ITEM 1. BUSINESS
MERGER TRANSACTIONS
Vestar/LPA Investment Corp. (Investment), a privately-held Delaware corporation, was formed in 1993 for the purpose of holding the capital stock of La Petite Holdings Corp. (Holdings), a Delaware corporation. Holdings was formed in 1993 for the purpose of holding the capital stock of La Petite Acquisition Corp. (Acquisition). On July 23, 1993, as a result of a series of transactions, Holdings acquired all the outstanding shares of common stock, par value $.01 (the Common Stock), of La Petite Academy, Inc., a Delaware corporation (La Petite). The transaction was accounted for as a purchase and the excess of purchase price over the net assets acquired is being amortized over 30 years. On May 31, 1997, Holdings was merged with and into La Petite with La Petite as the surviving corporation. On August 28, 1997, LPA Services, Inc. (Services), a wholly owned subsidiary of La Petite, was incorporated. Services provides third party administrative services on insurance claims to La Petite.
On March 17, 1998, LPA Investment LLC (the Investor), a Delaware limited liability company owned by an affiliate of Chase Capital Partners (CCP) and by an entity controlled by Robert E. King, a director of La Petite, and Investment, which was renamed LPA Holding Corp. (Parent), entered into an Agreement and Plan of Merger pursuant to which a wholly owned subsidiary of the Investor was merged into Parent (the Recapitalization). In the Recapitalization (i) all of the then outstanding shares of preferred stock and common stock of Investment (other than the shares of common stock retained by Vestar/LPT Limited Partnership and management of La Petite) owned by the existing stockholders of Investment (the Existing Stockholders) were converted into the right to receive cash and (ii) the Existing Stockholders received the cash of La Petite as of the date of the closing of the Recapitalization. As part of the Recapitalization, the Investor purchased $72.5 million (less the value of options retained by management) of common stock of the Parent (representing approximately 74.5% of the common stock of Parent on a fully diluted basis) and $30 million of redeemable preferred stock of Parent (collectively, the Equity Investment). In addition, in connection with the purchase of preferred stock of Parent, the Investor received warrants to purchase up to 6.0% of Parent's common stock on a fully diluted basis (resulting in an aggregate fully diluted ownership of 80.5% of the common stock of Parent). The Recapitalization was completed May 11, 1998.
Parent, consolidated with La Petite and Services, is referred to herein as the Company.
BUSINESS DESCRIPTION
The following discussion refers to La Petite, and includes a discussion of La Petite prior to the 1993 acquisition:
La Petite Academy, founded in 1968, is the second largest operator of for-profit preschool educational facilities in the United States. The Company provides center-based educational and child care services five days a week throughout the year to children between the ages of six weeks and 12 years. Management believes the Company differentiates itself through its superior educational programs, which were developed and are regularly enhanced by its curriculum department. The Company's focus on quality educational services allows it to capitalize on the increased awareness of the benefits of premium educational instruction for preschool and elementary school age children. At its residential and employer-based Academies, the Company utilizes its proprietary Journey(R) curriculum with the intent of maximizing a child's cognitive and social development. The Company also operates Montessori schools which employ the Montessori method of learning, a classical approach that features the programming of tasks with materials presented in a sequence dictated by each individual child's capabilities.
On July 21, 1999 the Company acquired Bright Start, Inc. (see note 13 to the consolidated financial statements) which operates 43 child care/pre-school facilities in the states of Minnesota, Wisconsin,
Nevada, and New Mexico.
As of July 3, 1999, the Company operated 743 educational facilities, including 689 Journey Academies, 27 employer-based Academies and 27 Montessori schools, located in 35 states and the District of Columbia. For the 44 weeks ended July 3, 1999, the Company had an average attendance of approximately 81,000 full and part-time children. The Company's average operating capacity (as defined) was approximately 91,000 full-time children and estimated full-time equivalent student (FTE) utilization (as defined) was 65% during the 44 weeks ended July 3, 1999.
Tuition for the programs varies depending upon the location of an Academy and is proportionally higher for children attending part-time. In addition, parents currently pay an annual registration fee, which is reduced for families with more than one child attending an Academy.
Historically, the Company's operating revenue has followed the seasonality of a school year, declining during the summer months and the year-end holiday period. The number of new children enrolling at the Academies is generally highest in September-October and January-February and, therefore, the Company attempts to concentrate its marketing efforts and new Academy openings immediately preceding these high enrollment periods. Several Academies in certain geographic markets have a backlog of children waiting to attend; however, this backlog is not material to the overall attendance throughout the system.
