to pollution,
reclamation, or protection of the environment, including laws relating to
emissions, discharges, releases or threatened releases of pollutants,
contaminants, or hazardous or toxic materials or wastes into air, water or land,
or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transportation, or handling of pollutants,
contaminants or hazardous or toxic materials or wastes.
(b) Notification. Borrower shall immediately notify Lender in writing
of (i) any notice received by Borrower with respect to any occurrence on any
property owned or leased by Borrower involving the spill, release, leak, seepage
or discharge of any pollutant, contaminant, or hazardous or toxic material or
waste into the air, water or land, or (ii) any complaint, order or citation
received by Borrower with respect to any such occurrence which might have a
material adverse effect on the assets, business, operations, prospects or
condition (financial or otherwise) of Borrower.
Section 4.15 - Business. Borrower shall remain substantially in the
business in which Borrower is engaged as of the date of this Restated Agreement.
Section 4.16 - Ownership. The current ownership (shareholders) of the
Borrower must maintain majority control of the Borrower.
ARTICLE V.
NEGATIVE COVENANTS
So long as the 1998 RLC Note, 1998 LC Note, or any Obligation shall
remain unpaid or Lender shall have any commitment hereunder, Borrower covenants
and agrees that, without the prior written consent of Lender:
Section 5.1 - Debt. Borrower shall not create, incur, assume, or suffer
to exist any indebtedness of any description whatsoever, including, without
limitation, secured and unsecured borrowings, and deferred payment obligations,
except (i) indebtedness incurred under this Restated Agreement, (ii) additional
indebtedness, excluding capital lease obligations, not to exceed $100,000.00 in
amount in any one fiscal year of Borrower, (iii) trade indebtedness incurred in
the ordinary course of business payable within 60 days of its incurrence and not
evidenced by a promissory note, (iv) the Subordinated Debt, (v) existing debt of
the Borrower, (vi) additional debt borrowed from the lender; and (vii) Seller
debt financing incurred in connection with acquisition of additional childcare
facilities provided any such debt is subordinated to all obligations of Borrower
to the Lender and such Seller debt financing does not create a breach of the
financial covenants contained in the Restated Agreement, and, provided further,
if such Seller debt financing is not
13
<PAGE> 14
subordinated to the indebtednesses owed by Borrower to the Lender, then such
amount will be included in the Adjusted Funded Debt to proforma Cash Flow
calculation to determine the level of borrowings available to Borrower.
Section 5.2 - Loans, Investments and Contingent Liabilities. Borrower
shall not (a) guarantee or become contingently liable for, in any manner,
whether directly or indirectly, any obligations or indebtedness of any Person,
(b) make any future loans, advances or extensions of credit to any Person,
including, without limitation, any shareholder, director, officer or employee of
Borrower or (c) make any investments or purchases or acquire any stock,
obligations or securities that are not issued by or guaranteed by the United
States Government, or are of the following types: (i) commercial paper rated
Prime-1 or better by Moody's Investors Services or "A-1" or better by Standard &
Poor's Corporation; (ii) repurchase agreements secured by United States
government securities; (iii) negotiable certificates of deposit or bankers
acceptances issued by Lender or an affiliate of Lender, except that Borrower may
engage in such activities described in (a), (b) and above to the extent that
these activities do not exceed $100,000 in aggregate amount at any one time
during the term of this Restated Agreement, including extensions and renewals
hereof.
Section 5.3 - Capital Expenditures and Acquisitions. Borrower shall not
make or incur Capital Expenditures, including, without limitation, any capital
lease obligations, in excess of $1,500,000.00 in any one fiscal year of the
Borrower. For the purposes of this Restated Agreement any capital lease
obligation shall be deemed and considered a Capital Expenditure. Acquisitions by
Borrower not to exceed $7,500,000.00 per transaction may be made by Borrower
without lender's prior consent.
Section 5.4 - Financial Requirements. Borrower shall not:
(a) Minimum Net Worth. Permit its Net Worth to be less than
$3,600,000.00 plus 35% of cumulative earnings before tax distributions after
December 31, 1997, calculated at the end of each Fiscal Quarter. Shareholder
distributions in excess of tax distributions will be permissible as long as
Borrower is still in compliance with this Minimum Net Worth requirement.
Provided, however, in the event Borrower elects to initiate a public equity
offering, Borrower may pay a dividend to its shareholders that causes Borrower's
Minimum Net Worth to be not less than $3,400,000.00 only if such public equity
offering closes within 30 days after the dividend is distributed.
(b) Fixed Charged Coverage Ratio. Permit Earnings before tax
distributions, interest expense and lease expense (EBITR) divided by interest
expense and rent expense not to be less than 2.00 to 1.00, calculated at the end
of the expiration of each Fiscal Quarter on a rolling four Fiscal Quarter basis.
(c) Adjusted Fund Debt to Cash Flow . Adjusted Funded Debt divided by
Cash Flow calculated on a rolling four Quarter basis, may not exceed 3.25 to
1.00 for two years from the date
14
<PAGE> 15
hereof and shall not exceed 3.00 to 1.00 thereafter, as tested at the end of
each Fiscal Quarter end. Proforma Cash Flow shall be calculated on a proforma
basis to include as the first day of such period, the historical EBITDAR of all
acquired companies as if the had been owned for the entire period.
(d) Additional Indebtedness. With the exception of Seller debt
financing, Borrower shall not incur any additional indebtedness without lender's
prior consent.
Section 5.5 - Liens and Other Encumbrances. Borrower shall not grant or
permit to exist any Lien on or in, or otherwise encumber, any of its properties
or assets, except for (a) Liens for taxes, assessments or other governmental
charges not yet due and payable or which are being actively contested in good
faith by appropriate proceedings and with respect to which adequate reserves are
being maintained, (b) statutory Liens of landlords and Liens of mechanics,
materialmen and other Liens imposed by law created in the ordinary course of
business for amounts not yet due or which are being contested in good faith by
appropriate proceedings and for which adequate reserves are being maintained,
(c) purchase money security interests, (d) easements, licenses, rights-of-way,
restrictions, covenants and other similar charges or encumbrances not
interfering with the ordinary conduct of the business of Borrower or any of its
properties, and (e) those Liens and encumbrances existing as of the date hereof
and identified and disclosed to Lender in Exhibit "L" attached hereto and
incorporated herein.
Section 5.6 - Compliance with ERISA. Neither Borrower nor any ERISA
Affiliate will take, or fail to take, any action with respect to a Plan
including, but not limited to, (I) establishing any Plan, (ii) amending any
Plan, (iii) terminating or withdrawing from any Plan, or (iv) incurring an
amount of unfunded benefit liabilities, as defined in Section 4001(a)(18) of
ERISA, or any withdrawal liability under Title IV of ERISA, where such action or
failure could have a material adverse effect on Borrower, result in a Lien on
the property of Borrower, or require Borrower to provide any security.
