<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 9, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
CHILDCARE NETWORK, INC.
(Exact Name of Registrant as Specified in its Charter)
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<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:
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<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. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
=====================================================================================================================
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value per
share............................ 3,277,500 $15.00 $49,162,500 $14,503
=====================================================================================================================
</TABLE>
(1) Includes 427,500 shares issuable upon the exercise of the Underwriters'
over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 of the Securities Act of 1933, as amended.
---------------------
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.
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<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 JUNE 9, 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 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 intends to apply 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
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[MAP SHOWING LOCATIONS OF THE COMPANY'S SCHOOLS]
[PICTURES OF CHILDREN ENGAGED IN VARIOUS ACTIVITIES IN THE COMPANY'S CLASSROOMS]
------------------------
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."
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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 May 31, 1998, the Company's 67 schools served over
8,000 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 enrollment to over 7,000 students. As a result,
revenues increased from $1.1 million in 1992 to $16.3 million in 1997,
representing a compound annual growth rate of 71.4%. Income before income taxes
increased from approximately $86,000 in 1992 to approximately $2.2 million in
1997, representing a compound annual growth rate of approximately 90.0%.
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 superior operating margins.
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
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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. The Company believes that the following factors will contribute to
increased demand for high quality child care: 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
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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
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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 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."
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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 MARCH 28, MARCH 27,
1993 1994 1995 1996 1997 1997(1) 1997(2) 1998(2)
------ ------ ------ ------- ------- ----------- ----------------- -----------------
(UNAUDITED) (UNAUDITED)
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STATEMENT OF INCOME
DATA:
Revenues.............. $4,825 $6,505 $9,209 $12,183 $16,331 $21,052 $3,480 $6,421
Operating expenses.... 4,158 5,417 7,758 10,281 13,991 19,053 2,853 5,470
------ ------ ------ ------- ------- ------- ------ ------
Income from
operations.......... 667 1,088 1,451 1,902 2,340 1,999 627 951
Interest expense,
net................. (211) (262) (311) (277) (190) (344) (49) (91)
------ ------ ------ ------- ------- ------- ------ ------
Income before income
taxes............... 456 826 1,140 1,625 2,150 1,655 578 860
Pro forma provision
for income
taxes(3)............ 173 314 433 618 817 629 220 327
------ ------ ------ ------- ------- ------- ------ ------
Pro forma net
income.............. $ 283 $ 512 $ 707 $ 1,007 $ 1,333 $ 1,026 $ 358 $ 533
====== ====== ====== ======= ======= ======= ====== ======
Basic and diluted
shares
outstanding......... 4,905 4,905 4,905 4,905 4,932 4,932 4,925 4,935
Pro forma net income
per basic and
diluted share(4).... $ 0.06 $ 0.10 $ 0.14 $ 0.21 $ 0.27 $ 0.21 $ 0.07 $ 0.11
SCHOOL DATA:
Number of schools (end
of period).......... 25 25 32 34 63 67
Number of students
(end of period)..... 2,256 2,543 3,297 4,211 7,325 8,282
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 27,
1998
---------------------
AS
ACTUAL ADJUSTED(5)
------- -----------
(UNAUDITED)
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BALANCE SHEET DATA:
Working capital........................................... $ 251 $14,405
Total assets.............................................. 11,528 25,682
Total debt, including current portion..................... 5,328 --
Shareholders' equity...................................... 4,491 23,873
</TABLE>
- ---------------
(1) 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.
(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.
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(4) 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.
(5) 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) additional debt incurred for the payment of approximately
$550,000 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."
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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. Revenues from such programs represented
approximately 57.0% of the Company's total revenues in each of 1996 and 1997.
The eligibility of the Company to continue such participation 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."
GOVERNMENT REGULATION
Child care providers must comply with various state and local statutes,
regulations and licensing requirements. The Company's facilities and equipment
(including the vehicles the Company operates to transport children) are
periodically inspected by state agencies to review compliance with applicable
standards. 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.
Licenses for certain of the Company's schools are in the process of renewal or
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 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
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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 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
transportation of students 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" 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."
EXPANSION
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.
SCHOOL STAFFING AND COMPENSATION
The success of the Company is dependent on its 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
9
<PAGE> 11
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.
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."
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 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 the following types of insurance policies: workers'
compensation, commercial general liability, automobile liability, commercial
property liability, professional liability and excess "umbrella" liability.
These policies provide for a variety of coverages and 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."
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."
10
<PAGE> 12
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."
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
unanimous 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
2,247,821 shares of Common Stock, representing 34.4% of the issued and
outstanding Common Stock. Because each share of Common Stock held by the same
beneficial owner on , 1998 is entitled to ten votes per share, upon
completion of the Offering, executive officers and directors will collectively
control in the aggregate approximately 56.6% of the voting power of the
Company's outstanding Common Stock. In addition, each share acquired pursuant to
options granted prior to , 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
11
<PAGE> 13
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.
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. 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.
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 66.7% of the estimated net proceeds to the Company of the
Offering ($13.4 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
12
<PAGE> 14
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 $10.67 per share in the net tangible book
value per share of the Common Stock. In addition, shareholders 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 by the Company hereby (after deducting the underwriting discount
and estimated expenses of the Offering) are estimated to be $20.0 million ($23.4
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 $6.6 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 revolving line of credit which matures July 1, 1999 and up to $5.0
million in term loans which must be repaid in installments through 2002. At May
31, 1998, $1,522,400 was outstanding under the line of credit, and $3,773,296 in
term loans was outstanding. 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 $550,000 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 2.0-2.5% or the secondary certificate of deposit ("C/D") rate
plus 2.0-2.5%, at the Company's option. Such debt had an interest rate of
approximately 7.6% per annum as of May 31, 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 May 31, 1998. The Company intends to defease this indebtedness
by payment 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 $13.4 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 March 27, 1998, the net tangible book value of the Company was
$2,371,783, or $0.48 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
$550,000 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 March 27, 1998, would have been approximately $21,753,783, or
$3.33 per share of Common Stock. This represents an increase in net tangible
book value per share of Common Stock of $2.85 to the Company's existing
shareholders and an immediate dilution of $10.67 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..... $ 0.48
Increase in net tangible book value per share attributable
to the Offering........................................ 2.85
------
Net tangible book value per share after the Offering........ 3.33
------
Dilution per share to new investors......................... $10.67
======
</TABLE>
Assuming the Underwriters' over-allotment option is exercised in full, pro
forma net tangible book value upon consummation of the Offering would be $3.70
per share, the immediate increase in pro forma net tangible book value of shares
owned by existing shareholders would be $3.22 per share and the immediate
dilution to new investors would be $10.30 per share.
The following table summarizes, on a pro forma basis as of March 27, 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 March 27,
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 March 27, 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 foregoing information does not give effect to the exercise of stock
options, as none were outstanding as of March 27, 1998.
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 27, 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>
MARCH 27, 1998
---------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt........................... $ 400 $ --
====== =======
Long-term debt:
Bank credit agreement..................................... $4,095 $ --
Acquisition note.......................................... 833 --
------ -------
Total long-term debt.............................. 4,928 --
Shareholders' equity:
Common Stock, no par value, 10,000,000 shares authorized;
4,935,000 shares issued and outstanding; 6,535,000
shares issued and outstanding, as adjusted(1).......... 532 20,564
Retained earnings......................................... 3,959 3,309(2)
------ -------
Total shareholders' equity........................ 4,491 23,873
------ -------
Total capitalization............................ $9,419 $23,873
====== =======
</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 $550,000 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
March 28, 1997 and January 1, 1998 through March 27, 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
March 27, 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 MARCH 28, 1997(1) MARCH 27, 1998(1)
------ ------ ------ ------- ------- ------------------ ------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.................. $4,825 $6,505 $9,209 $12,183 $16,331 $3,480 $6,421
Operating expenses:
Cost of services........ 3,510 4,643 6,761 8,981 12,249 2,488 4,865
Selling, general and
administrative
expenses.............. 369 374 496 616 888 182 312
Depreciation and
amortization
expense............... 279 400 501 684 854 183 293
------ ------ ------ ------- ------- ------ ------
Total operating
expenses......... 4,158 5,417 7,758 10,281 13,991 2,853 5,470
------ ------ ------ ------- ------- ------ ------
Income from operations.... 667 1,088 1,451 1,902 2,340 627 951
Interest expense, net..... (211) (262) (311) (277) (190) (49) (91)
------ ------ ------ ------- ------- ------ ------
Income before income
taxes................... 456 826 1,140 1,625 2,150 578 860
Pro forma provision for
income taxes(2)......... 173 314 433 618 817 220 327
------ ------ ------ ------- ------- ------ ------
Pro forma net income...... $ 283 $ 512 $ 707 $ 1,007 $ 1,333 $ 358 $ 533
====== ====== ====== ======= ======= ====== ======
Basic and diluted shares
outstanding............. 4,905 4,905 4,905 4,905 4,932 4,925 4,935
Pro forma net income per
basic and diluted
share(3)................ $ 0.06 $ 0.10 $ 0.14 $ 0.21 $ 0.27 $ 0.07 $ 0.11
SCHOOL DATA:
Number of schools (end of
period)................. 25 25 32 34 63 67
Number of students (end of
period)................. 2,256 2,543 3,297 4,211 7,325 8,282
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
----------------------------------------------- MARCH 27,
1993 1994 1995 1996 1997 1998
------ ------ ------ ------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....................... $ 23 $ 215 $ 241 $ 260 $ 65 $ 251
Total assets.......................... 4,453 4,529 6,886 6,285 10,911 11,528
Total debt, including current
portion(3).......................... 3,418 2,945 3,769 2,992 5,122 5,328
Shareholders' equity.................. 735 1,221 1,999 2,543 3,896 4,491
</TABLE>
- ---------------
(1) 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.
(2) 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.
(3) 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 $ 125(1) 19,053
------- ------- ----- -------
Income from operations....................... 2,340 (216) (125) 1,999
Interest expense, net........................ (190) -- (154)(1) (344)
------- ------- ----- -------
Net income (loss) before pro forma
provision for income taxes....... 2,150 (216) (279) 1,655
Pro forma provision for income taxes(2)...... (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...................................... $ .27 $ .21
======= =======
</TABLE>
- ---------------
(1) Reflects the (i) increase in depreciation and amortization of the Young
World, Inc. assets based on the Company's allocation of the purchase price;
(ii) increase in lease expense based on the new lease agreement executed as
part of the purchase agreement with the seller of Young World, Inc.; and
(iii) 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%).
(2) 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, representing a compound annual
growth rate of 71.4%. Income before income taxes increased from $86,000 in 1992
to approximately $2.2 million in 1997, representing a compound annual growth
rate of 90.0%.
The Company's revenues are derived from tuition payments and funding from
certain state and federal programs. Tuition for programs varies depending upon
location of the school and the age of the child and is proportionally higher for
children attending part-time. 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.