EMPLOYEES
As of July 3, 1999, the Company employed approximately 12,000 persons. The Company's employees are not represented by any organized labor unions or employee organizations, and management believes relations with employees are good.
COMPETITION
Each Academy competes with other child care alternatives in a very localized market. The preschool education and child care industry is highly fragmented and has historically been dominated by small, local nursery and day care centers. The Company is the second largest provider of for-profit preschool education and child care in the United States based on the number of centers operated and competes principally with local nursery and day care centers, some of which are church-affiliated or non-profit, and individuals caring for a few children in their homes. In addition, in recent years certain public school districts have begun to offer after school programs which compete with the Company's SuperStar Program. The Company competes principally by offering trained and qualified personnel, professionally planned educational and recreational programs, well-equipped facilities and additional services such as transportation. In addition, the Company offers a challenging and sophisticated program that emphasizes the individual development of the child. Management believes that the quality of the staff and facilities and the unique programs offered are the principal factors in parents' choice of the Company, although price and location of the facility are also important. For some of the Company's potential customers, the non-profit status of certain of the Company's competitors may be a significant factor in choosing a child care provider.
INSURANCE AND CLAIMS ADMINISTRATION
Since July 1989, the Company has maintained excess liability insurance covering general liability and automotive liability, in addition to primary general liability, automotive liability, workers compensation, property and casualty, crime and directors' and officers' insurance. Management believes that the coverage provided by these policies is adequate to meet the Company's needs. Third-party administration and claims payments services for general liability and auto liability are provided by LPA Services, Inc., a wholly owned subsidiary of La Petite.
REGULATION AND GOVERNMENT INVOLVEMENT
Each Academy must be licensed under applicable state and local licensing laws and is subject to a variety of state and local regulations. Although these state and local regulations vary greatly from jurisdiction to jurisdiction, governmental agencies generally review the safety, fitness and adequacy of the buildings and equipment, the ratio of staff to children, the dietary program, the daily curriculum and compliance with health standards. In a few jurisdictions, new 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. For example, all states in which the Company operates require criminal record checks for all child care staff as part of licensing regulations and some require fingerprint verification. Repeated failures by an Academy to comply with applicable regulations can subject it to state sanctions, which might include being placed on probation or, in more serious cases, suspension or revocation of the Academy's license to operate. Management believes the Company is in substantial compliance with all material regulations and licensing requirements applicable to its businesses.
Although no federal license is required at this time, there are minimum standards, which must be met to qualify for participation in certain federal subsidy programs.
Government, at both the federal and state levels, is actively involved in expanding the availability of child care services. Federal support is delivered at the state level through government-operated educational and financial assistance programs. Child care services offered directly by states include training for child care providers and resource and referral systems for parents seeking child care. In addition, the state of Georgia has an extensive government-paid private sector preschool program in which the Company participates.
In August and September of 1998, the National Highway Transportation Safety Administration (NHTSA) issued interpretative letters that modified its interpretation of regulations governing the sale by automobile dealers of vehicles intended to be used for the transportation of children to and from school. These letters indicate that dealers may no longer sell fifteen-passenger vans for this use, and that any vehicle designed to transport eleven persons or more must meet federal school bus standards if it is likely to be "used significantly" to transport children to and from school or school-related events. The Company, currently, maintains a fleet of approximately 1,500 fifteen-passenger vans for use in transportation of children which management believes are safe and effective vehicles for that purpose. The Company's current fleet meets all necessary federal, state, and local safety requirements. In accordance, however, with the new NHTSA requirements all new fleet additions or replacements will meet school bus standards. Accordingly, in August the Company took delivery of 99 fourteen-passenger school buses. The new school buses cost approximately 50% more than the fifteen-passenger vans previously purchased and should have a longer economic useful life. The economic consequences of the regulatory change will increase the cost to the Company of transporting children.
COMPLIANCE WITH ENVIRONMENTAL PROTECTION PROVISIONS
Compliance with federal, state and local laws and regulations governing pollution and protection of the environment is not expected to have any material effect upon the financial condition or results of operations of the Company.
ITEM 2.