Section 5.7 - Restricted Payments. Borrower shall not (i) pay any
dividend or other distribution on any shares of its capital stock (other than
dividends payable solely in shares of its capital stock), (ii) make any payment
on the Subordinated Debt other than as allowed under the Subordination
Agreements, (iii) make any acquisition of any of Borrower's capital stock
(except any acquisition of shares upon conversion thereof into or exchange
thereof for other shares of capital stock of Borrower), (iv) make any advance,
loan, financial accommodation or other extension of credit to any Person except
as permitted in Section 5.2 above; or (v) make any payment or distribution to
any principal shareholder of Borrower other than salaries and bonuses paid to
employees who are also shareholders or any member of his or her immediate family
(other than as allowed under the Subordination Agreement); provided, however,
that at any time while Borrower shall remain an "S corporation" under Subchapter
S of the Code Borrower may make payments to its shareholders constituting
Permissible Tax Distributions.
15
<PAGE> 16
Section 5.8 - Sale and Lease-Back. Borrower shall not enter into any
arrangement with any lender or investor or under which such lender or investor
is a party, providing for the leasing by Borrower of real or personal property
used by Borrower in the operations of Borrower, which has been or is sold or
transferred by Borrower to such lender or investor or to any Person to whom
funds have been or are to be advanced by such lender or investor on the security
of such rental obligations of Borrower.
Section 5.9 - Amendments to Subordinated Debt. Borrower shall not
amend, modify or change or consent to any amendment, modification, change or
waiver of any terms of the Subordinated Debt unless Lender shall have consented
thereto in writing.
ARTICLE VI.
EVENTS OF DEFAULT AND REMEDIES
Section 6.1 - Events of Default. Any one or more of the following shall
constitute an "Event of Default" hereunder:
(a) Borrower fails to pay when due any payment of principal or interest
due on the 1998 RLC Note, the 1998 LC Note or any Obligation or any other sum
due hereunder; provided, however, that Borrower shall have a ten (10) day cure
or grace period with respect to any such payment; or
(b) Borrower fails to pay when due and fails to cure within any
applicable cure or grace period any payment of principal or interest due on any
other obligation for money borrowed, or defaults on any obligation under
conditional sale or other title retention agreement or on any obligation secured
by purchase money security interest or mortgage, or defaults in the performance
of any other covenant, term or condition contained in any agreement under which
any such obligation is created, if the effect of such failure to pay or default
is to cause or permit the holder of such obligation to cause such obligation to
become due prior to its date of maturity; provided, however, that Borrower shall
not be deemed to be in default hereunder if Borrower, in good faith and at its
own expense, contests the alleged failure to pay or default by appropriate legal
proceedings; or
(c) Any representation or warranty contained herein or deemed to have
been made hereunder or made by or furnished on behalf of Borrower in connection
herewith shall be false or misleading in any material respect as of the date
made or deemed to have been made; or
(d) Borrower fails to perform or observe any covenant or agreement
contained in Article V of this Restated Agreement or any covenant or agreement
contained in any other Loan
16
<PAGE> 17
Document, or an event of default, as defined in the respective Loan Document,
should occur under any such Loan Document and not be cured within any applicable
grace or cure period provided therein; or
(e) Borrower fails to perform or observe any covenant or agreement
contained in Article IV of this Restated Agreement or any other covenant, term
or condition contained in this Restated Agreement within thirty (30) days after
written notice of such failure; or
(f) Borrower fails to perform or observe any covenant, term or
condition contained in any other agreement and such default shall continue for
thirty (30) days after Borrower knows or has reason to know of any such failure;
provided, however, that Borrower shall not be deemed to be in default hereunder
if Borrower, in good faith and at its own expense, contests the alleged failure
by appropriate legal proceedings: or
(g) Borrower fails to pay its debts generally as they become due; or
(h) Borrower shall make or take any action to make an assignment for
the benefit of creditors, petition or take any action to petition any tribunal
for the appointment of a custodian, receiver or any trustee for it or a
substantial part of its assets, or shall commence or take any action to commence
any proceeding under any bankruptcy, reorganization, arrangement, readjustment
of debt, dissolution, liquidation or debtor relief law or statute of any
jurisdiction, whether now or hereafter in effect including, without limitation,
the Bankruptcy Code; or, if there shall have been filed any such petition or
application, or any such proceeding shall have been commenced against it, in
which an order for relief is entered; or Borrower by any act or omission shall
indicate its consent to, approval of or acquiescence in any such petition,
application or proceeding or order for relief or the appointment of a custodian,
receiver or any trustee for it or any substantial part of any of its properties,
or shall suffer to exist any such custodianship, receivership or trusteeship; or
(i) Borrower shall have concealed, removed, or permitted to be
concealed or removed, any part of its property, with intent to hinder, delay or
defraud its creditors or any of them, or made or suffered a transfer of any of
its property which may be fraudulent under any bankruptcy, fraudulent conveyance
or similar law; or shall have made any transfer of its property to or for the
benefit of a creditor at a time when other creditors similarly situated have not
been paid; or shall have suffered or permitted, while insolvent, any creditor to
obtain a Lien upon any of its property through legal proceedings or distraint
which is not vacated within thirty (30) days from the date thereof; or
(j) Any order, judgement or decree is entered in any proceeding against
Borrower decreeing a split-up or dissolution of Borrower, which order, judgement
or decree requires the divestiture of all or a substantial part of the assets of
Borrower, and such order remains unstayed and in effect for more than thirty
(30) days; or
17
<PAGE> 18
(k) A judgement or order for the payment of money in an amount in
excess of $50,000 or otherwise materially adverse to the business, financial
condition, results of operations or prospects of Borrower, is rendered against
Borrower, and either (i) enforcement proceedings shall have been commenced by
any creditor upon such judgement or order or (ii) there shall be any period of
ten (10) consecutive days during which a stay of enforcement of such judgement
or order, by reason of a pending appeal or otherwise, shall not be in effect; or
(l) Lender, at any time and in good faith shall deem itself insecure
(and for the purposes of this Restated Agreement, Lender shall be entitled to
deem itself insecure when some event occurs, fails to occur or is threatened or
some objective condition exists or is threatened which significantly impairs the
prospects that any of the Funded Debt will be paid when due, which significantly
impairs the value of the Collateral to Lender or which significantly affects the
financial or business condition of Borrower); or
(m) The failure of the current ownership and Board of Directors to
maintain controlling interest in the voting shares of Borrower.
Section 6.2 - Remedies on Default.
(a) Upon the occurrence and during the continuation of any Event of
Default (other than an Event of Default specified in Section 6.1 (h)), Lender
may (i) terminate all obligations of Lender to Borrower including, without
limitation, all obligations to lend money under the 1998 RLC Note and the 1998
LC Note, and (ii) declare all Obligations, including, without limitation,
principal, accrued interest and costs of collection (including, without
limitation, reasonable attorneys' fees if collected by or through an attorney or
in bankruptcy or in other judicial proceedings) immediately due and payable,
without presentment, demand, protest or any other notice of any kind, all of
which are expressly waived.