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 MARCH 28, 1997 MARCH 27, 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 71.5 75.8
Selling, general and administrative
expenses............................... 5.4 5.1 5.4 5.2 4.8
Depreciation and amortization expense..... 5.4 5.6 5.3 5.3 4.6
----- ----- ----- ----- -----
Income from operations...................... 15.8 15.6 14.3 18.0 14.8
Interest expense, net....................... 3.4 2.3 1.2 1.4 1.4
----- ----- ----- ----- -----
Income before income taxes.................. 12.4% 13.3% 13.2% 16.6% 13.4%
===== ===== ===== ===== =====
</TABLE>
Quarter Ended March 27, 1998 Compared to Quarter Ended March 28, 1997
Revenues increased $2.9 million, or 84.5%, to $6.4 million for the first
quarter of 1998 from $3.5 million for the first quarter of 1997. Of this
increase, $2.5 million was attributable to 29 schools acquired in September 1997
(the "1997 Acquisitions"), and $400,000 related to an increase in enrollment and
tuition increases at schools which were in operation at the beginning of each
period.
Cost of services increased $2.4 million, or 95.5%, to $4.9 million for the
first quarter of 1998 from $2.5 million for the first quarter of 1997. Of this
increase, $2.1 million related to the 1997 Acquisitions, and $300,000 related to
increases in variable costs associated with additional enrollment at schools
which were in operation at the beginning of each period. Cost of services as a
percentage of revenues increased to 75.8% for the first quarter of 1998 from
71.5% for the first quarter of 1997. 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.
Selling, general and administrative expenses increased $130,000, or 71.4%,
to $312,000 for the first quarter of 1998 from $182,000 for the first quarter of
1997. 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 4.8% for the first quarter of
1998 from 5.2% for the first quarter of 1997.
Depreciation and amortization expense increased $110,000, or 60.3%, to
$293,000 for the first quarter of 1998 from $183,000 for the first quarter of
1997. 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 first quarter of
1998 compared to 5.3% for the first quarter of 1997 due to lower incremental
depreciation and amortization expense as a percentage of incremental revenues
from the 1997 Acquisitions.
Income from operations increased $324,000, or 51.6%, to $951,000 for the
first quarter of 1998 from $627,000 for the first quarter of 1997. Income from
operations as a percentage of revenues decreased to 14.8% for the first quarter
of 1998 from 18.0% for the first quarter of 1997 as a result of the factors
discussed above.
Interest expense, net, increased $42,000, or 86.5%, to $91,000 for the
first quarter of 1998, from $49,000 for the first quarter of 1997 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 to an increase in enrollment and 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.
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 balance of $1.4 million related to an increase in enrollment and
tuition increases at schools which were in operation at the beginning of each
year.
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 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.
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.
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<PAGE> 23
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 nine quarters ended March 27, 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
------- ------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <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
Cost of services........................ 2,367 2,272 2,040 2,302 2,488 2,550 2,453 4,758 4,865
Selling, general and administrative
expenses.............................. 160 146 134 176 182 179 201 326 312
Depreciation and amortization expense... 134 170 166 215 183 183 188 300 293
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from operations.................. 550 515 358 479 627 736 555 422 951
Interest expense, net................... 84 71 66 56 49 38 27 76 91
------ ------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes.............. 466 444 292 423 578 698 528 346 860
Pro forma provision for income taxes.... 177 169 111 161 220 265 200 132 327
------ ------ ------ ------ ------ ------ ------ ------ ------
Pro forma net income.................... $ 289 $ 275 $ 181 $ 262 $ 358 $ 433 $ 328 $ 214 $ 533
====== ====== ====== ====== ====== ====== ====== ====== ======
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
====== ====== ====== ====== ====== ====== ====== ====== ======
</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.
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 $822,000 for the period January 1, 1998
through March 27, 1998 includes net income of $860,000 and noncash charges of
$226,000 less changes in operating assets and liabilities of $264,000. Cash flow
from operations and $201,000 of borrowings under the Company's bank credit
agreement were used to purchase one school for $250,000, purchase property and
equipment of $509,000 and pay dividends of $264,000.
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. 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
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<PAGE> 24
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 2, 1998, the Company entered into a commitment letter for a new
credit agreement with its bank which provides for aggregate borrowings of $15
million. The new bank credit agreement will consist 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 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 April 1998, the Company paid a dividend of $334,600 to its shareholders.
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
$550,000 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 May 31, 1998, $1,522,400 was outstanding under the
line of credit, and $3,773,296 in term loans was outstanding. Borrowings under
the bank credit agreement bear interest at the bank's prime rate, LIBOR plus
2.0-2.5% or the secondary C/D rate plus 2.0-2.5%. Such debt had an interest rate
of approximately 7.6% as of May 31, 1998. The Company currently has no specific
plan for the remaining estimated net offering proceeds of approximately $13.4
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.
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.
23
<PAGE> 25
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 May 31, 1998, the Company's 67 schools served over 8,000 children in seven
states.
INDUSTRY OVERVIEW
The Company believes that the market for child care services is growing
rapidly and that the following factors will contribute to increased demand for
high quality child care: 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
24
<PAGE> 26
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 superior operating margins.
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
25
<PAGE> 27
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.
26
<PAGE> 28
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 and the
age of the child 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
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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
designed 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
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<PAGE> 30
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.
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<PAGE> 31
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
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<PAGE> 32
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, transportation plans used for the
transportation of children 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 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.
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
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(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 has applied for participation
in the Food Program for certain of its centers located in South Carolina and
Virginia.
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 Program typically is determined 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 a portion 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 Program.
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. 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 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.
For the year ended December 31, 1997, approximately 32.8% of the Company's
revenues were generated from the Food Program and the Assistance Programs, and
approximately 24.0% of its revenues were generated as a result of the Georgia
Pre-K Program. 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
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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."
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
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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 following table sets forth information regarding the Company's schools
in the indicated states:
<TABLE>
<CAPTION>
NUMBER OF SCHOOLS
----------------------
STATE LEASED OWNED TOTAL
----- ------ ----- -----
<S> <C> <C> <C>
Alabama..................................................... 11 1 12
Florida..................................................... 4 0 4
Georgia..................................................... 15 15 30
North Carolina.............................................. 10 0 10
South Carolina.............................................. 5 1 6
Tennessee................................................... 1 0 1
Virginia.................................................... 4 0 4
-- -- --
Total............................................. 50 17 67
== == ==
</TABLE>
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.
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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...................... 67 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
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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. From 1976 to 1991 Mr. Ernest was
employed with Barnett Bank, Inc., most recently as President and Chief Operating
Officer. Prior to 1976, Mr. Ernest was President and Chief Executive Officer of
Allied Timber Company St. Regis Corporation, Jacksonville, Florida. 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
the Emerald Fund.
Calvin Jay Martin, Jr. has served as a director of the Company since May
1998. Since 1992, Mr. Martin has served as Vice President and Chief Financial
Officer of W.C. Bradley Co., a company engaged in manufacturing, real estate
development and retail. 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 , ____ are designated Class I directors and have been
elected for a term expiring in 1999 and until their successors are elected and
qualified; , and are designated Class II directors and have
been elected for a term expiring in 2000 and until their successors are elected
and qualified; and , and 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."
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<PAGE> 38
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 , 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.
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<PAGE> 39
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.
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<PAGE> 40
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.............................. 1,087,725 22.0% -- 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(4)...................... 371,610 7.5 -- 371,610 5.7 9.4
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)........................ 2,404,008 48.7% 156,187 2,247,821 34.4% 56.6%
OTHER 5% SHAREHOLDERS AND SELLING
SHAREHOLDERS
- --------------------------------------------
Sandari Raju(5)............................. 603,864 12.2% 503,864 100,000 1.5% 2.5%
Devery Van Cleave Wright(6)................. 357,258 7.2 140,000 217,258 3.3 5.5
Elizabeth Van Cleave Harp(7)................ 355,758 7.2 -- 355,758 5.4 9.0
Estate of Noll A. Van Cleave(8)............. 321,762 6.5 100,000 221,762 3.4 5.6
Jack Wright(9).............................. 278,706 5.6 -- 278,706 4.3 7.0
Ernie Wright(9)............................. 278,706 5.6 -- 278,706 4.3 7.0
Joyce L. Curry.............................. 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(10).................. 30,000 * 30,000 -- -- --
Jennifer and Stephen Marcontell(11)......... 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 March 27, 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 and Mr. Bradley will sell up to 50,000, 60,000 and
58,813 shares of Common Stock, respectively.
(4) Includes 60,000 shares owned by Lara Loudermilk Hughes and Jennifer and
Stephen Marcontell. See notes 10 and 11.
(5) The address for Sundari Raju is 62 West Broad Street, Richland, Georgia
31825.
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<PAGE> 41
(6) The address for Devery Van Cleave Wright is 9705 Bent Brook Drive,
Montgomery, Alabama 36117.
(7) The address for Elizabeth Van Cleave Harp is 5074 Sedona Court, Columbus,
Georgia 31907.
(8) The executor of the Estate of Noll A. Van Cleave is Betty Van Cleave. The
address of the Estate of Noll Van Cleave is 2406 Downing Drive, Columbus,
Georgia 31906.
(9) The address for Ernie Wright and Jack Wright is 6400 Bradley Park Drive,
Columbus, Georgia 31904.
(10) Mr. Loudermilk has the sole voting and investment power of these shares
pursuant to an Irrevocable Proxy dated May 27, 1998.
(11) Mr. Loudermilk has sole voting and investment power over these shares
pursuant to a Special Power of Attorney dated May 26, 1998.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 10,000,000 shares
of Common Stock, no par value per share.
COMMON STOCK
There were 4,935,000 shares of Common Stock outstanding held by 20
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 (6,793,687 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 ,
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 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
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<PAGE> 42
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 combination
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
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<PAGE> 43
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 unanimous written
consent in lieu of a meeting; (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 and not by shareholders. 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."
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<PAGE> 44
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is .
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 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
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<PAGE> 45
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 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% of the then
outstanding shares of Common Stock. See "Risk Factors -- Shares Eligible for
Future Sale."
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<PAGE> 46
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
45
<PAGE> 47
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.
46
<PAGE> 48
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 March
27, 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
March 28, 1997 and January 1, 1998 through March 27, 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 March 27, 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 March 28, 1997 and January 1, 1998 through March
27, 1998 (unaudited)...................................... F-6
Notes to Financial Statements............................... F-7
YOUNG WORLD, INC.