ITEM 2. PROPERTIES
Due to different licensing requirements and design features, Academies typically contain 5,400, 6,700 or 7,800 square feet in a one-story, air-conditioned building typically located on three-quarters of an acre to one acre of land. Each Academy has an adjacent playground designed to accommodate the full age range of children attending the Academy.
Licensed capacity for the same size building varies from state to state because of different licensing requirements. In an open Academy design, a 5,400 square foot Academy is typically licensed for 100 to 140 children, a 6,700 square foot Academy is typically licensed for 130 to 170 children and a 7,800 square foot Academy is typically licensed for 175 to 200 children.
In 1998, the Company designed new prototypes for residential Academies and Montessori schools, both of which are 9,500 square foot facilities built on one acre or more of commercially zoned property. The new residential Academy facilities have an operating capacity for approximately 175 children and are a closed classroom designs, without infant rooms, that reflects a preschool environment and supports the latest curriculum improvements. The Montessori schools are divided into six equal-sized classrooms, which support 25 children, resulting in an operating capacity for approximately 150 children. Management believes the new facilities afford the Company more flexibility to better suit varying site plans and future changes as residential neighborhoods evolve. The new exterior design was developed to enhance the appearance and image of the Academies.
The following table shows the locations of the Company's open Academies as of July 3, 1999:
Alabama (18) Indiana (17) Nebraska (10) South Carolina (25) Arizona (25) Iowa (8) Nevada (9) Tennessee (26) Arkansas (8) Kansas (23) New Jersey (2) Texas (122) California (58) Kentucky (4) New Mexico (4) Utah (4) Colorado (25) Louisiana (1) North Carolina (30) Virginia (36) Delaware (1) Maryland (15) Ohio (18) Washington, D. C. (1) Florida (95) Minnesota (1) Oklahoma (24) Washington (15) Georgia (53) Mississippi (3) Oregon (7) Wisconsin (2) Illinois (16) Missouri (31) Pennsylvania (5) Wyoming (1)
As of July 3, 1999, the Company operated 743 Academies, 672 of which were leased under operating leases, 55 of which were owned and 16 of which were operated in employer-owned centers. Most of these Academy leases have 15-year terms, some have 20-year terms, many have renewal options, and most require the Company to pay utilities, maintenance, insurance and property taxes. In addition, some of the leases provide for contingent rentals, if the Academy's operating revenue exceeds certain base levels.
On July 21, 1999 the Company acquired Bright Start, Inc. (see note 13 to the consolidated financial statements) which operates 43 child care/pre-school facilities in the states of Minnesota, Wisconsin, Nevada, and New Mexico. These facilities are leased under operating leases of various terms.
In opening a new Academy, the Company historically acquires the land, constructs the facility and then seeks long-term financing through a sale (at cost) and operating leaseback transaction. The Company currently leases 672 Academies from approximately 400 investors.
The leases have initial terms expiring as follows:
The Company has generally been successful when it has sought to renew expiring Academy leases.
In fiscal year 1999, the Company opened six Residential Academies and seven Montessori schools. The Company expects to have an additional eight Residential Academies and seven Montessori schools open for fall enrollment.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company is not publicly traded. As of September 30, 1999, Investor owned 90.3% of the Company's common stock, management owned 6.1% and Vestar/LPT Limited Partnership owned 3.6%.