(b) Upon the occurrence of an Event of Default specified in Section
6.1(h), (I) all Obligations of Lender to Borrower including, without limitation,
all obligations to lend money under the 1998 Revolving Line of Credit and the
1998 Line of Credit shall terminate automatically, and (ii) the 1998 RLC Note,
1998 LC Note, and any other note or Obligation of Borrower held by Lender
including, without limitation, principal, accrued interest and costs of
collection (including, without limitation, reasonable attorneys' fees if
collected by or through an attorney or in bankruptcy or in other judicial
proceedings) shall be immediately due and payable, without presentment, demand,
protest or any other notice of any kind, all of which are expressly waived.
(c) Upon the occurrence of an Event of Default and/or the acceleration
of the 1998 RLC Note, the 1998 LC Note, or any other note or Obligation of
Borrower held by Lender pursuant to subsections (a) or (b) of this Section 6.2,
Lender may pursue any remedy available to it under this Agreement, under the
1998 RLC Note, the 1998 LC Note, or under any other note or Obligation
18
<PAGE> 19
of Borrower held by Lender or under any other Loan Document, or available at law
or in equity, all of which shall be cumulative.
(d) All payments with respect to this Restated Agreement received by
Lender after the occurrence of an Event of Default and acceleration of the 1998
RLC Note, the 1998 LC Note or any other note or Obligation of Borrower held by
Lender, shall be applied first, to the costs and expenses incurred by Lender as
a result of the Event of Default, second, to the payment of accrued and unpaid
fees, third, to the payment of accrued and unpaid interest on any such notes, to
and including the date of such application, fourth, to the payment of the unpaid
principal on such notes, and fifth, to the payment of all other amounts then
owing to Lender under the Loan Documents. No application of the payments will
cure any Event of Default or prevent acceleration, or continued acceleration, of
amounts payable under the Loan Documents or this Restated Agreement or prevent
the exercise, or continued exercise, of rights or remedies of Lender hereunder
or under applicable law.
ARTICLE VII.
DEFINITIONS
For the purposes of this Agreement, the terms:
(a) "Adjusted Funded Debt" shall mean Total Senior Funded Debt plus an
adjustment regarding operating lease expense, which shall be calculated as total
lease expense over the previous 12 months times an adjustment factor of seven
(7).
(b) "Advance" shall mean any advance of funds by Lender to Borrower
under the 1998 Revolving Line of Credit or the 1998 Line of Credit.
(c) "Affiliate" shall mean a Person that, at any time such a
determination is made, (i) directly or indirectly through one or more
intermediaries controls, is controlled by, or is under common control with
Borrower, (ii) beneficially owns or holds five percent or more of any class of
stock of Borrower, or (iii) five percent or more of any class of voting common
stock (or in the case of a Person that is not a corporation, five percent or
more of the equity interest) of such Person is beneficially owned or held by
Borrower. The term "control" shall mean the possession of the power to direct or
cause, directly or indirectly, the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise.
(d) "Business Day" shall mean a day of the year on which commercial
banks are not required or authorized to close in Columbus, Georgia.
(e) "Capital Expenditures" shall mean on any date the Borrower's Gross
Property, Plant and Equipment on such date, plus net proceeds from sales of
Borrower's Gross Property, Plant and
19
<PAGE> 20
Equipment during Borrower's then current fiscal year, minus Borrower's Gross
Property, Plant and Equipment as at the close of Borrower's prior fiscal year.
(f) "Current Assets", "Current Liabilities", "Earnings Before Interest
and Taxes", "Non-Cash Expenses", "Non-Cash Revenues", "Gross Property, Plant and
Equipment", "Operating Lease Expenses", "Interest Expenses", "Depreciation",
"Receivables", "Shareholder Equity", and "Net Income After Taxes" shall have the
meanings normally given them by, and shall be calculated, both as to amounts and
classifications of items, in accordance with, generally accepted accounting
principles, which principles shall be applied on a basis consistent with that
applied to the income and expense statements, the balance sheets, and the
statements of income and retained earnings furnished to Lender pursuant to
Section 4.1.
(g) "Cash Flow" for any given period shall mean Earnings before tax
distributions, interest expense, rent expense, depreciation and amortization. In
the event Borrower acquires one or more additional child care facilities and the
selling entity of such facilities provides the Lender with audited financial
information in such form and content as may be acceptable to the Lender, then in
such event such portion of the cash flow as allotted by the Lender, in its sole
discretion, to such facilities being purchased by the Borrower may, in the
Lender's sole discretion, be added to Borrower's Cash Flow for the current 12
month period.
(h) "Code" shall mean the Internal Revenue Code of 1986, as amended,
and the regulations promulgated and the rulings issued thereunder.
(i) "Current Portion of Funded Debt" shall mean amounts with respect to
Funded Debt which are payable within one year from the date as of which any
determination is made and are classified as Current Liabilities under generally
accepted accounting principles.
(j) "Default" shall mean an event that, with notice or lapse of time or
both, would constitute an Event of Default.
(k) "ERISA" shall mean the Employment Retirement Income Security Act of
1974, as amended from time to time, and the regulations promulgated and the
rulings issued thereunder.
(l) "ERISA Affiliate" shall mean each trade or business (whether or not
incorporated) which together with Borrower is treated as a single employer under
Section 414(b), (c), (m) or (o) of the Code.
(m) "Lien" shall mean any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind or description and shall include,
without limitation, any agreement to give any of the foregoing, any conditional
sale or other title retention agreement, any lease in the nature thereof
including any lease or similar arrangement with a public authority executed in
connection with the issuance of industrial development revenue bonds or
pollution control revenue bonds, and
20
<PAGE> 21
the filing of or agreement to give any financing statement under the Uniform
Commercial Code of any jurisdiction.
(n) "Loan Documents" shall mean and include, as the context requires,
this Restated Agreement, the 1998 RLC Note, the 1998 LC Note, the Deeds to
Secure Debt, the Security Agreement, the Subordination Agreements, and any and
all other instruments, agreements, documents and writings contemplated hereby or
executed in connection herewith.
(o) "Multiemployer Plan" shall mean a "multiemployer plan" as defined
in Section 4001(a)(3) of ERISA.
(p) "PBGC" shall mean the Pension Benefit Guaranty Corporation and any
successor thereto.
(q) "Permissible Tax Distribution" shall mean with respect to Borrower
cash dividends to its shareholders with respect to each taxable year in an
amount not to exceed the product of (i) Borrower's taxable income for the
taxable year computed for federal income tax purposes under Section 1363(b) of
the Code combining all separately stated items, multiplied by (ii) the sum of
(A) the maximum marginal individual income tax rate in effect for taxable income
in such taxable year under the Code (under the Code as enacted on the date
hereof, 31% for taxable years beginning after 1990), plus (B) the product of (x)
the maximum marginal individual income tax rate in effect for taxable income in
such taxable year of any shareholder under applicable Georgia state income tax
laws, multiplied by (y) the difference of (xx) one (1.00), minus (yy) the amount
of clause (A) above; (e.g., (B) would equal 4.14% for taxable years beginning
after 1990 based upon the Code and the Georgia state income tax laws as enacted
on the date hereof).