Report of Independent Auditors.............................. F-16
Statement of Operations for the Period January 1, 1997
through September 29, 1997................................ F-17
Statement of Cash Flows for the Period January 1, 1997
through September 29, 1997................................ F-18
Notes to Financial Statements............................... F-19
</TABLE>
F-1
<PAGE> 49
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 10, as to which the
date is June 1, 1998
F-2
<PAGE> 50
CHILDCARE NETWORK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 27,
1996 1997 1998
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 947,512 $ 859,075 $ 863,165
Accounts receivable, less allowances of $79,000,
$76,000 and $96,000, respectively................... 370,583 1,050,166 869,025
Prepaid expenses and other current assets.............. 67,281 120,429 423,780
---------- ----------- -----------
Total current assets........................... 1,385,376 2,029,670 2,155,970
Property and equipment (Notes 2 and 3):
Land................................................... 398,751 398,751 398,751
Buildings.............................................. 3,337,363 3,386,714 3,386,714
Equipment.............................................. 1,927,273 4,362,382 4,909,841
Automobiles............................................ 818,685 1,292,579 1,515,768
---------- ----------- -----------
6,482,072 9,440,426 10,211,074
Accumulated depreciation and amortization.............. (1,911,058) (2,712,542) (2,980,112)
---------- ----------- -----------
4,571,014 6,727,884 7,230,962
Other assets:
Intangible assets...................................... 308,498 2,131,393 2,119,219
Other assets........................................... 20,250 21,962 21,962
---------- ----------- -----------
328,748 2,153,355 2,141,181
---------- ----------- -----------
$6,285,138 $10,910,909 $11,528,113
========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 160,145 $ 750,312 $ 617,895
Accrued salaries and wages............................. 306,210 569,253 762,711
Other accrued expenses................................. 96,674 283,175 86,601
Current portion of deferred liabilities (Note 6)....... 187,634 108,194 37,419
Current portion of long-term debt (Note 3)............. 374,400 253,333 400,314
---------- ----------- -----------
Total current liabilities...................... 1,125,063 1,964,267 1,904,940
Long-term debt, less current portion (Note 3)............ 2,617,560 4,869,024 4,928,067
Other long-term liabilities, less current portion........ -0- 181,822 204,104
Commitments (Notes 6, 7, 8, and 9)
Shareholders' equity (Notes 4 and 10):
Common stock, no par value; 10,000,000 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 3,959,202
---------- ----------- -----------
Total shareholders' equity..................... 2,542,515 3,895,796 4,491,002
---------- ----------- -----------
$6,285,138 $10,910,909 $11,528,113
========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 51
CHILDCARE NETWORK, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 1,
1997 1998
YEAR ENDED DECEMBER 31, THROUGH THROUGH
-------------------------------------- MARCH 28, MARCH 27,
1995 1996 1997 1997 1998
---------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues (Note 6).................. $9,209,278 $12,183,318 $16,330,758 $3,479,791 $6,420,946
Operating expenses:
Cost of services................. $6,761,277 8,980,864 12,249,202 2,488,128 4,865,370
Selling, general and
administrative expenses....... 495,594 615,508 888,197 181,779 311,559
Depreciation and amortization
expense....................... 501,342 684,471 853,545 182,902 293,230
---------- ----------- ----------- ---------- ----------
Total operating
expenses............... 7,758,213 10,280,843 13,990,944 2,852,809 5,470,159
---------- ----------- ----------- ---------- ----------
Income from operations............. 1,451,065 1,902,475 2,339,814 626,982 950,787
Interest expense, net.............. (311,142) (277,098) (190,223) (48,893) (91,181)
---------- ----------- ----------- ---------- ----------
Net income............... $1,139,923 $ 1,625,377 $ 2,149,591 $ 578,089 $ 859,606
========== =========== =========== ========== ==========
Supplemental unaudited pro forma
information:
Net income, as above............. $1,139,923 $ 1,625,377 $ 2,149,591 $ 578,089 $ 859,606
Pro forma provision for income
taxes (Note 5)................ (433,170) (617,640) (816,840) (219,674) (326,650)
---------- ----------- ----------- ---------- ----------
Pro forma net income............. $ 706,753 $ 1,007,737 $ 1,332,751 $ 358,415 $ 532,956
========== =========== =========== ========== ==========
Basic and diluted shares
outstanding................... 4,905,000 4,905,000 4,932,000 4,925,000 4,935,000
========== =========== =========== ========== ==========
Pro forma net income per basic
and diluted share............. $ 0.14 $ 0.21 $ 0.27 $ 0.07 $ 0.11
========== =========== =========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 52
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 -0- -0- -0-
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- 859,606 859,606
Dividends (Unaudited)............................ -0- -0- (264,400) (264,400)
--------- -------- ----------- ----------
Balance at March 27, 1998 (Unaudited)............ 4,935,000 $531,800 $ 3,959,202 $4,491,002
========= ======== =========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 53
CHILDCARE NETWORK, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 1,
1997 1998
YEAR ENDED DECEMBER 31, THROUGH THROUGH
--------------------------------------- MARCH 28, MARCH 27,
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 $ 578,089 $ 859,606
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization..... 501,342 684,471 853,545 182,902 293,230
Amortization of deferred
revenues....................... (38,010) (113,893) (140,054) (53,563) (66,922)
Other............................. -0- 32,883 (2,932) -0- -0-
Changes in operating assets and
liabilities:
Accounts receivable............ (204,022) 92,545 (679,583) 96,647 181,141
Prepaid expenses and other
current and noncurrent
assets....................... (130,891) 105,120 (54,860) (53,625) (352,019)
Accounts payable............... 376,344 (293,096) 440,167 (151,108) (132,417)
Accrued salaries and wages..... 175,450 8,960 263,043 64,298 193,458
Other accrued expenses......... (11,525) 32,639 182,463 (14,263) (154,545)
----------- ----------- ----------- --------- -----------
Net cash provided by
operating activities....... 1,808,611 2,175,006 3,011,380 649,377 821,532
INVESTING ACTIVITIES
Acquisition of child development and
learning centers.................. (1,393,397) (95,825) (1,840,476) -0- (250,000)
Purchases of property and
equipment......................... (532,809) (455,850) (926,762) (30,607) (509,066)
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) (30,607) (759,066)
FINANCING ACTIVITIES
Bank credit agreement
Borrowings........................ 1,250,000 -0- 3,497,000 -0- 2,277,793
Repayments........................ (405,100) (654,341) (3,033,269) (543,600) (1,238,436)
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) (232,154) (264,400)
----------- ----------- ----------- --------- -----------
Net cash provided by (used
in) financing activities... 357,646 (1,858,319) (332,579) (758,954) (58,376)
----------- ----------- ----------- --------- -----------
Net increase (decrease) in cash and
cash equivalents.................... 581,732 (227,541) (88,437) (140,184) 4,090
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 $ 807,328 $ 863,165
=========== =========== =========== ========= ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 54
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
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 of approximately $1,080,000, $1,164,000 and
$1,581,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
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. Deposits with banks are generally federally insured in limited amounts.
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.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill and deferred debt costs and
are amortized over a period ranging from 5 to 25 years under the straight-line
method. Accumulated amortization of intangible assets was approximately $47,000
and $83,600 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. If such an evaluation is required, the estimated future
undiscounted cash flows associated with this asset would be 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.
F-7
<PAGE> 55
CHILDCARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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. 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 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.
F-8
<PAGE> 56
CHILDCARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
INTERIM FINANCIAL DATA (UNAUDITED)
The accompanying balance sheet as of March 27, 1998, and the related
statements of income, shareholders' equity and cash flows for the period January
1, 1998 through March 27, 1998 and the period January 1, 1997 through March 28,
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.
RECLASSIFICATIONS
Certain amounts in the accompanying financial statements have been
reclassified to be consistent with the 1997 presentation.
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. See Note
3 "Indebtedness."
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. The excess of the purchase
price over the net tangible assets acquired was not material.
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 as defined in the purchase agreement.
At closing, the Company paid approximately $920,000 in cash. The Academe
Acquisition was accounted for using the purchase method and, accordingly, the
purchase price was allocated to the net tangible assets acquired based
F-9
<PAGE> 57
CHILDCARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS -- (CONTINUED)
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 of
$1,666,666. 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 year ended December 31, 1997 and
the period January 1, 1997 through March 28, 1997 is presented below and assumes
that the Young World Acquisition occurred on January 1, 1997. 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, 1997, 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, 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>
Unaudited pro forma operating data for the period January 1, 1997 through
March 28, 1997 are as follows:
<TABLE>
<CAPTION>
YOUNG
WORLD PRO FORMA PRO FORMA
COMPANY ACQUISITION ADJUSTMENTS COMPANY
---------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................................ $3,479,791 $1,412,236 $ -0- $4,892,027
========== ========== ======== ==========
Net income (loss) before pro forma
provision for income taxes............ $ 578,089 $ (127,940) $(93,039) $ 337,110
========== ========== ======== ==========
Pro forma net income (loss)............. $ 358,415 $ (127,940) (21,467) $ 209,008
========== ========== ======== ==========
Pro forma net income per basic and
diluted share......................... $ 0.07 $ 0.04
========== ==========
</TABLE>
F-10
<PAGE> 58
CHILDCARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS -- (CONTINUED)
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 MARCH 27, 1998
---------- ---------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Bank Credit Agreement............................ $2,991,960 $3,455,691 $4,495,048
Acquisition Note................................. -0- 1,666,666 833,333
---------- ---------- ----------
2,991,960 5,122,357 5,328,381
Less current portion............................. (374,400) (253,333) (400,314)
---------- ---------- ----------
$2,617,560 $4,869,024 $4,928,067
========== ========== ==========
</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 $2,000,000 through July 1,
1999 (the "Line of Credit") and term loans up to an aggregate maximum of
$5,000,000 (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 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.
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.
F-11
<PAGE> 59
CHILDCARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. INDEBTEDNESS -- (CONTINUED)
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 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.
During February 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 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.
Dividends of approximately $466,000, $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.
F-12
<PAGE> 60
CHILDCARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 MARCH 28, 1997 MARCH 27, 1998
-------- -------- -------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Computed using a 34% tax
rate..................... $387,574 $552,628 $730,861 $201,432 $298,655
State income taxes, net of
federal tax.............. 45,596 65,012 85,979 23,698 35,135
-------- -------- -------- -------- --------
$433,170 $617,640 $816,840 $225,130 $333,790
======== ======== ======== ======== ========
</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.
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 program 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
F-13
<PAGE> 61
CHILDCARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. FEDERAL AND STATE CONTRACTS -- (CONTINUED)
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. Revenues and fees
generated under these agreements equaled approximately $1,034,000, $1,587,000
and $1,638,000 in 1995, 1996 and 1997, 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.
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,
F-14
<PAGE> 62
CHILDCARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. SUBSEQUENT EVENTS -- (CONTINUED)
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.
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.
DIVIDEND
In April 1998, the Company declared and paid dividends of approximately
$335,000 to its shareholders of record at April 11, 1998.
F-15
<PAGE> 63
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-16
<PAGE> 64
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
Other operating expenses.................................. 1,900,036
----------
Total operating expenses.......................... 4,937,146
----------
Net loss.................................................... $ (215,583)
==========
</TABLE>
See accompanying notes.