No cash dividends were declared or paid on the common stock during fiscal year 1999 and 1998. The Company's Senior Notes and preferred stock (see Note 3 and Note 7, respectively, to the Consolidated Financial Statements) contain certain covenants that, among other things, do not permit La Petite to pay cash dividends on its common or preferred stock now or in the immediate future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS OF DOLLARS)
a) During fiscal year 1995, the Company approved a plan to close 39 Academies located in areas where the demographic conditions no longer support an economically viable operation and to restructure its operating management to better serve the remaining Academies. Accordingly, the Company recorded an $11.7 million restructuring charge ($7.0 million after tax) to provide for costs associated with the Academy closures and restructuring. The charge included approximately $10.0 million for the present value of rent and real estate taxes for the remaining lease terms. The charge also included restructuring and other costs related to the closures. b) Recapitalization costs consist principally of transaction bonuses of $1.5 million and payments for the cancellation of options of $7.2 million, both of which were inclusive of payroll taxes. c) Interest expense includes $0.8 million, $0.8 million, $0.9 million, $1.3 million, and $1.4 million of amortization of deferred financing costs and accretion of the discount on the Convertible Debentures for fiscal years 1999, 1998, 1997, 1996, and 1995, respectively. d) On May 11, 1998, the Company incurred a $5.5 million extraordinary loss related (i) to the retirement of all the outstanding $85.0 million principal amount of 9 5/8% Senior Notes due on 2001, (ii) the exchange of all outstanding shares of La Petite's Class A Preferred Stock for $34.7 million in aggregate principal amount of La Petite's 12 1/8% Subordinated Exchange Debentures due 2003 and (iii) the retirement of all the then outstanding exchange debentures. The loss principally reflects the write off of premiums and related deferred financing costs, net of applicable income tax benefit. e) EBITDA is defined herein as net income before non-cash restructuring charges, extraordinary items, net interest cost, taxes, depreciation and amortization and is presented because it is generally accepted as providing useful information regarding a company's ability to service and/or incur debt. EBITDA should not be considered in isolation or as a substitute for net income, cash flows from operating activities and other consolidated income or cash flow statement data prepared in accordance with generally accepted accounting principles or as a measure of the Company's profitability or liquidity. f) Depreciation and amortization includes amortization of deferred financing costs and the accretion of the discount on the Convertible Debentures, which are presented in interest expense on the statements of income. g) FTE Utilization is the ratio of FTE students to the total operating capacity for all of the Company's Academies. FTE attendance is not a measure of the absolute number of students attending the Company's Academies; rather, it is an approximation of the full-time equivalent number of students based on Company estimates and weighted averages. For example, a student attending full-time is equivalent to one FTE, while a student attending one-half of each day is equivalent to 0.5 FTE.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this document.
On June 10, 1999, the Company changed its fiscal year to be the period starting on the first Sunday in July and ending on the first Saturday in July in the subsequent year (See Note 1 of the Notes to Consolidated Financial Statements). For comparative purposes the table below presents the results of the 44 weeks ended July 4, 1998 and the results of the 44 weeks ended July 3, 1999. The subsequent discussion of results is based on the 44 week comparison.
The Company's operating results for the 44 weeks ended July 3, 1999 are consistent and comparable with the 44 weeks ended July 4, 1998 except for pre-opening costs and operating losses associated with new educational facilities (the Academies). Pre-opening costs are included in other operating costs, and cover all activities associated with preparing a new Academy for opening other than capital development cost. Pre-opening costs for the 44 weeks ended July 3, 1999 were $0.6 million. New Academies also typically generate operating losses during the first few months of operation, until the Academies achieve normalized occupancies. Included in operating income and EBIDTA were new Academy operating losses of $0.6 million for the 44 weeks ended July 3, 1999. There were no significant pre-opening costs or new Academy operating losses during the same period last year as the new Academy construction program was not fully underway until fiscal year 1999.
Full-time equivalent (FTE) attendance, as defined by the Company, is not a measure of the absolute number of students attending the Company's Academies, but rather is an approximation of the full-time equivalent number of students based on Company estimates and weighted averages. For example, a student attending full-time is equivalent to one FTE, while a student attending only one-half of each day is equivalent to 0.5 FTE.
1999 COMPARED TO 1998 RESULTS (IN THOUSANDS OF DOLLARS)
Fifteen Academies in operation on July 4, 1998 were closed and thirteen new Academies were opened prior to July 3, 1999. As a result, the Company operated 743 Academies on July 3, 1999. The closures resulted principally from management decisions not to renew the leases or contracts of certain Academies.
Operating revenue. Operating revenue increased 5.2% during the 44 weeks ended July 3, 1999 as compared to the 44 weeks ended July 4, 1998. Excluding closed and new Academies from both years, operating revenue increased 5.5%, full time equivalent (FTE) attendance decreased 1.4%, and average weekly FTE tuition increased 6.9% during the 44 weeks ended July 3, 1999 as compared to the 44 weeks ended July 4, 1998. The decline in FTE's occurred principally in the infant, toddler and school age programs as the Company is concentrating its focus on enhancing and expanding its pre-school program. Prior to the start of fiscal year 1999, 238 Academies received modification to enhance the preschool environment. The modifications included new room arrangements and added preschool furniture and equipment which enhanced the pre-school appearance of the Academies. The Company's Journey program continues to be an outstanding curriculum for young children. As a result of this effort, attendance of pre-school aged children increased 1,407 in the eight weeks ended June 5, 1999 (end of the school term) as compared to the same period in 1998. This gain, however, was offset by declines in infants, toddlers, and school age children. During fiscal year 1999 additional Academies received the pre-school enhancements and by year-end, 550 Academies had been impacted.