(r) "Person" shall mean and shall include an individual, a partnership,
a joint venture, a corporation, a trust, an unincorporated association, a
government or any department or agency thereof and any other entity whatsoever.
(s) "Plan" shall mean any employee benefit plan, program, arrangement,
practice or contract, maintained on behalf of Borrower or an ERISA Affiliate,
which provides benefits or compensation to or on behalf of employees or former
employees, whether formal or informal, whether or not written, including but not
limited to the following types of plans:
(i) Executive Arrangements - any bonus, incentive compensation,
stock option, deferred compensation, commission, severance, golden parachute or
other executive compensation plan, rabbi trust, program, contract, arrangement
or practice;
(ii) ERISA Plans - any "employee benefit plan" (as defined in
Section 3(3) of ERISA ), including, but not limited to, any defined benefit
pension plan, profit sharing plan, money purchase pension plan, savings or
thrift plan, stock bonus plan, employee stock ownership plan, Multiemployer
Plan, or any plan, fund, program, arrangement or practice providing for medical
21
<PAGE> 22
(including post-retirement medical), hospitalization, accident, sickness,
disability, or life insurance benefits; and
(iii) Other Employee Fringe Benefits - any stock purchase,
vacation, scholarship, day care, prepaid legal services, severance pay or other
fringe benefit plan, program, arrangement, contract or practice.
(t) "Real Property" shall mean the real property owned by Borrower
referenced in Section 2.1 (f) and described on Exhibit "G" attached hereto.
(u) "Shareholder Investment" shall mean the sum of Shareholder Equity
plus Subordinated Debt.
(v) "Subordinated Debt" for any given fiscal year shall mean the
outstanding principal amount, as of the close of such fiscal year, of Funded
Debt of Borrower which is subordinate to the prior payment in full of all
amounts owing by Borrower under the Loan Documents upon terms and conditions
approved by Lender in writing.
(w) "Subsidiary" shall mean any corporation, regardless of its
jurisdiction of incorporation, a majority of the total combined voting power of
all classes of stock entitled to vote of which shall be owned, at the time as of
which any determination is made, by Borrower either directly or indirectly.
22
<PAGE> 23
(x) "Total Senior Funded Debt" shall mean total outstanding debt owed
to the Bank by the Borrower plus all unsubordinated seller debt owed by the
Borrower, all other indebtedness for borrowed money, capitalized leases, and any
indebtedness secured by a lien on property owned by the Borrower.
(y) "Net Worth" shall mean Shareholder Equity as defined by GAAP.
(z) "Obligations" shall mean all loans contemplated hereunder,
including, without limitation, the 1998 Revolving Line of Credit and 1998 Line
of Credit (including, in each case, all interest thereon), all commitment fees,
all obligations for reimbursement of expenses and indemnification, obligations
arising under this Agreement or any other loan document, and all other
indebtedness, liabilities, obligations, covenants and duties of Borrower of
every kind, nature and description, direct or indirect, absolute or contingent,
due or not due, in contract or in tort, liquidated or unliquidated, arising
under any loan document, now existing or hereafter arising, and all renewals,
extensions and modifications of any of the foregoing.
(aa) "Fiscal Quarter" shall mean Borrower's four quarterly financial
reporting periods the first three of which are each twelve weeks long and the
fourth or final period is sixteen weeks long and every third year said fourth
period is seventeen weeks long with the fourth period ending on or shortly
before or after December 31 of each calendar year.
ARTICLE IX.
MISCELLANEOUS
Section 9.1 - Non Waiver. No delay or failure on the part of Lender or
on the part of any holder of the Term Notes or the Revolving Credit Note in the
exercise of any right, power or privilege granted under this Agreement, under
any other Loan Document, or available at law or in equity, shall impair any such
right, power or privilege or be construed as a waiver of any Event of Default or
any acquiescence therein. No single or partial exercise of any such right, power
or privilege shall preclude the further exercise of such right, power or
privilege. No waiver shall be valid against Lender unless made in writing and
signed by Lender, and then only to the extent expressly specified therein.
Section 9.2 - Notices. Except as otherwise particularly provided
herein, all notices and communications provided for hereunder shall be in
writing, and shall be effective when received if personally delivered or sent
via telecopier or on the second business day after the day on which mailed if
sent by first-class, certified mail, postage prepaid, to the following
addresses:
23
<PAGE> 24
(1) If to Lender, SunTrust Bank, West Georgia, N.A.
P.O. Box 431
Columbus, GA 31902
Telecopier number 706-649-3757
Attn: Mark W. Hudson
(2) If to Borrower, Childcare Network, Inc.
P.O. Box 1155
Columbus, GA 31902
Telecopier number 706-571-2650
Attn: Lanier Merritt
Borrower and Lender may change their respective addresses for notice purposes by
notice to all other parties in the manner provided herein.
Section 9.3 - Governing Law. This Restated Agreement and all other Loan
Documents shall be governed by and interpreted in accordance with the laws of
the State of Georgia (without regard to the conflict of laws provisions thereof)
unless the individual document specifically provides otherwise.
Section 9.4 - Survival of Representations and Warranties. All
representations and warranties contained herein or made by or furnished on
behalf of Borrower in connection herewith shall survive the execution and
delivery of this Agreement and all other Loan Documents.
Section 9.5 - Descriptive Headings. The descriptive headings of the
several sections of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
Section 9.6 - Severability. If any part of any provision contained in
this Restated Agreement or in any other Loan Document shall be invalid or
unenforceable under applicable law, said part shall be ineffective to the extent
of such invalidity only, without in any way affecting the remaining parts of
said provision or the remaining provisions.
Section 9.7 - Time is of the Essence. Time is of the essence in
interpreting and performing this Restated Agreement and all other Loan
Documents.
Section 9.8 - Counterparts. This Restated Agreement may be executed in
any number of counterparts, each of which shall be deemed to be an original and
all of which, taken together, shall constitute one and the same instrument.
24
<PAGE> 25
Section 9.9 - Payment of Costs. Borrower shall pay all reasonable
costs, expenses, taxes and fees incurred by Lender in connection with the
preparation, execution and delivery of this Restated Agreement and all other
Loan Documents including, without limitation, all recording costs and fees, the
costs and professional fees of counsel for Lender, and any and all stamp,
intangible or other taxes that may be payable or determined in the future to be
payable in connection therewith.
Section 9.10 - Successors and Assigns. This Restated Agreement shall
bind and inure to the benefit of Borrower, Lender, and their respective
successors and assigns; provided, however, Borrower shall have no right to
assign its rights or obligations hereunder to any Person. Notwithstanding
anything in this Restated Agreement to the contrary, Lender shall have the
right, but shall not be obligated, to sell participations and subparticipations
in the loans made pursuant hereto to other banks, financial institutions and
investors.