F-17
<PAGE> 65
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-18
<PAGE> 66
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 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 executive management. Compensation expense
under these plans includes approximately $172,000 paid subsequent to September
29, 1997.
ADVERTISING
The Company expenses advertising costs when incurred.
F-19
<PAGE> 67
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.
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.
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-20
<PAGE> 68
[PICTURES OF CHILDREN ENGAGED IN VARIOUS ACTIVITIES IN THE COMPANY'S CLASSROOMS]
<PAGE> 69
======================================================
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.............................. 24
Management............................ 35
Certain Transactions.................. 38
Principal and Selling Shareholders.... 39
Description of Capital Stock.......... 40
Shares Eligible for Future Sale....... 43
Underwriting.......................... 45
Legal Matters......................... 46
Experts............................... 46
Additional Information................ 46
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> 70
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 Registar 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> 71
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 October 21, 1996 the Company issued 10,000 shares to Albert Ernest, Jr.
at a price of $7.00 per share in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act.
II-2
<PAGE> 72
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 -- Form of Restated Articles of Incorporation of the Company
3.2 -- Form of 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
, 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 -- Term Loan and Revolving Line of Credit Agreement dated March
26, 1993 by and between the Company and Trust Company Bank
of Columbus, N.A., as amended
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>
- ---------------
* To be filed by amendment
II-3
<PAGE> 73
(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 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> 74
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 June 8, 1998.
CHILDCARE NETWORK, INC.
By: /s/ RAY E. CROWLEY
------------------------------------
Ray E. Crowley
Chairman and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ray E. Crowley, James F. Loudermilk and Lanier
Merritt, jointly and severally, his true and lawful attorneys-in-fact and
agents, each with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments to this registration statement, and to file the same, with exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each of said attorneys-in-fact and agents, or his substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
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 June 8, 1998
- ----------------------------------------------------- Officer
Ray E. Crowley (Principal Executive
Officer)
/s/ JAMES F. LOUDERMILK President and Director June 8, 1998
- -----------------------------------------------------
James F. Loudermilk
/s/ LANIER MERRITT Executive Vice President, June 8, 1998
- ----------------------------------------------------- Chief Financial Officer
Lanier Merritt and Director (Principal
Financial Officer)
/s/ JOSEPH G. SLAUGHTER, III Controller (Principal June 8, 1998
- ----------------------------------------------------- Accounting Officer)
Joseph G. Slaughter, III
/s/ MURRAY D. GRAY, JR. Director June 8, 1998
- -----------------------------------------------------
Murray D. Gray, Jr.
/s/ NOLL A. VAN CLEAVE, JR. Director June 8, 1998
- -----------------------------------------------------
Noll A. Van Cleave, Jr.
/s/ ALBERT ERNEST, JR. Director June 8, 1998
- -----------------------------------------------------
Albert Ernest, Jr.
</TABLE>
II-5
<PAGE> 75
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ CALVIN J. MARTIN, JR. Director June 8, 1998
- -----------------------------------------------------
Calvin J. Martin, Jr.
/s/ RICHARD Y. BRADLEY Director June 8, 1998
- -----------------------------------------------------
Richard Y. Bradley
</TABLE>
II-6
<PAGE> 76
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 10, as to which the date is June 1, 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 10
as to which the date is June 1, 1998
II-7
<PAGE> 77
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 MARCH 27, 1998:
Deduction from asset account:
Allowance for doubtful
accounts.................. 76,152 61,795 41,795(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 ____________________ (__________) 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 ___________, 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 _____________, 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 __________, 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.
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:
James F. Loudermilk
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, 2.10, 3.2, 3.3, 3.4, 3.5, 8.7 and 8.8 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 all shareholders
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 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. 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
3
<PAGE> 4
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 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.
4
<PAGE> 5
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.
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.
5
<PAGE> 6
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.
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.
6
<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"). Any such request by a
majority of the Whole Board 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 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
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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 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
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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 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
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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 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
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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, 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
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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 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
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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 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
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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.
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
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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 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
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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 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
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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 time and place either within or without the State of Georgia as
shall from time to time be determined by the Board of Directors.
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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; (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
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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.
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
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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.
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
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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 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.
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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 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
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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 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.
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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 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
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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 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
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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.
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.
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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.
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.
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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 protection of a Director, officer, employee or agent that exists at the
time of such amendment, modification or repeal.
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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.
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(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.
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(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
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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
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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.
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EXHIBIT 10.2
TERM LOAN AND REVOLVING LINE OF CREDIT AGREEMENT
THIS TERM LOAN AND REVOLVING LINE OF CREDIT AGREEMENT (this
"Agreement"), dated as of March 26, 1993, by and between CHILDCARE NETWORK,
INC., a Georgia corporation ("Borrower"), and TRUST COMPANY BANK OF COLUMBUS,
N.A., a national banking association ("Lender").
WITNESSETH:
WHEREAS, Borrower has requested that Lender extend term loans to
Borrower in the principal amount of $2,200,000 to finance Borrower's acquisition
of certain assets of Kinder-Care Learning Centers, Inc. a Delaware
corporation("Kinder-Care"); and
WHEREAS, Borrower has requested that Lender extend a revolving line of
credit to Borrower in an aggregate principal amount not to exceed $175,000 at
any one time outstanding for Borrower's working capital needs; and
WHEREAS, Lender has agreed to extend such term loans and revolving line
of credit to Borrower upon the terms and conditions set forth and contained
herein;
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 as follows:
ARTICLE I
AMOUNT AND TERMS OF BORROWINGS
Section 1.1 Term Loans and Term Notes. Subject to the terms and
conditions set forth in this Agreement, Lender agrees to lend to Borrower the
aggregate principal amount of $2,200,000 (the "Term Loans") to be evidenced by
two promissory notes each dated the date of execution of this Agreement in the
form of Exhibits "A" and "B" attached hereto and incorporated herein (the "Term
Notes"). The Term Notes shall be payable to the order of Lender in the original
principal amount of $1,775,360.00 and $424,640.00, ("Real Estate Note" and
"Equipment Note" respectively) and shall bear interest on the outstanding
principal balances from the date of the Term Notes to final payment at an annual
rate of interest equal to Lender's Prime Rate from time to time in effect plus
one-half of one percent (.50%) (the "Term Note Rate"), but in no event shall the
Term Note Rate ever be greater than ten percent (10.0%) per annum or less than
six percent (6.0%) per annum, and the Real Estate and Equipment Notes shall
mature on April 1, 1998, or sooner should Lender declare the principal and
accrued interest on the Term Note
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to be immediately due and payable as provided for hereinafter. Accrued and
unpaid interest on the Term Loans shall be due and payable on the first (1st)
day of each calendar month during the term thereof commencing May 1, 1993, and
the principal amount of the Term Loans shall be due and payable in fifty-nine
(59) consecutive monthly installments as provided in said Term Loans with a
sixtieth and final payment equal to the then outstanding principal balance and
all accrued and unpaid interest being due and payable on April 1, 1998; and the
Equipment Note shall be due and payable in sixty (60) consecutive monthly
installments as provided in said Equipment Note with the first such monthly
principal installment being due and payable on May 1, 1993. Any combined
installment of principal and interest shall be first credited to interest in an
amount equal to the amount of accrued and unpaid interest and the portion of
each such installment not so credited to interest shall be credited to
principal.
Section 1.2 Revolving Line of Credit and Revolving Credit Note. Subject
to the terms and conditions of this Agreement, Lender agrees to establish a
revolving line of credit in favor of Borrower in an aggregate principal amount
not to exceed $175,000 at any one time outstanding (the "Revolving Line of
Credit"). Within the limits of the Revolving Line of Credit, Borrower may
borrow, repay and reborrow under the terms of this Agreement; provided, however,
that Borrower may neither borrow nor reborrow should there exist a Default or an
Event of Default. Borrowings and reborrowings under the Revolving Line of Credit
shall be evidenced by a single revolving credit note dated the date of execution
of this Agreement in the form of Exhibit "C" attached hereto and incorporated
herein (the "Revolving Credit Note"). The Revolving Credit Note shall be payable
to the order of Lender in the principal amount of $175,000, shall bear interest
on the outstanding principal balance from the date of the Revolving Credit Note
to final payment at an annual rate of interest equal to Lender's Prime Rate from
time to time in effect (the "Revolving Credit Note Rate") and shall mature on
April 1, 1996, or sooner should Lender declare the principal and accrued
interest on the Revolving Credit Note to be immediately due and payable as
provided for hereinafter. Interest shall accrue on the unpaid principal amount
of each Advance from the date of such Advance at the Revolving Credit Note Rate
and shall be due and payable monthly on the first (1st) day of each calendar
month.
Section 1.3 Method of Borrowing Under the Revolving Line of Credit.
Borrower may borrow under the Revolving Line of Credit by giving Lender written
or telephonic notice (promptly confirmed in writing) of any requested Advance
under the Revolving Line of Credit (a " Notice of Borrowings) specifying (i) the
amount of such Advance and (ii) the date the proposed Advance is to be made
(which shall be a Business Day). Each Notice of Borrowing shall be given to
Lender no later than 12:00 Noon (Columbus, Georgia time) on the
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day of the requested Advance. Lender 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 of Borrower and any Advance made by Lender based on such
telephonic notice shall, when deposited by Lender to Borrower's account at
Lender, constitute an Advance under the Revolving Line of Credit for all
purposes hereunder.
Section 1.4 Optional Prepayment of the Term Loans.
(a) Borrower shall have the right to prepay the Term Loans in whole at
any time or in part from time to time, without premium or penalty, but with
accrued and unpaid interest on the principal amount prepaid to the date of such
prepayment. All such prepayments shall first be credited to accrued and unpaid
interest and the balance shall be credited to principal.
(b) Borrower shall notify Lender at least two days in advance of any
such voluntary prepayment. Any partial prepayments shall be in the minimum
principal amount of $10,000 and in increments of $1,000 thereafter (or the
entire outstanding principal amount of either of the Term Loans), and each such
partial prepayment shall be applied in the inverse order of maturity to
principal installments due under the Term Loans as specified by the Borrower.
Section 1.5 Computation of Interest. Interest payable on the Term Notes
and the Revolving Credit Note shall be calculated on the basis of a 360-day year
and the actual number of days elapsed. Any change in the rate of interest
accruing under the Term Note or the Revolving Credit Note and resulting from a
change in Lender's Prime Rate shall be effective as of the opening of business
on the effective date of the change in Lender's Prime Rate.
Section 1.6 Interest Upon Default. In the event that any payment of
principal and/or interest under the Term Notes or the Revolving Credit Note is
not paid within ten (10) Days from its due date, whether or not by reason of
acceleration, such sum shall bear interest from the due date thereof until paid
at the per annum rate which is two percent (2%) above the interest rate which
would otherwise be in effect thereunder (the "'Default Rate"). Interest accruing
at the Default Rate shall be payable upon demand or, if sooner, on the date of
the next installment of principal and/or interest due under the Term Notes or
the Revolving Credit Note, as the case may be.