The increase in average weekly tuition per FTE was principally due to: (i) selective price increases which were put into place in February of fiscal years 1998 and 1999, based on geographic market conditions and class capacity utilization and (ii) changes in various tuition rate discount policies which took place in fiscal year 1999 and (iii) the change in enrollment mix resulting in fewer children in the lower priced school age before and after program and more children in the higher priced preschool program, offset somewhat by the decline of children in the higher price infant and toddler programs.
Salaries, wages and benefits. Salaries, wages and benefits increased $9.1 million or 6.4% during the 44 weeks ended July 3, 1999 as compared to the 44 weeks ended July 4, 1998. The increase was principally due to a 7.0% increase in average hourly wage rates, and higher health care costs resulting from benefit plan enhancements. These increases were offset by a small decline in hours worked. As a percentage of revenue, labor costs were 53.4% for the 44 weeks ended July 3, 1999 as compared to 52.8% during the 44 weeks ended July 4, 1998.
Amortization of goodwill and other intangibles. Amortization of goodwill and other intangibles decreased 46.1% during the 44 weeks ended July 3, 1999 as compared to the 44 weeks ended July 4, 1998, as certain intangible assets became fully amortized at the end of the third quarter of fiscal year 1998.
Recapitalization costs. Recapitalization costs consist principally of transaction bonuses of $1.5 million and payments for the cancellation of stock options of $7.2 million, both of which were inclusive of payroll taxes.
All other operating costs. Many of the Company's operating costs are relatively fixed and do not decline or increase directly with small changes in attendance. Facility lease expense, depreciation, amortization and other operating costs, which includes repair and maintenance, utilities, insurance, marketing, real estate taxes, food, supplies and transportation, excluding pre-opening costs all declined or remained unchanged as a percentage of revenue during the 44 weeks ended July 3, 1999, as compared to the 44 weeks ended July 4, 1998.
Operating income and EBITDA. As a result of the foregoing, operating income was $16.2 million for the 44 weeks ended July 3, 1999, as compared to $5.8 million during the 44 weeks ended July 4, 1998. Excluding Recapitalization Costs, this reflects gains in operating income of 11.2% for the 44 weeks ended July 3, 1999, as compared to the 44 weeks ended July 4, 1998. Earnings before recapitalization costs, extraordinary items, interest, taxes, depreciation and amortization (EBITDA) was $28.0 million for 44 weeks ended July 3, 1999 and for the 44 weeks ended July 4, 1998. Excluding pre-opening costs and new
Academy operating losses, EBIDTA would have been $29.2 million for 44 weeks ended July 3, 1999 as compared to $28.1 million for the 44 weeks ended July 4, 1998.
Interest expense. Net interest expense for the 44 weeks ended July 3, 1999 increased $2.9 million from the 44 weeks ended July 4, 1998. The increase was mainly due to increased interest payments related to the issuance of $145.0 million of 10% Senior Notes and a $40.0 million term loan facility under the Credit Agreement which occurred as part of the Recapitalization (see notes to the consolidated financial statements).
Loss on retirement of debt. On May 11, 1998, the Company incurred a $5.5 million extraordinary loss related (i) to the retirement of all the outstanding $85.0 million principal amount of 9 5/8% Senior Notes due on 2001, (ii) the exchange of all outstanding shares of La Petite's Class A Preferred Stock for $34.7 million in aggregate principal amount of La Petite's 12 1/8% Subordinated Exchange Debentures due 2003 and (iii) the retirement of all the then outstanding exchange debentures. The loss principally reflects the write off of premiums and related deferred financing costs, net of applicable income tax benefit.
Income tax rate. After adding back the permanent differences to pretax income, the effective income tax rate for the 44 weeks ended July 3, 1999 was approximately 47%, as compared to approximately 33% for the 44 weeks ended July 4, 1998. The 1999 fiscal year effective income tax rate was impacted by the resolution of issues raised by the IRS regarding the Company's benefit plan. (see note 8 to the consolidated financial statements).