Section 9.11 - Amendments; No Implied Waiver. This Restated Agreement
may be amended or modified, and Borrower may take any action herein prohibited,
or omit to perform any act herein required to be performed by it, only if
Borrower shall obtain the prior written consent of Lender to such amendment,
modification, action or omission to act, and no course or dealing between
Borrower and Lender shall operate as a waiver of any right, power or privilege
granted under this Restated Agreement, under any other Loan Document, or
available at law or in equity.
Section 9.12 - Rights Cumulative. All rights, powers and privileges
granted hereunder shall be cumulative to and shall not be exclusive of any other
rights, powers and privileges granted by any other Loan Document or available at
law or in equity.
Section 9.13 - Set-Off. Upon the occurrence and during the continuation
of an Event of Default, Borrower authorizes the Lender without notice or demand,
to apply any indebtedness due or to become due to Borrower from Lender in
satisfaction of any of the indebtedness, liabilities or obligations of Borrower
under this Restated Agreement, under any other Loan Document or under any other
note, instrument, agreement, document or writing of Borrower held by or executed
in favor of Lender, including, without limitation, the right to set-off against
any deposits or other cash collateral of Borrower held by Lender.
Section 9.14 - Construction. Should any provision of this Restated
Agreement require judicial interpretation, the parties hereto agree that the
court interpreting or construing the same shall not apply a presumption that the
terms hereof shall be more strictly construed against one party by reason of the
rule of construction that a document is to be more strictly construed against
the party who itself or through its agents prepared the same, it being agreed
that Borrower, Lender and their respective agents have participated in the
preparation hereof.
Section 9.15 - Holidays. In any case where the date for any action
required to be performed under this Restated Agreement or under any other Loan
Document shall be, in the city
25
<PAGE> 26
where the performance is to be made, a Saturday, a Sunday, a legal holiday or a
day on which banking institutions are authorized by law to close, then such
performance may be made on the next succeeding business day not a Saturday, a
Sunday, a legal holiday or a day on which banking institutions are authorized by
law to close.
Section 9.16 - Entire Agreement. This Restated Agreement and the other
Loan Documents executed and delivered contemporaneously herewith, together with
the exhibits and schedules attached hereto and thereto, constitute the entire
understanding of the parties with respect to the subject matter hereof, and any
other prior or contemporaneous agreements, whether written or oral, with respect
thereto including, without limitation, the commitments from Lender to Borrower,
are expressly superseded hereby. The execution of this Restated Agreement and
the other Loan Documents by Borrower was not based upon any facts or materials
provided by Lender, nor was Borrower induced to execute this Restated Agreement
or any other Loan Document by any representation, statement or analysis made by
Lender.
Section 9.17 - Indemnification. Borrower shall pay all costs of lender
in connection with this Restated Agreement including, without limitation, all
reasonable fees and expenses of Lender's counsel. Borrower shall indemnify
Lender and its affiliates, directors, officers, employees and agents against all
costs, losses, liabilities, damages and expenses incurred in connection with
this Restated Agreement and the Obligations unless caused by the gross
negligence or willful misconduct of any indemnified party.
WITNESS the hand and seal of the parties hereto through their duly
authorized officers, as of the date first above written.
CHILDCARE NETWORK, INC..
BY: /s/ Lanier Merritt
------------------------------
Lanier Merritt, Senior Vice President
ATTEST: /s/ Joseph G. Slaughter
--------------------------
Joseph G. Slaughter, III, Secretary
[CORPORATE SEAL]
26
<PAGE> 27
[EXECUTION CONTINUED ON NEXT PAGE]
SUNTRUST BANK, WEST GEORGIA, N.A.
BY: /s/ E. Jerry Coleman
------------------------------
TITLE: Senior Vice President
----------------------
ATTEST:
--------------------------
TITLE:
----------------------
[BANK SEAL]
27
<PAGE> 28
1998 REVOLVING LINE OF CREDIT NOTE
("NOTE")
$13,000,000.00 June 19, 1998
Columbus, Georgia
FOR VALUE RECEIVED, the undersigned, CHILDCARE NETWORK, INC., a Georgia
corporation (the "Borrower"), hereby promises to pay to the order of SUNTRUST
BANK, WEST GEORGIA, N.A., a national banking association (the "Bank"), on June
19, 2003 (the "Maturity Date"), or sooner should this Note be declared
immediately due and payable as hereafter provided the principal sum of THIRTEEN
MILLION AND N0/100 DOLLARS ($13,000,000.00) or so much thereof as shall have
been advanced hereunder and remains outstanding plus all accrued and unpaid
interest thereon, upon the terms and conditions hereinafter set forth and
contained.
The Borrower agrees to pay interest on the principal amount advanced
(an "Advance") hereunder from the date of the Advance until paid at the rate of
interest outlined below. All payments of principal and interest hereunder shall
be made in United States dollars and in immediately available funds.
Interest on the Note and all Advances made hereunder shall be payable
on the first day of each month, in arrears, commencing August 1, 1998, and
thereafter on the first day of each month up to and through the Maturity Date.
This Note evidences indebtedness incurred under a revolving line of
credit established by the Bank in favor of Borrower in the principal amount of
Thirteen Million Dollars ($13,000,000.00) (the "Revolving Line of Credit"). The
Borrower may borrow, repay and reborrow under the Revolving Line of Credit,
provided, however, that the Borrower may neither borrow nor reborrow should
there exist an Event of Default (as hereinafter defined). The Note shall bear
interest as hereinafter provided and shall mature on the Maturity Date, unless
renewed pursuant to the terms outlined below, or sooner should the principal and
accrued interest thereon by declared immediately due and payable.
Interest shall accrue on the unpaid principal amount of each Advance
under the Revolving Line of Credit from time to time from the date of such
Advance until paid, at the Prime Rate unless the Borrower shall have selected
one of the following rates by Borrower giving the Bank telephonic notice
(promptly confirmed in writing) by 10:00 a.m. one Business Day prior to the
beginning of each Interest Period in accordance with the provisions set forth
below with such notice to specify whether the
1
<PAGE> 29
current interest rate is to be continued as is or converted to one of the other
rates, subject, however, to the provision in the Restated Agreement that the
1998 Line of Credit Note and this Note shall each accrue interest at the same
interest rate, and, if so, which rate and, if applicable, the Interest Period
selected by the Borrower:
(i) the Prime Rate; or
(ii) LIBOR, plus the Applicable Margin; or
(iii) the Secondary C/D Rate, plus the Applicable Margin;
provided that, the Borrower may not select a rate based on LIBOR or the
Secondary C/D Rate if the Interest Period with respect thereto would extend
beyond the Maturity Date. If the Bank does not receive timely notice of any
succeeding interest rate and/or Interest Period selected by the Borrower as
provided for herein or if the Borrower selects an interest rate for an Interest
Period which is not available under this Note, the outstanding balance for which
the Borrower failed to select an interest rate and/or Interest Period or
selected an interest rate for an Interest Period which is not available under
this Note, the interest rate or index shall be converted to the existing
interest index previously chosen by the Borrower and the Bank shall promptly
notify the Borrower by telephone, which notice shall be promptly confirmed in
writing (including telex), at Bank's option, to the Borrower, of such
conversion.