Section 1.7 Use of Proceeds. The proceeds from the Term Loans and the
Revolving Line of Credit shall be used by Borrower for business and commercial
purposes, including in the case of the Term Loans, for the acquisition of some
of the assets of KinderCare and in the case of the Revolving Line of Credit, for
the general working capital needs of Borrower.
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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
Agreement is subject to the strict satisfaction by Borrower of the following
conditions (all such conditions hereinafter the "Conditions") and this 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 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. Borrower shall have delivered to
Lender a favorable written opinion from Hatcher, Stubbs, Land, Hollis and
Rothschild, 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 Agreement, the
sale of the assets of Kinder-Care by Borrower has been properly approved by the
Bankruptcy Court in which the Chapter 11 bankruptcy of Kinder-Care is pending,
and covering such additional matters relating to the transactions contemplated
hereby as Lender may reasonable request. Borrower also shall deliver to Lender
title insurance policies with respect to the interest of Lender under the Deeds
to Secure Debt and the Assignments of Leases required by subsection (f) of this
Section 2.1 with such exceptions as are reasonably acceptable to Lender dated
the date of this Agreement.
(b) No Defaults; Certificate. Borrower shall be in full compliance with
all the terms and conditions of this Agreement, and no Default or Event of
Default shall have occurred. The representations and warranties set forth in
this 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.
(c) Corporate Action and Authority: Incumbency Certificate. Borrower
shall have delivered to Lender (i) a copy of the organizational papers of
Borrower, certified as true and
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correct by the Secretary of State of the State of Borrower's incorporation, (ii)
certificates from the Secretaries of State of those States (including, without
limitation, Georgia, Alabama, and South Carolina) in which Borrower owns or
leases any property, or otherwise conducts business, certifying Borrower's good
standing as a corporation in such States, and (iii) 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
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 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 deliver the Loan Documents
and to request borrowings and Advances under this Agreement, together with the
original, not photocopied, signatures of such officers. Such certificate shall
be substantially in the form of Exhibit "E" attached hereto and incorporated
herein.
(d) Delivery of Notes. Borrower shall have executed and delivered to
Lender the Term Notes and the Revolving Credit Note.
(e) Security Agreement. Borrower shall have executed and delivered to
Lender a security agreement in form and substance satisfactory to Lender (the
"Security Agreement"), granting and conveying to Lender a first-priority
security interest and lien (as defined by the Uniform Commercial Code in effect
in Georgia, O.C.G.A. ss.11-g-101 et. seq.) in all assets of Borrower being
purchased from Kinder-Care together with all replacements and substitutions
thereof, excluding vehicles, as set forth and described on Exhibit "F" attached
hereto and incorporated herein (the "Collateral"). The security interests
granted to Lender under the Security Agreement shall secure all obligations of
Borrower under this Agreement. Further, Borrower shall have executed and
delivered to Lender for filing UCC-1 Financing Statements in form and substance
satisfactory to Lender and properly endorsed or executed certificates of title
or other properly executed instruments or documents deemed necessary or proper
by Lender, to enable Lender to establish and perfect the security interests of
Lender in the Collateral as granted by the Security Agreement.
(f) Deeds to Secure Debt. Borrower shall have executed and delivered to
Lender Deeds to Secure Debt and Security Agreement in form and substance
satisfactory to Lender (the "Deed"), granting and conveying to Lender the real
property described in Exhibit "G" attached hereto and incorporated herein (the
"Real Property") subject only to such liens and encumbrances that are acceptable
to Lender, in its sole discretion. The Deed shall secure all obligations of
Borrower under this Agreement.
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(g) Assignment of Leases. Borrower shall have executed and delivered to
Lender Assignments of Leases in form and substance satisfactory to Lender (the
"Assignments") assigning the real property leases scheduled on Exhibit "H"
attached hereto and incorporated herein (the "Leased Real Property") subject
only to such liens and encumbrances that are acceptable to Lender, in its sole
discretion. The Assignments shall secure all obligations of Borrower under this
Agreement.
(h) Subordination Agreement. Borrower shall have executed, and shall
have caused the holders of the Subordinated Debt described on Exhibit "I" to
have executed, in favor of Lender subordination agreements in form and substance
satisfactory to Lender ("Subordination Agreements"), subordinating the
indebtedness evidenced by the Subordinated Debt as provided in the Subordination
Agreements.
(j) Capital Structure and Ownership of Borrower. On and as of the
Effective Date, the capital structure and ownership of Borrower shall be as set
forth on Exhibit "J" attached hereto and incorporated herein.
(k) Insurance. Borrower shall have provided evidence satisfactory to
Lender that Borrower has procured the insurance described in Sections 3.16 and
4.8 hereof and that such insurance is in full force and effect on the Effective
Date.
(l) Environmental Assessment. Borrower shall have completed and
returned to Lender the environmental report or check list form provided Borrower
by Lender.
(m) Appraisals. Lender shall have received appraisals of the Real
Property from appraisers satisfactory to Lender, which appraisals shall have
been conducted not more than ninety (90) days prior to the Effective Date.
(n) Closing and Purchase of Assets. Borrower's purchase of certain
assets of Kinder-Care pursuant to that certain Asset Purchase Agreement dated
January 21, 1993, by and among Borrower (as "Purchaser"), Kinder-Care (as
"Seller"), shall have been closed or completed in all respects and proper
approval of the Bankruptcy Court in which the Chapter 11 bankruptcy of
Kinder-Care is pending has been obtained.
(o) 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.
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(P) Surveys. Lender shall have received surveys of the Real Property
from surveyors satisfactory to Lender.
Section 2.2 Conditions to Each Advance. At the time of the making by
Lender of each Advance under the Revolving 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 power and authority (corporate and other) to
execute, deliver and to perform its obligations under the Loan Documents.
Section 3.2 Corporate Authority. The execution and delivery by Borrower
of and the performance by Borrower of its obligations under the Loan Documents
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
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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
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.
Section 3.7 Title to Properties. Borrower owns marketable fee simple
title to all of the property and assets of Borrower
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including, without limitation, (i) on the Effective Date, all properties and
assets acquired from Kinder-Care (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 Agreement, the Term Note, the
Revolving Credit Note, the Deed, the Security Agreement, 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.
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
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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 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 Term Notes or the Revolving Credit Note.
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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.
Section 3.17 Possession of Franchises Licenses. Etc. Borrower possesses
all franchises, certificates, licenses (other than those licenses which cannot
be issued or transferred until after the closing of the purchase of the assets
from Kinder-Care) 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 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 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 Term Loans or the Revolving Line of Credit 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:
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(a) Quarterly Statements. As soon as practicable and in any event
within thirty (30) days after each fiscal quarter, an unaudited income and
expense statement and balance sheet and statement of cash flows for Borrower
certified as correct in all material respects by the chief executive officer and
chief financial officer of Borrower;
(b) Annual Audited Statement. As soon as practicable and in any event
within one hundred twenty (120) 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 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, and (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;
(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
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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 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 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
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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
insurance in the amount of $2,000,000.00 per location of the Leased Real
Property and the Real Property and hazard insurance in the aggregate amount of
$6,000,000.00 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.
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.
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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 Security Agreement.
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 and
subject to the terms of the Security Agreement, any and all personal property
acquired by Borrower for use at the child care centers being acquired from
Kinder-Care including without limitation, any and all equipment, machinery,
furniture, inventory and accounts (but not including vehicles) shall be subject
to a first priority security interest (other than purchase money security
interests) in favor of Lender, and Borrower shall execute and deliver to Lender
any security agreement, financing statement, deed to secure debt, certificate of
title or other document deemed proper by Lender to perfect such security
interest in Lender.
Section 4.13 Deposits. Borrower shall maintain its primary depository
account with Lender.
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.
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Section 4.15 Business. Borrower shall remain substantially in the
business in which Borrower is engaged as of the date of this Agreement.
ARTICLE V.
NEGATIVE COVENANTS
So long as the Term Loans and the Revolving Line of Credit 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 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, and (v) existing
debt of the 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 (c) above to the extent that these activities do not
exceed $100,000 in aggregate amount at any one time during the term of this
Agreement, including extensions and renewals hereof.
Section 5.3 Capital Expenditures. Borrower shall not make or incur
Capital Expenditures, including, without limitation, any capital lease
obligations, in excess of $300,000.00 in any one fiscal year of Borrower except
for the current fiscal year during which Borrower shall not make or incur
Capital Expenditures in excess of $700,000.00 of which $400,000.00 shall be
funded by a portion of the Subordinated Debt. For the purposes of this
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Agreement any capital lease obligation shall be deemed and considered a Capital
Expenditure.
Section 5.4 Financial Requirements. Borrower shall not:
(a) Debt Service Coverage Ratio. Permit its Debt Service Coverage Ratio
at any time to be less than 1.50 to 1.
(b) Shareholder Investment to Total Capitalization. Permit, at any time,
its Shareholder Investment to be less than 35% of its Total Capitalization.
(c) Minimum Tangible Net Worth. Maintain a minimum Tangible Net Worth of
not less than $1,600,000 by December 31, 1993 and shall increase by at least 50%
of net income after tax distributions on a yearly basis.
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
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<PAGE> 18
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.
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 Term Notes, the Revolving Credit Note 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
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<PAGE> 19
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 Agreement or any covenant or agreement contained
in any other Loan 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 Agreement or any other covenant, term or
condition contained in this 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
19
<PAGE> 20
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
(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
(1) Lender, at any time and in good faith shall deem itself insecure (and
for the purposes of this Agreement, Lender shall be entitled to deem itself
insecure when some event occurs, fails to occur or is threatened or some
objective consition 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).
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 Revolving Line of Credit, and (ii)
declare the Term Notes, the Revolving Credit Note and any other note of Borrower
held by Lender including, without limitation, principal, accrued interest and
costs of collection (including, without
20
<PAGE> 21
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 Revolving Line of Credit shall terminate
automatically, and (ii) the Term Notes, the Revolving Credit Note and any other
note 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 Term Notes, the Revolving Credit Note or any other note 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 Term Notes, under the
Revolving Credit Note, under any other note 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 Agreement received by Lender after
the occurrence of an Event of Default and acceleration of the Term Notes, the
Revolving Credit Note or any other note 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 prevent the exercise, or continued exercise, of
rights or remedies of Lender hereunder or under applicable law.
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<PAGE> 22
ARTICLE VII.
DEFINITIONS
For the purposes of this Agreement, the terms:
(a) "Advance" shall mean any advance of funds by Lender to Borrower under
the Revolving Line of Credit.
(b) "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.