1998 COMPARED TO 1997 ACTUAL RESULTS (IN THOUSANDS OF DOLLARS)
The results of operations for the Company for the 52 weeks ended August 29, 1998 are consistent and comparable with the 52 weeks ended August 30, 1997. Ten Academies in operation at the end of the fiscal year 1997 were closed and one new Academy was opened prior to the end of fiscal year 1998. As a result, the Company operated 736 Academies at the end of fiscal year 1998, nine less than at the end of fiscal year 1997. The closures resulted principally from management decisions not to renew the leases or contracts of certain Academies.
Operating revenue. During the 52 weeks ended August 29, 1998 as compared to the prior fiscal year, operating revenue increased 4.0%, FTE attendance declined 1.1% and Average Weekly FTE Tuition increased 5.2%. Excluding closed Academies from both years, operating revenue increased 4.7%, FTE attendance declined 0.4% and Average Weekly FTE Tuition increased 5.1%. The decline in FTE attendance reflects, among other things, the Company's continuing focus on preschool-aged children and a reduced emphasis on infant care. In addition, the strong economy reportedly had the effect of increasing summer vacations, which in turn could have negatively impacted Academy attendance. The increase in Average Weekly FTE Tuition was principally due to selective price increases that were put into place in the second quarter of fiscal 1998, based on geographic market conditions and class capacity utilization.
Salaries, wages and benefits. Salaries, wages and benefits increased $7.3 million or 4.6% during the 52 weeks ended August 29, 1998 as compared to the 52 weeks ended August 30, 1997. The increase was principally due to increased average hourly wage rates as staff hours worked in fiscal year 1998 declined slightly from the prior year. As a percentage of revenue, labor costs were 52.9% for the 52 weeks ended August 29, 1998 as compared to 52.6% during the 52 weeks ended August 30, 1997.
Recapitalization costs. Recapitalization costs consist principally of transaction bonuses of $1.5 million and payments for the cancellation of options of $7.2 million, both of which were inclusive of payroll taxes.
All other operating costs. Many of the Company's operating costs are relatively fixed and do not decline or increase directly with small changes in attendance. Facility lease expense, depreciation, amortization and other operating costs all declined or remained unchanged as a percentage of revenue during the 52 weeks ended August 29, 1998, as compared to the 52 weeks ended August 30, 1997. In September 1997, the Company held a special conference to which all Academy Directors were invited at which the Company
articulated its future business strategy for the growth of the Company. Total operating expenses for the 52 weeks ended August 29, 1998 include $1.2 million related to this conference.
Operating income and EBITDA. As a result of the foregoing, operating income was $8.0 million for the 52 weeks ended August 29, 1998, as compared to $14.0 million during the 52 weeks ended August 30, 1997. Earnings before recapitalization costs, extraordinary items, interest, taxes, depreciation and amortization (EBITDA) was $32.5 million for the 52 weeks ended August 29, 1998 as compared to $30.1 million for the 52 weeks ended August 30, 1997, an increase of 8.1%. Adjusted EBITDA, defined as EBITDA exclusive of the special conference and of Vestar management and board fees which ceased with the recapitalization, was $34.3 million for the 52 weeks ended August 29, 1998 as compared to $30.8 million for the 52 weeks ended August 30, 1997, an increase of 10.7%.
Interest expense. Net interest expense for the 52 weeks ended August 29, 1998 increased $4.1 million from the 52 weeks ended August 30, 1997. The increase was mainly due to $1.6 million in fees for bridge loan commitments related to the new debt offerings and increased interest payments related to the 10% Senior Notes and term loan under the Credit Agreement (see notes to the consolidated financial statements).
Loss on retirement of debt. On May 11, 1998, the Company incurred a $5.5 million extraordinary loss related (i) to the retirement of all the outstanding $85.0 million principal amount of 9 5/8% Senior Notes due on 2001, (ii) the exchange of all outstanding shares of La Petite's Class A Preferred Stock for $34.7 million in aggregate principal amount of La Petite's 12 1/8% Subordinated Exchange Debentures due 2003 and (iii) the retirement of all the then outstanding exchange debentures. The loss principally reflects the write off of premiums and related deferred financing costs, net of applicable income tax benefit.