For purposes of this Note, the following terms shall have the following
meanings unless otherwise noted herein:
"Adjusted Funded Debt" shall mean Total Senior Funded Debt plus an
adjustment regarding operating lease expense, which shall be calculated as total
lease expense over the previous 12 months times an adjustment factor of seven
(7).
"Applicable Margin" shall be determined with reference to Borrower's
Adjusted Funded Debt to Cash Flow Ratio determined for the most recently ended
quarter of Borrower from the quarterly financial statements delivered to Bank
pursuant to Section 4.1(a) of the Fourth Amended and Fully Restated Loan and
Revolving Line of Credit Agreement of even date herewith between Bank and
Borrower ("Agreement"), per the matrix as follows:
<TABLE>
<CAPTION>
ADJUSTED FUNDED DEBT TO CASH FLOW APPLICABLE MARGIN
<S> <C>
<3.25 x & > 3.00 x 2.375%
<3.00 x & > 2.50 x 2.125%
<2.50 x & > 2.00 x 2.00%
<2.00 x 1.75%
</TABLE>
Based on the foregoing, the Applicable Margin as of this date is two percent
(2%). Thereafter, each
2
<PAGE> 30
adjustment in the Applicable Margin shall take effect at the end of the Fiscal
Quarter following the Fiscal Quarter for which the financial statements have
been furnished the Bank by the Borrower with such adjustment to be effective
immediately as to all outstanding amounts hereunder beginning with Borrower's
fourth Fiscal Quarter (Fiscal Quarter as is defined in the Agreement).
Notwithstanding the foregoing, so long as an Event of Default shall have
occurred and be continuing, the Applicable Margin shall be the highest among the
rates specified above.
"Assessment Rate" shall mean, for any Interest Period, the net annual
assessment rate (rounded upward, if necessary, to the nearest whole multiple of
1/100 of 1%) estimated by the Bank as of the first day of such Interest Period
to be the then current annual assessment payable by the Bank to the Federal
Deposit Insurance Corporation or any successor (the "FDIC") for insuring time
deposits made in U.S. dollars at offices of the Bank in the United States.
"Base Rate" shall mean, with respect to any Interest Period, the
consensus bid-side rate of interest of the secondary certificate of deposit
market as shown on page 5 of the Telerate Service or a comparable service
selected by the Bank at 10:00 a.m. (Columbus, Georgia time) or as soon
thereafter as practicable, on the first day of the Interest Period, for the
purchase at face value of certificates of deposit in an amount substantially
equal to the outstanding principal balance of the Note and with a maturity
approximately equal to such Interest Period.
"Business Day" shall mean a day of the year on which commercial banks
are not required or authorized to close in Columbus, Georgia and, if the
applicable Business Day relates to Eurodollar borrowings, on which dealings are
carried on in the London interbank market.
"Cash Flow" for any given period shall mean Earnings before tax
distributions, interest expense, rent expense, depreciation and amortization. In
the event Borrower acquires one or more additional childcare facilities and the
selling entity of such facilities provides the Bank with audited financial
information in such form and content as may be acceptable to the Bank, then in
such event such portion of the cash flow as allotted by the Bank, in its sole
discretion, to such facilities being purchased by Borrower may, in the Bank's
sole discretion, be added to Borrower's Cash Flow for the current 12 month
period.
"C/D Reserve Percentage" shall mean, for any day, the stated maximum
rate (expressed as a decimal) of all reserve requirements as specified in
Regulation D of the Board of Governors of the Federal Reserve System, or by any
successor thereto (including, without limitation, any basic, marginal,
emergency, supplemental, special, transitional or other reserves) applicable
during such Interest Period to new non-personal time deposits in the United
States of any member of the Federal Reserve System in an amount equal to or
greater than $100,000 with a maturity comparable to the relevant Interest
Period.
"Interest Period" shall mean, with respect to any LIBOR Borrowing or
Secondary C/D Rate Borrowing, a period of one (1), two (2) or three (3) months,
as the Borrower may elect as provided
3
<PAGE> 31
in this Agreement; provided, that (i) the first day of an Interest Period must
be a Business Day, (ii) any Interest Period that would otherwise end on a day
that is not a Business Day shall be extended to the next succeeding Business
Day, unless such Business Day falls in the next calendar month, in which case
the Interest Period shall end on the next preceding Business Day, and (iii) the
Borrower may not elect an Interest Period which would extend beyond the Maturity
Date.
"LIBOR" shall mean, with respect to any Interest Period for any
Eurodollar borrowing, the rate per annum equal to the quotient of (i) the
consensus of the LIBOR settings as of 11:00 a.m. (London time) on the second
Business Day preceding the first day of such Interest Period as shown on page
3750 of Telerate Service or as published by a comparable service selected by the
Bank for deposits in immediately available funds in U.S. Dollars on the first
day of such Interest Period in an amount substantially equal to the principal
amount of such Eurodollar borrowing and for a period approximately equal to such
Interest Period, divided by (ii) a number equal to 1.00 minus the Reserve
Percentage, the rate so determined to be rounded upward to the nearest whole
multiple of 1/100 of 1%.
"LIBOR Borrowing" shall mean any period of time during which this Note
is bearing interest based upon LIBOR.
"Loan Documents" shall mean and include, as the context requires, the
Restated Agreement, the 1998 Line of Credit Note, this Note, the Deeds to Secure
Debt and Security Agreements, the Security Agreements, the Mortgages, the
Subordination Agreements, and any and all other instruments, agreements,
documents and writings contemplated hereby or executed in connection herewith or
which have been executed heretofore.
"Maturity Date" shall mean June 19, 2003.
"Obligations" shall mean all loans hereunder, including without
limitation, the 1998 Line of Credit Note, this Note (including, in each case,
all interest thereon), all commitment fees, all obligations for reimbursement of
expenses and indemnification obligations arising under this Agreement or any
other Loan Document, and all other indebtedness, liabilities, obligations,
covenants and duties of Borrower of every kind, nature and description, direct
or indirect, absolute or contingent, due or not due, in contract or in tort,
liquidated or unliquidated, arising under this Note or any other Loan Document,
now existing or hereafter arising, and all renewals, extensions and
modifications of any of the foregoing.
"Prime Rate" shall mean the per annum rate of interest designated from
time to time by the Bank to be its prime rate, which is not necessarily the
Bank's best rate of interest charged to any of its customers, with any change in
the rate of interest resulting from a change in the Prime Rate to be effective
as of the opening of business of the Bank on the day of such change.
"Prime Rate Borrowing" shall mean any period of time during which this
Note is bearing interest based upon the Prime Rate.
4
<PAGE> 32
"Reserve Percentage" shall mean, for any day, the stated maximum rate
(expressed as a decimal) of all reserves required to be maintained with respect
to liabilities or assets consisting of or including "Eurocurrency liabilities,"
as prescribed by Regulation D of the Board of Governors of the Federal Reserve
System (or by any other governmental body having jurisdiction with respect
thereto), including, without limitation, any basic, marginal, emergency,
supplemental, special, transitional or other reserves, the rate so determined to
be rounded upward to the nearest whole multiple of 1/100 of 1%.