(c) "Business Day" shall mean a day of the year on which commercial banks
are not required or authorized to close in Columbus, Georgia.
(d) "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 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.
(e) "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.
(f) "Cash Flow" for any given period shall mean the sum of Borrower's Net
Income After Taxes (and Permissible Tax Distributions), plus Depreciation and
amortization, all for such period.
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<PAGE> 23
(g) "Code" shall mean the Internal Revenue Code of 1986, as amended, and
the regulations promulgated and the rulings issued thereunder.
(h) "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.
(i) "Debt Service Coverage Ratio" as at any date shall mean (i) Cash Flow
for the 12-month period ending on such date divided by (ii) the Current Portion
of Funded Debt on such date.
(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.
(1) "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) "Funded Debt" shall mean the Term Loan, the Revolving Line of Credit,
the Subordinated Debt and other indebtedness for borrowed money payable more
than one year from the date of creation thereof or renewable at the option of
Borrower by the terms of the governing instrument to mature more than one year
after the date of creation, capitalized leases, and any indebtedness secured by
a Lien on property owned by Borrower.
(n) "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 the filing of or agreement to give any financing statement under the
Uniform Commercial Code of any jurisdiction.
(o) "Loan Documents" shall mean and include, as the context requires, this
Agreement, the Term Notes, the Revolving Credit Note, the Deed, the Security
Agreement, the Subordination Agreements, and any and all other instruments,
agreements, documents and writings contemplated hereby or executed in connection
herewith.
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(p) "Multiemployer Plan" shall mean a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA.
(q) "PBGC" shall mean the Pension Benefit Guaranty Corporation and any
successor thereto.
(r) "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).
(s) "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.
(t) "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 (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,
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severance pay or other fringe benefit plan, program, arrangement, contract or
practice.
(u) "Real Property" shall mean the real property owned by Borrower
referenced in Section 2.1 (f) and described on Exhibit "G" attached hereto.
(v) "Shareholder Investment" shall mean the sum of Shareholder Equity plus
Subordinated Debt.
(w) "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.
(x) "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.
(y) "Total Capitalization" shall mean the sum of Shareholder Equity plus
Funded Debt.
(z) "Tangible Net Worth" shall mean Shareholder Equity plus Subordinated
Debt minus Goodwill.
ARTICLE IX.
MISCELLANEOUS
Section 9.1 No-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
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business day after the day on which mailed if sent by first-class, certified
mail, postage prepaid, to the following addresses:
(1) If to Lender, Trust Company Bank of Columbus, N.A.
P.O. Box 431
Columbus, GA 31994-3199
Telecopier number 706-649-3757
Attn: E. Jerry Coleman, III
(2) If to Borrower, Childcare Network, Inc.
P.O. Box 1155
Columbus, GA 31902
Telecopier number 706-571-2650
Attn: James F. Loudermilk
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 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
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 Agreement and all other Loan Documents.
Section 9.8 Counterparts. This 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.
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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 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 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 Agreement
to the contrary, Lender shall have the right, but shall not be obligated, to
sell participations and sell subparticipations in the loans made pursuant hereto
to other banks, financial institutions and investors.
Section 9.11 Amendments; No Implied Waiver. This 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
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 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 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
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<PAGE> 28
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 Agreement or under any other Loan Document shall be,
in the city 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 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 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 Agreement or any other Loan
Document by any representation, statement or analysis made by Lender.
WITNESS the hand and seal of the parties hereto through their duly
authorized officers, as of the date first above written.
CHILDCARE NETWORK, INC. INC.
BY: /s/ James F. Loudermilk, President
------------------------------------------
James F. Loudermilk, President
ATTEST: /s/ Murray D. Gray, Jr., Secretary
--------------------------------------
Murray D. Gray, Jr., Secretary
[CORPORATE SEAL]
[Execution of document continued on next page]
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TRUST COMPANY BANK OF COLUMBUS, N.A.
BY: /s/ E. Jerry Coleman
------------------------------------------
TITLE: First Vice President
----------------------------------
BY: /s/ John M. Eldridge
------------------------------------------
TITLE: Vice President
----------------------------------
[BANK SEAL]
29
<PAGE> 30
MODIFICATION TO TERM LOAN AND
REVOLVING LINE OF CREDIT AGREEMENT
This Modification Agreement made and entered into as of the 6th day of
May, 1994, by and between CHILDCARE NETWORK, INC., a Georgia corporation
("Borrower), and 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") whereby Lender
extended credit to Borrower in the aggregate amount of $2,375,000.00; and
WHEREAS, Lender has agreed to extend additional credit to Borrower in
the amount of $1,000,000.00 ("Additional Loan") and to make the Additional Loan
subject to the terms and conditions of the Agreement; and
WHEREAS, the parties hereto wish to modify the terms of the Agreement
to provide for the New Loan being made subject to the terms and conditions of
the Agreement and the Agreement being modified to accommodate the Additional
Loan which will be evidenced by a promissory note of even date hereof from
Borrower to Lender in the principal amount of $2,714,160.00, the difference
being a refinance of the present principal balance ($1,714,160.00) of the Term
Loan dated March 26, 1993 in the original amount of $1,750,360.00 from Maker to
Holder.
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 as follows:
1.
The Agreement is hereby modified by adding thereto the following
sections:
Section 1.1A - Additional Loan. Subject to the terms and conditions of
the Agreement, as modified herein, Lender agrees to lend to Borrower
the principal amount of $1,000,000.00 (the "Additional Loan") to be
evidenced by a promissory note in the amount of $2,714,160.00, a copy
of which is hereto annexed as Exhibit "A" and to which reference is
made for the particular terms and provisions thereof.
Section 1.7A - Use of Proceeds of Additional Loan. The proceeds from
the Additional Loan shall be used to pay certain indebtedness owned by
Borrower to its shareholders totalling $1,000,000.00.
<PAGE> 31
2.
The Agreement is hereby further modified by
(a) deleting from ARTICLE V, Section 5.1 the following, "and (v) existing
debt of the Borrower." and inserting in lieu thereof the following: (v)
existing debt of the Borrower, and (vi) additional debt borrowed from the
Lender.";
(b) deleting from ARTICLE V, Section 5.4(b) the following: "at any time"
and inserting in lieu thereof the following: "after December 31, 1994.";
and
(c) deleting from ARTICLE V, Section 5.4(c) the following: "1993" and
inserting in lieu thereof the following, "1994".
3.
Borrower hereby represents, warrants and convenants that it is in full
compliance with the terms of the Agreement, as modified, as of the date hereof
and that all of the covenants, representations and warranties contained in
Articles III, IV and V of the Agreement, as modified, are still true and
correct and that Lender is in compliance with each such representation,
warranty and covenant.
4.
Except as modified hereby, the original Agreement shall other otherwise
remain in full force and effect in accordance with its respective terms,
Borrower and Lender hereby ratifying and confirming the same.
IN WITNESS WHEREOF, Borrower and Lender have caused this modification to
be executed for them and on their behalf and have caused to be hereunto affixed
their corporate seals, by their duly authorized corporate officers, the day and
year first above written.
CHILDCARE NETWORK, INC.
By: /s/ James Loudermilk
----------------------------------
Title: President
------------------------
Attest: /s/ Murray D. Gray
----------------------------
Title: Secretary
------------------------
<PAGE> 32
Signed, sealed and delivered in
the presence of:
/s/ Debby Macon
- ---------------------------------------
/s/ J. B. Vaught
- ---------------------------------------
Notary Public, Muscogee County, Georgia
TRUST COMPANY BANK OF COLUMBUS, N.A.
By: /s/ E.J. Chuman
-----------------------
Title: Group V.P.
----------------
Attest: /s/ Pam W. Patruli
-------------------
Title: AVP
----------------
Signed, sealed and delivered in (Corporate Seal)
the presence of:
/s/ Debby Macon
- ---------------------------------------
/s/ J. B. Vaught
- ---------------------------------------
Notary Public, Muscogee County, Georgia
J.B. VAUGHT
- -NOTARY PUBLIC-
MUSCOGEE COUNTY, GA
- -OFFICIAL SEAL-
My Commission Expires March 20, 1995
3
<PAGE> 33
SECOND MODIFICATION TO TERM LOAN AND
REVOLVING LINE OF CREDIT AGREEMENT
This Second Modification Agreement dated as of the 30th day of June,
1995, by and between CHILDCARE NETWORK, INC., a Georgia corporation
("Borrower), and 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 whereby Lender extended
credit to Borrower in the aggregate amount of $2,375,000.00 which was modified
by a Modification to Term Loan and Revolving Line of Credit Agreement dated as
of May 6, 1994 between Borrower and Lender (as modified, "Agreement");
WHEREAS, Lender has agreed to extend additional credit to Borrower in
the amount of $1,250,000.00 ("Second Additional Loan") and to subject the Second
Additional Loan to the terms and conditions of the Agreement;
WHEREAS, the parties hereto wish to modify the terms of the Agreement
and to subject the Second Additional Loan to the terms and conditions of the
Agreement and the Agreement being modified to accommodate the Second Additional
Loan which will be evidenced by a promissory note of even date herewith from
Borrower to lender in the principal amount of $1,250,000.00; and
WHEREAS, the parties hereto have also agreed to extend the maturity
date of the Term Note dated May 6, 1994 in the original principal amount of
$2,714,160.00 (also defined as the "Additional Loan" in the Agreement) from
April 1, 1998 to April 1, 2000.
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 as follows:
1.
The Agreement is hereby modified by adding the following language at
the end of Article I, Section 1.1A: "The Additional Loan which is evidenced by
the Term Note dated May 6, 1994 from Borrower to Lender in the original
principal amount of $2,714,160.00 shall be amended and modified to provide for
24 additional monthly installments of $16,200.00 each plus accrued and unpaid
interest and maturity of April 1, 2000 ("Term Note Modification Agreement") a
copy of which is hereby annexed as Exhibit 'A' and when so modified shall
continue to be subject to the terms and provisions of the Agreement."
<PAGE> 34
2.
The Agreement is hereby modified by adding thereto the following sections:
Section 1.1B - Second Additional Loan. Subject to the terms and conditions
of the Agreement, as modified herein, Lender agrees to lend to Borrower the
principal amount of $1,250,000.00, (the Second Additional Loan), to be
evidenced by a promissory note in said amount, a copy of which is hereto
annexed as Exhibit "B" and to which reference is made for the particular
terms and provisions thereof.
Section 1.7B - Use of Proceeds of Second Additional Loan. The proceeds
from the Second Additional Loan shall be used to finance the acquisition of
seven KinderCare Daycare Centers located in Union City, Georgia; College
Park, Georgia; Conyers, Georgia; Athens, Georgia; Smyrna, Georgia;
Marietta, Georgia; and Chattanooga, Tennessee.
3.