"Secondary C/D Rate" shall mean a rate per annum equal to the
following:
Base Rate + Assessment Rate,
-----------------------------
1.00 - C/D Reserve Percentage
to be calculated on the basis of a 365-day year, if quoted to the Bank
on that basis, and otherwise on the basis of a 360-day year.
"Secondary C/D Rate Borrowing" shall mean any period of time during
which this Note is bearing interest based upon the Secondary C/D Rate.
"Total Senior Funded Debt" shall mean total outstanding debt owed to
the Bank by the Borrower plus all unsubordinated seller debt owed by the
Borrower, all other indebtedness for borrowed money, capitalized leases, and any
indebtedness secured by a lien on property owned by Borrower.
Unless otherwise noted in this Note, all financial terms contained
herein shall have the meanings as defined in the Agreement and if not defined
herein or in the Agreement, such terms shall have the meaning accorded such
terms under generally accepted accounting principles.
Notwithstanding any other provisions of this Note to the contrary, if
any change in any applicable law, regulation or directive, or in the
interpretation or application thereof shall make it unlawful or impractical for
the Bank to make or maintain any LIBOR Borrowings or Secondary C/D Rate
Borrowings or to maintain Eurodollar deposits in the London interbank market,
the obligation of the Bank hereunder to advance or maintain LIBOR Borrowings or
Secondary C/D Rate Borrowings, as the case may be, shall forthwith be canceled
and the Borrower shall, if any LIBOR Borrowings or Secondary C/D Rate Borrowings
are then outstanding, promptly upon request from the Bank, either, at the option
of the Borrower, pay all such LIBOR Borrowings or Secondary C/D Rate Borrowings
or convert such LIBOR Borrowings or Secondary C/D Rate Borrowings to Prime Rate
borrowings or Secondary C/D Borrowing. If any such payment or conversion of
LIBOR Borrowings or Secondary C/D Rate Borrowings is made on a day that is not
the last day of the then current Interest Period applicable to such LIBOR
Borrowings or Secondary C/D Rate Borrowings, the Borrower shall promptly pay,
upon demand of the Bank, such amount or amounts as may be necessary to
compensate the Bank for any loss or expense sustained or incurred by the Bank as
a result of such payment or conversion. The Bank shall certify the amount of
such loss or expense to
5
<PAGE> 33
the Borrower, and such certification shall be conclusive absent manifest error.
Interest shall accrue from the date hereof up to and through the date
on which all principal and interest hereunder is paid in full and shall be
computed on the basis of actual days elapsed in a 360-day year. All payments of
principal and interest hereunder shall be made in U.S. dollars and in
immediately available funds at the principal office of the Bank in Columbus,
Georgia, or at such other location as the holder(s) hereof shall designate in
writing.
The Borrower shall give the Bank written or telephonic notice of any
requested Advance under this Note (a "Notice of Borrowing") specifying (i) the
amount of the Advance and (ii) the date the proposed Advance is to be made. Each
Notice of Borrowing shall be given to the Bank not later than 11:00 a.m.
(Columbus, Georgia time) on the day of such requested Advance. The Bank shall be
entitled to rely on any telephonic Notice of Borrowing which it believes in good
faith to have been given by a duly authorized officer or employee of the
Borrower, whose names shall be provided to the Bank on the date hereof and from
time to time hereafter, and any Advances made by the Bank based on such
telephonic notice shall, when credited by the Bank to the Borrower's account
number 1002516472 at the Bank, be Advances for all purposes hereunder.
Accrued interest on this Note shall be payable monthly, in arrears,
commencing on August 1, 1998, and continuing thereafter on the first Business
Day of each succeeding month up to and through the Maturity Date.
In addition to and not in limitation of the foregoing, the Borrower
further agrees to pay all expenses of collection, including reasonable
attorneys' fees actually incurred, if this Note shall be collected by law or
through an attorney at law, or in bankruptcy, receivership or other court
proceedings. The Borrower at its option may prepay the indebtedness represented
by this Note in whole or in part at any time without penalty or premium but with
accrued interest to the date of such prepayment on the principal amount prepaid.
In the event that any change (other than any change by way of
imposition or increase of reserve requirements included in the definition of
"Reserve Percentage" hereinabove) in any applicable law, treaty or governmental
regulation, or in the interpretation or application thereof, or compliance by
the Bank with any guideline, request or directive (whether or not having the
force of law) from any central bank or other U.S. or foreign financial, monetary
or other governmental authority, shall: (a) subject the Bank to any tax of any
kind whatsoever with respect to this Note or any Borrowing or change the basis
of taxation of payments to the Bank of principal, interest, fees or any other
amount payable hereunder (except for changes in the rate of tax on the overall
net income of the Bank); (b) impose, modify or hold applicable any reserve,
special deposit, assessment or similar requirement against assets held by, or
deposits in or for the account of, advances or loans by, or other credit
extended by or committed to be extended by any office of the Bank, including,
without limitation, pursuant to Regulation D of the Board of Governors of the
Federal Reserve System; or (c) impose on the Bank or on the London interbank
market any other condition with respect to this Note, or any LIBOR Borrowing
hereunder; and the result of any of the foregoing is to increase the
6
<PAGE> 34
cost to the Bank of making or committing to make, renewing or maintaining any
LIBOR Borrowing or to reduce the amount of any payment (whether of principal,
interest or otherwise) in respect of any LIBOR Borrowing, THEN, IN ANY CASE,
Borrower shall promptly pay from time to time, upon demand of the Bank, such
additional amounts as will compensate the Bank for such additional cost or such
reduction, as the case may be. The Bank shall certify the amount of such
additional cost or reduced amount to Borrower, and such certification shall be
conclusive absent manifest error.
Borrower hereby agrees to indemnify the Bank and hold the Bank harmless
from any loss, cost or expense it may sustain or incur as a consequence of the
failure by Borrower to complete any LIBOR Borrowing after notice thereof has
been given to the Bank, including, without limitation, any loss, cost or expense
incurred by reason of the liquidation or re-employment of deposits or other
funds acquired by the Bank to fund the LIBOR Borrowing, when as a result of such
failure, the LIBOR Borrowing is not made on such date. The Bank shall certify
the amount of its loss or expense to Borrower, and such certification shall be
conclusive absent manifest error.
If the Borrower shall fail to pay within ten (10) days of the due date
thereof, whether by acceleration or otherwise, any principal owing under the
Note, then interest shall accrue on such unpaid principal from the due date
until and including the date on which such principal is paid in full at a rate
of interest equal to the Prime Rate plus an additional two percent (2%) per
annum.