The Agreement is hereby further modified by:
(a) deleting Section 5.4(a) of Article V and in lieu thereof, substituting
the following: "(a) Debt Service Coverage Ratio. Maintain a ratio of net
income after tax distributions plus depreciation and amortization expense
to current maturities of long term debt and capital leases of not less than
1.25 to 1.00.";
(b) deleting Section 5.4(c) of Article V and in lieu thereof, substituting
the following: "(c) Minimum Tangible Net Worth. Maintain at all times a
Tangible Net Worth of not less than $1,100,000.00 plus 50 percent of net
income after distributions on a yearly basis.";
(c) adding a new Section 5.4(d) to Article V as follows: "Fixed Charge
Coverage Ratio. Maintain a ratio of net income before tax distributions
plus interest expense and lease expense to interest expense plus lease
expense of at least 1.50 to 1.00."; and
(d) adding a new Section (m) to Article VI as follows: "(m). The failure
of the current ownership and Board of Directors to maintain controlling
interest in the voting shares of Borrower."
4.
Borrower hereby represents, warrants and covenants that it is in full
compliance with the terms of the Agreement, as modified, as of the date hereof
and that all of the covenants, representations and warranties contained in
Article III, IV and V of the Agreement, as modified, are
<PAGE> 35
still true and correct and that Lender is in compliance with each such
representation, warranty and covenants.
5.
Except as modified hereby, the original Agreement shall otherwise remain
in full force and effect in accordance with its respective terms, Borrower and
Lender hereby ratifying and confirming the same.
IN WITNESS WHEREOF, Borrower and Lender have caused this modification to
be executed for them and on their behalf and have caused to be hereunto affixed
their corporate seals, by their duly authorized corporate officers, the day and
year first above written.
CHILDCARE NETWORK, INC.
By: /s/ James F. Loudermilk
---------------------------
Title: President
-------------------------
Attest: /s/ Murray D. Gray
-----------------------
Title: Secretary
-------------------------
(CORPORATE SEAL)
Signed, sealed and delivered in
the presence of:
/s/ Mr. W. Franklin
- --------------------------------------
/s/ Sheryll T. Hutson
- --------------------------------------
Notary Public, Muscogee County, Georgia
My Commission Expires December 6, 1997
<PAGE> 36
TRUST COMPANY BANK OF
COLUMBUS, N.A.
By: /s/ E. J. Chuman
-------------------------------
Title: Sr. V.P.
-------------------------
Attest: /s/
---------------------------
Title: 1st V.P.
-------------------------
(CORPORATE SEAL)
Signed, sealed and delivered in
the presence of:
/s/ Jan Vann
- ---------------------------------------
Rebecca M. Bross expires 10/25/98
- ---------------------------------------
Notary Public, Muscogee County, Georgia
<PAGE> 37
THIRD MODIFICATION TO TERM LOAN AND
REVOLVING LINE OF CREDIT AGREEMENT
This Second Modification Agreement dated as of the 26th day of June,
1997, by and between CHILDCARE NETWORK, INC., a Georgia corporation
("Borrower"), and SUNTRUST BANK, WEST GEORGIA, 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 whereby Lender extended
credit to Borrower in the aggregate amount of $2,375,000.00 which was modified
by a Modification to Term Loan and Revolving Line of Credit Agreement dated as
of May 6, 1994 between Borrower and Lender, and further modified by the Second
Modification to Term Loan and Revolving Line of Credit Agreement dated as of
June 30, 1995 (as modified, "Agreement"); and
WHEREAS, Lender has agreed to restructure the indebtedness owed by
Borrower and to extend additional credit to Borrower; and
WHEREAS, Lender has agreed to provide a revolving line of credit in the
amount of $2,000,000.00 ("1997 Line of Credit") to Borrower and to extend term
loans up to an aggregate maximum of $5,000,000.00 (" 1997 Term Loans"); and
WHEREAS, the parties hereto wish to modify the terms of the agreement
and to subject the 1997 Line of Credit and the 1997 Term Loans to the terms and
conditions of this agreement and to modify the agreement to accommodate the 1997
Line of Credit and the 1997 Term Loans.
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 as follows:
1.
The Agreement is hereby modified by deleting Section 1.1 in its
entirety and inserting in lieu thereof the following:
Section 1.1. 1997 Line of Credit and 1997 Term Loans. Subject
to the terms and conditions set forth in this Agreement, Lender agrees
to lend Borrower the aggregate principal amount of $7,000,000.00 to be
evidenced by (i) the 1997 Revolving 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;
and (ii) one or more term promissory notes substantially in the form as
the term
1
<PAGE> 38
promissory note a copy of which is hereto annexed as Exhibit "B" which
term loans can total a maximum of $5,000,000.00, must be made in
increments greater than $100,000.00, will be repaid based on a 12 year
amortization schedule, and will mature not later than five years from
the date hereof. Provided, however, that the Lender's obligation to
advance funds, and Borrower's ability to borrow and reborrow, under
said 1997 Line of Credit and the Lender to make term loans 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
1997 Line of Credit Note or the 1997 Term Notes, 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 the 1997 Line
of Credit and 1997 Term Loans are to be used to pay Borrower's existing
debt to the Lender and for general corporate needs.
2.
The Agreement is hereby modified by capitalizing the words "fiscal
quarter" in Section 4.1(a) the Agreement.
3.
The Agreement is hereby modified by deleting Section 4.12 in its
entirety and inserting in lieu thereof the following:
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 (but not including vehicles) 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.
4.
Article VI of the Agreement is hereby amended by adding a new paragraph
thereto as follows:
(aa) "Obligations" shall mean all loans contemplated
hereunder, including, without limitation, the 1997 term loan and the
1997 line of credit (including, in each case, all interest thereon),
all commitment fees, all obligations for reimbursement of
2
<PAGE> 39
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.
5.
The Agreement is hereby modified by deleting Sections 1.2, 1.3, 1.4,
1.5, 1.6, 1.7 and all subsections thereof.
6.
The Agreement is hereby modified by deleting paragraph 5.4(a) in its
entirety and inserting in lieu thereof the following:
"(a) ADJUSTED FUNDED DEBT TO CASH FLOW RATIO. Permit Adjusted
Funded Debt (as defined in the 1997 Revolving Line of Credit Note) plus
an adjustment for leases (lease expense times seven) divided by
Earnings before tax distributions, interest expense, lease expense,
depreciation and amortization not to exceed 3.50 to 1.00 for two years
following the date of this Third Modification to Term Loan and
Revolving Line of Credit Agreement and shall not exceed 3.00 to 1.00
thereafter.
7.
The Agreement is hereby modified by deleting paragraph 5.4(c) in its
entirety and inserting in lieu thereof the following:
(c) MINIMUM WORTH. Permit its Worth to be less than
$2,500,000.00 which is Borrower's Worth as of this date and such Worth
shall increase by not less than 35 percent of earnings before tax
distributions on a yearly basis. Shareholder distributions in excess of
tax distributions will be permissible as long as Borrower is still in
compliance with this Minimum Worth requirement.
8.
The Agreement is hereby modified by deleting paragraph 5.4(d) in its
entirety and inserting in lieu thereof the following:
"(d) FIXED CHARGED COVERAGE RATIO. Permit Earnings before tax
distributions, interest expense and lease expense divided by interest
expense and rent
3
<PAGE> 40
expense not to exceed 1.75 to 1.00 within the one year period following
the date of this Third Modification, and 2.00 to 1.00 thereafter.
9.
Section 4.8 of the Agreement is hereby modified by deleting
"$6,000,000.00" in the third line of said section and inserting in lieu thereof
"$9,000,000.00".
10.
Section 5.1 of the Agreement is hereby modified by deleting the word
"and" in the seventh line of said section appearing immediately before "(v)" and
"(vi)", and adding at the end of said section the following: "; 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 Agreement, and, provided further, if such
Seller debt financing is not subordinated to the indebtednesses owed by Borrower
to the Lender, then Lender's obligation to advance funds under either the 1997
Line of Credit or 1997 Term Loans shall be reduced by the amount of such
unsubordinated Seller debt financing."
11.
The Agreement is hereby modified by adding at the end of Article VII
the following: "(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."
12.
Borrower hereby represents, warrants and covenants that it is in full
compliance with the terms of the Agreement, as modified, as of the date hereof
and that all of the covenants, representations and warranties contained in
Articles III, IV and V of the Agreement, as modified, are still true and correct
and that Lender is in compliance with each such representation, warranty and
covenants.
13.
Except as modified hereby, the original Agreement shall otherwise
remain in full force and effect in accordance with its respective terms,
Borrower and Lender hereby ratifying and confirming the same.
4
<PAGE> 41
IN WITNESS WHEREOF, Borrower and Lender have caused this modification
to be executed for them and on their behalf and have caused to be hereunto
affixed their corporate seals, by their duly authorized corporate officers, the
day and year first above written.
CHILDCARE NETWORK, INC.
By: /s/ Noll A. Van Cleave
-----------------------------------------
Name: Noll A. Van Cleave
Title: Chairman of the Board
By: /s/ James F. Loudermilk
-----------------------------------------
Name: James F. Loudermilk
Title: President
Attest: /s/ Murray D. Gray, Jr.
-------------------------------------
Name: Murray D. Gray, Jr.
Title: Secretary
[CORPORATE SEAL]
Signed, sealed and delivered in
the presence of:
/s/ Margo McMahon
- ---------------------------------------
- ---------------------------------------
Notary Public, Muscogee County, Georgia
Notary Public, Muscogee County, Georgia
My Commission Expires March 26, 2001
SUNTRUST BANK, WEST GEORGIA, N.A.
By: /s/
-----------------------------------------
Title: Vice President
-------------------------------
Attest: /s/
-------------------------------------
Title: VP
-------------------------------
(CORPORATE SEAL)
Signed, sealed and delivered in
the presence of:
/s/ Lisa C. Davenport
- ---------------------------------------
Expires - June 19, 1999
- ---------------------------------------
Notary Public, Muscogee County, Georgia
5
<PAGE> 1
EXHIBIT 10.3
(LOGO)
OFFICE OF SCHOOL READINESS
1998-99 SCHOOL YEAR CONTRACT
I. PARTIES
This contract is made and entered into in Fulton County this 23rd day of March,
1998, by and between the Office of School Readiness, 10 Park Place South, Suite
200, Atlanta, Georgia 30303, hereinafter referred to as the "Office," and
Childcare Network, Inc., 3025 University Ave, Suite B-2, Columbus, GA 31907,
hereinafter referred to as the "Contractor."
II. PURPOSE
The purpose of this contract is to coordinate and provide services for 1260
four-year-old children and their families served by the prekindergarten program
as shown in Attachment A.
III. THE CONTRACTOR AGREES:
A. To coordinate and provide services for a total of 8 hours, with a
minimum of 6.5 instructional hours per day beginning no earlier than 7:30
am, and 1.5 other hours for teacher and teacher assistant planning time,
transportation, or activities specifically related to prekindergarten for
180 days to funded four-year-old children and their families.