This Note shall immediately mature and become due and payable, without
notice or demand, upon the occurrence of any one or more of the following events
(an "Event of Default"):
(1) the Borrower fails to pay when due any amount due hereunder or any
other sum payable hereunder and such failure is not cured within ten (10) days;
or
(2) any representation or warranty contained herein or deemed to have
been made hereunder or made by or furnished on behalf of the Borrower in
connection herewith shall be false or misleading in any material respect as of
the date made or deemed to have been made; or
(3) the Borrower fails to perform or observe any covenant, term or
condition contained herein not constituting an Event of Default under Subsection
(1) above for more than thirty (30) consecutive calendar days; or
(4) the Borrower (i) defaults in any payment of principal or interest
on any other obligation for money borrowed (or any obligation under a capital
lease, any obligation under a conditional sale or other title retention
agreement, any obligation issued or assumed as full or partial payment for
property whether or not secured by a purchase money mortgage, or any obligation
under notes payable or drafts accepted representing extensions of credit) beyond
any period of grace provided with respect thereto, or (ii) fails to perform or
observe any other agreement, term or condition contained in any agreement under
which any obligation described in clause (i) is created (or if any other event
shall occur and be continuing thereunder) and the effect of such failure or
other
7
<PAGE> 35
event, after the expiration of any applicable grace or cure period, is to cause
or to permit the holder or holders of such obligation (or a trustee on behalf of
such holder or holders) to cause such obligation to become due prior to any
stated maturity; or
(5) the Borrower fails to pay its debts generally as they become due
or shall admit in writing its inability to pay its debts generally; or
(6) the Borrower shall make or take any action to make an assignment
for the benefit of creditors, petition or take any action to petition any
tribunal for the appointment of a custodian, receiver or any trustee for it or a
substantial part of its assets, or shall commence or take any action to commence
any proceeding under any bankruptcy, reorganization, arrangement, readjustment
of debt, dissolution, liquidation or debtor relief law or statute of any
jurisdiction, whether now or hereafter in effect including, without limitation,
the Bankruptcy Code; or, if there shall have been filed any such petition or
application, or any such proceeding shall have been commenced against it, in
which an order for relief is entered which remains unstayed and in effect for
more than sixty (60) days; or the Borrower by any act or omission shall indicate
its consent to, approval of or acquiescence in any such petition, application or
proceeding or order for relief or the appointment of a custodian, receiver or
any trustee for it or any substantial part of any of its properties, or shall
suffer to exist any such custodianship, receivership or trusteeship; or any
corporate action is taken by the Borrower for the purpose of effecting any of
the foregoing; or
(7) the Borrower shall have concealed, removed, or permitted to be
concealed or removed, any part of its property, with intent to hinder, delay or
defraud its creditors or any of them, or made or suffered a transfer of any of
its property which is fraudulent under any bankruptcy, fraudulent conveyance or
similar law; or shall have made any transfer of its property to or for the
benefit of a creditor at a time when other creditors similarly situated have not
been paid while the Borrower is insolvent; or shall have suffered or permitted,
while insolvent, any creditor to obtain a lien upon any of its property through
legal proceedings or distraint; or
(8) any order, judgment or decree is entered in any proceedings
against the Borrower decreeing the dissolution of the Borrower and such order,
judgment or decree remains unstayed and in effect for more than sixty (60) days;
or
(9) a judgment or order for the payment of money not covered by
insurance in an amount in excess of $500,000 or otherwise materially adverse to
the business, financial condition, results of operations or prospects of the
Borrower is rendered against the Borrower and either (i) enforcement proceedings
shall have been commenced by any creditor upon such judgment or order or (ii)
there shall be any period of sixty (60) consecutive days during which a stay of
enforcement of such judgment or order, by reason of a pending appeal or
otherwise, shall not be in effect; or
(10) an event of default shall have occurred in any of the Loan
Documents, the Agreement, or the 1998 Line of Credit Note; or
8
<PAGE> 36
(11) an event of default shall have occurred under the Restated
Agreement.
No delay or failure on the part of the Bank or on the part of any
holder of this Note in the exercise of any right, power or privilege granted
under this Note, or otherwise available by agreement, at law or in equity, shall
impair any such right, power or privilege or be construed as a waiver of any
Event of Default or any acquiescence therein. No single or partial exercise of
any such right, power or privilege shall preclude the further exercise of such
right, power or privilege. No waiver shall be valid against the Bank unless made
in writing and signed by the Bank, and then only to the extent expressly
specified therein.
Upon the existence or occurrence of an Event of Default, the Borrower
authorizes the Bank, without notice, to apply and set off any indebtedness due
or to become due from the Bank to the Borrower in satisfaction of any liability
of the Borrower to the Bank hereunder, regardless of the nature of such
liability or the time it arises.
TIME IS OF THE ESSENCE UNDER THIS NOTE. This Note has been delivered in
Columbus, Georgia, and shall be governed by and construed under the laws of
Georgia.
PRESENTMENT, PROTEST AND NOTICE OF DISHONOR ARE HEREBY WAIVED BY THE
BORROWER.
IN WITNESS WHEREOF, the Borrower has caused this Note to be executed
and delivered by its duly authorized officers as of the date first above
written.
CHILDCARE NETWORK, INC.
By:
-----------------------------------------
Name: Lanier Merritt
Title: Senior Vice President
Attest:
-------------------------------------
Name: Joseph G. Slaughter, III
Title: Secretary
[CORPORATE SEAL]
9
<PAGE> 1
EXHIBIT 23.2
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated April 2, 1998, except for Note 3 as to which the
date is June 19, 1998 and Note 10 as to which the date is July 6, 1998, with
respect to the financial statements and schedule of Childcare Network, Inc. and
the use of our report dated May 29, 1998, with respect to the statements of
operations and cash flows for the period of January 1, 1997 through September
29, 1997 of Young World, Inc. included in the Registration Statement (Form S-1)
and related Prospectus of Childcare Network, Inc. for the registration of
2,850,000 shares of its common stock.
/s/ Ernst & Young LLP
Columbus, Georgia
July 16, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CHILDCARE NETWORK, INC. FOR THE YEARS ENDED DECEMBER 31,
1997 AND DECEMBER 25, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-25-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 JUN-26-1998
<CASH> 859 1,446
<SECURITIES> 0 0
<RECEIVABLES> 1,126 1,327
<ALLOWANCES> 76 96
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,030 3,146
<PP&E> 9,440 10,691
<DEPRECIATION> 2,713 3,270
<TOTAL-ASSETS> 10,911 12,801
<CURRENT-LIABILITIES> 1,964 1,231
<BONDS> 0 0
0 0
0 0
<COMMON> 532 532
<OTHER-SE> 3,364 4,372
<TOTAL-LIABILITY-AND-EQUITY> 10,911 12,801
<SALES> 0 0
<TOTAL-REVENUES> 16,331 13,574
<CGS> 0 0
<TOTAL-COSTS> 13,897 11,287
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 94 112
<INTEREST-EXPENSE> 190 213
<INCOME-PRETAX> 2,150 1,962
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 2,150 1,962
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,150 1,962
<EPS-PRIMARY> .27 .25
<EPS-DILUTED> .27 .25
</TABLE>