B. To comply with the Georgia Prekindergarten Program 1998-99 School Year
Pre-K Providers' Operating Guidelines and any addenda.
C. To permit the Office, or its authorized representatives, to observe and
evaluate the delivery or performance of the contracted services. This
includes access to any books, documents, papers and records of the
Contractor which are directly related to this contract for the purpose of
making an audit, examination, photocopies, excerpts and transcriptions.
D. To correct within 10 working days any written notice of noncompliance
found during a program review process and/or show written evidence that
recommendations from the Office or other evaluation results are being
addressed, and that progress is being made toward program improvement.
Failure to comply with program and fiscal requirements may result in
withholding of monthly payments and/or termination from the program.
E. To maintain full and complete records which pertain to the contract for a
period of three years beyond the contract ending date, or until all
litigation, claims, or audit findings involving the records have been
resolved if such claim or audit is started before the expiration date of
the three-year period.
F. To assure, in accordance with the federal Drug-Free Workplace Act of 1988,
that the unlawful manufacture, distribution, dispensing, possession, or
use of a controlled substance is prohibited for individuals who are
directly engaged in the performance of work pursuant to this contract.
G. To comply with the Official Code of Georgia Annotated (O.C.G.A.) Sec.
49-5-110 et. seq. that requires a criminal background check to ensure that
potential employees have not been convicted of crimes that would invalidate
their acceptability for employment.
<PAGE> 2
H. To maintain all current certifications, licenses, and registrations during
the contract period.
I. To remain in compliance with all licensing requirements. If confirmation
or substantiation of maltreatment occurs, notwithstanding any other
provisions of this contract, the Office may terminate this contract
immediately, should the Office determine that the findings impact the
provision of services under this contract.
J. To maintain data which is of a personal and confidential nature and not
disseminate to any third party unless expressly permitted by the Office.
K. To not assign, transfer, or subcontract for the provision of services
under this contract unless prior written consent is obtained from the
Office. This includes providing the Office with all necessary transfer
papers according to the Office procedures in the event of the sale of any
contractor site.
L. Private providers are required to send the Office a copy of an expenditure
report spanning the dates of this contract, with supporting documentation
if requested, for purposes of verifying that funds were spent in
appropriate categories for their intended uses by August 31, 1999. A
check, made payable to the Office of School Readiness, should accompany
the report if appropriate, covering any unexpected funds that were
received under this contract. The Office reserves the right to require an
independent financial audit of the Contractor's prekindergarten program at
the Contractor's expense.
Private nonprofit providers must adhere to audit requirements as specified
in O.C.G.A. Sec. 50-20, Relations with Nonprofit Contractors.
Public school systems are required to send the Office a copy of an
expenditure report spanning the dates of this contract by September 30,
1999. A check, made payable to the Office of School Readiness, should
accompany the report if appropriate, covering any unexpended funds that
were received under this contract. School systems will be required to
comply with audit requirements contained in the Office of Management and
Budget's Circular A-133, Audits of State and Local Government or other
applicable publications.
IV. THE OFFICE AGREES:
A. To provide technical and consultative assistance to the Contractor
in performing the services required by this contact.
B. To pay the Contractor up to the sum specified in this contract (see
Section V., item D) for acceptable services rendered according to
established budgeting procedures.
V. THE CONTRACTOR AND OFFICE MUTUALLY AGREE:
A. The contract period will be August 1, 1998, through June 30, 1999, unless
the contract is amended in writing.
B. The Office will pay the Contractor according to the schedule detailed on
Attachment A unless the contract is amended.
C. Teacher credential status, enrollment information, and the number of
Category One children enrolled will be reported in October 1998, November
1998, December 1998, January 1999, and February 1999 to determine payment
reimbursement.
In the event that the Contractor fails to provide required documentation for
lead teacher credentials and enrollment information in a timely manner,
payment under this contract may be reduced accordingly.
D. The maximum amount of payment for Pre-K and Resource Coordination services
(if applicable) is $4,177,387.40 unless the contract is amended in writing.
<PAGE> 3
E. Funding for Resource Coordination services is part of the monthly payments
for each approved program in accordance to the grant amount awarded.
F. Additional funding for certified teacher training and experience will be
added to monthly payments sent to local school systems.
Additional funding for Transportation will be added to monthly payments for
each eligible Category One child utilizing the service. (Up to $150.00
Annually)
G. No modification of this contract shall be binding upon either party,
unless the contract is amended in writing and approved by both parties.
H. All parties to this contract certify that provisions of the O.C.G.A. Sec.
45-10-20 through 45-10-25, as amended, which prohibit and regulate certain
transactions between State officials, employees, and the State of Georgia,
have not been violated and will not be violated in any respect.
I. Neither party will discriminate in educational programs and activities or
in employment relating to this contract on the basis of race, color,
religion, national origin, sex, age or disability.
J. In the event funding no longer exists or is insufficient to pay the charges
for services obtained hereunder, this contract shall terminate without
further obligation to this Office.
K. Contractor and all of its employees, agents, or subcontractors are not
partners, employees, or agents of the State or Office. Neither party shall
have the authority to bind the other party in any respect, and each shall
remain an independent party. Contractor has responsibility for advising
its clients served under the terms of this agreement about the independent
status of the Contractor and Office.
CHILDCARE NETWORK, INC. OFFICE OF SCHOOL READINESS
BY: /s/ James F. Loudermilk BY: /s/ Pam L. Shapiro
------------------------- ------------------------
(Authorized Signature)
Date: March 23, 1998 Date: June 8, 1998
------------------------ -----------------------
James F. Loudermilk Pam L. Shapiro
President Deputy Director
Federal EIN: 63-0986576 Federal EIN: 58-2238669
Organization Code: 9-2-45 Contract Number: 99-0137
State Class: 201 Vendor Code: 8-1494
State SCOA: 624.201 Source of Funds: 100% Lottery Funds
Cost: $4,177,387.40
<PAGE> 4
(LOGO)
OFFICE OF SCHOOL READINESS
1998-99 SCHOOL YEAR CONTRACT
ATTACHMENT A
<TABLE>
<CAPTION>
<S> <C>
Childcare Network, Inc. Contract Number: 99-0137
James F. Loudermilk Vendor Code: 8-1494
President Cost: $4,177,387.40
3025 University Ave, Suite B-2
Columbus, GA 31907
</TABLE>
Beginning in September 1998, payments will be made on the 15th of each month or
closest business day following the 15th.
<TABLE>
<CAPTION>
COUNTY ZONE TOTAL TOTAL LEAD TEACHER CREDENTIALS SITE
SITE NAME CLASSES CHILDREN CERTIFIED 4 YEAR DEGREE MONTH/VOC CDA/CCP FUNDING
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BIBB 2
Childcare Network #16 1 20 1 0 0 0 $ 59,759.80
Childcare Network #17 1 20 1 0 0 0 $ 59,759.80
Childcare Network #18 2 40 2 0 0 0 $119,519.60
Childcare Network #19 2 40 2 0 0 0 $119,519.60
CHATHAM 2
Childcare Network #20 2 40 2 0 0 0 $119,519.60
Childcare Network #21 2 40 2 0 0 0 $119,519.60
Childcare Network #22 2 40 2 0 0 0 $119,519.60
CLARKE 2
Childcare Network #31 2 40 2 0 0 0 $119,519.60
CLAYTON 1
Childcare Network #29 2 40 2 0 0 0 $132,023.60
COBB 1
Childcare Network #32 2 40 2 0 0 0 $132,023.60
Childcare Network #33 2 40 2 0 0 0 $132,023.60
COLUMBIA 2
Childcare Network #23 2 40 2 0 0 0 $119,519.60
FULTON 1
Childcare Network #28 2 40 2 0 0 0 $132,023.60
HOUSTON 2
Childcare Network #14 1 20 1 0 0 0 $ 59,759.80
</TABLE>
<PAGE> 5
(LOGO)
OFFICE OF SCHOOL READINESS
1998-99 SCHOOL YEAR CONTRACT
ATTACHMENT A
<TABLE>
<CAPTION>
<S> <C>
Childcare Network, Inc. Contract Number: 99-0137
COUNTY ZONE TOTAL TOTAL LEAD TEACHER CREDENTIALS SITE
SITE NAME CLASSES CHILDREN CERTIFIED 4 YEAR DEGREE MONTH/VOC CDA/CCP FUNDING
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HOUSTON 2
Childcare Network #15 2 40 2 0 0 0 $119,519.60
LOWNDES 2
Childcare Network #12 2 40 2 0 0 0 $119,519.60
MUSCOGEE 2
Childcare Network #10 2 40 2 0 0 0 $119,519.60
Childcare Network #11 2 40 2 0 0 0 $119,519.60
Childcare Network #2 1 20 1 0 0 0 $ 59,759.60
Childcare Network #35 2 40 2 0 0 0 $119,519.60
Childcare Network #36 2 40 2 0 0 0 $119,519.60
Childcare Network #4 2 40 2 0 0 0 $119,519.60
Childcare Network #5 2 40 2 0 0 0 $119,519.60
Childcare Network #6 3 60 3 0 0 0 $179,279.40
Childcare Network #8 2 40 2 0 0 0 $119,519.60
Childcare Network #9 2 40 2 0 0 0 $119,519.60
RICHMOND 2
Childcare Network #24 4 80 4 0 0 0 $239,039.20
Childcare Network #25 4 80 4 0 0 0 $239,039.20
Childcare Network #26 4 80 4 0 0 0 $239,039.20
ROCKDALE 1
Childcare Network #30 2 40 2 0 0 0 $132,023.60
- ------------------------------------------------------------------------------------------------------------------------------------
63 1,260 63 0 0 0 3,827,387.40
Resource Coordination Services Grant $350,000.00 Total Grant Award
=================
4,177,387.40
</TABLE>
<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 10 as to which the
date is June 1, 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, GA
June 5, 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>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-25-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-27-1998
<CASH> 859 863
<SECURITIES> 0 0
<RECEIVABLES> 1,126 965
<ALLOWANCES> 76 96
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,030 2,156
<PP&E> 9,440 10,211
<DEPRECIATION> 2,713 2,980
<TOTAL-ASSETS> 10,911 11,528
<CURRENT-LIABILITIES> 1,964 1,905
<BONDS> 0 0
0 0
0 0
<COMMON> 532 532
<OTHER-SE> 3,364 3,959
<TOTAL-LIABILITY-AND-EQUITY> 10,911 11,528
<SALES> 0 0
<TOTAL-REVENUES> 16,331 6,421
<CGS> 0 0
<TOTAL-COSTS> 13,897 5,408
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 94 62
<INTEREST-EXPENSE> 190 91
<INCOME-PRETAX> 2,150 860
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 2,150 860
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,150 860
<EPS-PRIMARY> .27 .11
<EPS-DILUTED> .27 .11
</TABLE>