Income tax rate. After adding back the permanent differences to pretax income, the effective income tax rate for the 52 weeks ended August 29, 1998 was approximately 34%, as compared to approximately 40% for the 52 weeks ended August 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are from cash flow generated by operations, borrowings under the revolving credit facility under the Credit Agreement, and sale and leaseback financing for newly constructed Academies. The Company's principal uses of liquidity are to meet its debt service requirements, finance its capital expenditures and provide working capital.
Weekly tuition, the Company's primary source of revenue, is due from parents on Mondays, in advance of service delivery. Accordingly, receivables from parents are very low and accounts receivable generally reflects amounts due from third party paying agencies. In addition, the nature of the Company's business does not require a significant investment in inventories or other current assets. Payroll, supplies and most other cost items, other than rent, are generally paid in arrears, generating current liabilities in excess of working capital requirements. As a result the Company has historically operated with negative working capital, which funds can be used in the business or to reduce debt.
The Company incurred substantial indebtedness in connection with the Recapitalization. See note 1 of the notes to consolidated financial statements.
In connection with the Recapitalization, Parent and La Petite entered into the Credit Agreement, consisting of the $40 million Term Loan Facility and the $25 million Revolving Credit Facility. Parent and La Petite borrowed the entire $40 million available under the Term Loan Facility which, together with the proceeds from the sale of the Senior Notes and the Equity Investment, were used to consummate the Recapitalization and to pay the related fees and expenses.
The Term Loan Facility is subject to mandatory prepayment in the event of certain equity or debt issuances or asset sales by the Company or any of its subsidiaries and in amounts equal to specified percentages of the Company's excess cash flow (as defined). The Term Loan Facility will terminate on May 11, 2005. The
term loan amortizes in an amount equal to $1.0 million in each of the first five years, $10.0 million in the sixth year and $25.0 million in the seventh year. The Revolving Credit Facility will terminate on the same date.
The Company opened thirteen new Academies during fiscal 1999, and expects to open 15 more between July and October. During fiscal 2000, new development will be reduced as discussed below. The cost to open a new Academy ranges from $1.0 million to $1.5 million, of which approximately 85% is typically financed through a sale and leaseback transaction. Alternatively, the Academy may be constructed on a build to suit basis, which reduces the working capital requirements during the construction process.
Purchasers of Academies in sale and leaseback transactions have included insurance companies, bank trust departments, pension funds, real estate investment trusts and individuals. The leases are operating leases and generally have terms of 15 to 20 years with one or two five-year renewal options. Most of these transactions are structured with an annual rental designed to provide the owner/lessor with a fixed cash return on its capitalized cost over the term of the lease. In addition, many of the Company's leases provide for either contingent rentals if the Academy's operating revenue exceeds certain levels or a fixed percentage increase every five years. Letters of commitment and substantial funding have been obtained for all but two of the units being developed during calendar 1999. Due diligence is currently in process and sale closings are expected to generally occur over the next few months. Although the Company expects sale and leaseback transactions to continue to finance its expansion, no assurance can be given that such funding will always be available.
On July 21, 1999 the Company acquired all the outstanding shares of Bright Start, Inc. ("Bright Start") for $9.3 million in cash and assumed approximately $2.0 million in debt. Bright Start operates 43 preschools in the states of Minnesota, Wisconsin, Nevada, and New Mexico. For the year ended August 31, 1998 Bright Start had operating revenue of $22.2 million and at August 31, 1998 total assets were $5.1 million. See Note 13 to the consolidated financial statements.
Total capital expenditures for fiscal 1997, 1998 and 1999, were $7.3 million, $13.6 million and $31.7 million, respectively. The Company views all capital expenditures, other than those incurred in connection with the development of new Academies, to be maintenance capital expenditures. Maintenance capital expenditures for fiscal 1997, 1998, and 1999 were $7.0 million, $9.2 million and $6.1 million, respectively.
During fiscal year 1999 the Company invested $25.5 million in new Academy development and received $19.3 million as construction financing for sale and leaseback transactions. Sale and leaseback transactions, completed or currently in process, will fund most of this development. For fiscal year 1999, the Company used $4.0 million of the Revolving Credit Facility to temporarily fund a portion of this investment.
In addition to maintenance capital expenditures, the Company expends additional funds to ensure that its facilities are in good working condition. Such funds are expensed in the periods in which they are incurred. The amounts of such expenses in fiscal 1997, 1998 and 1999 were $9.2 million, $9.9 million and $8.9 million, respectively.
The Company's ability to meet its debt and redeemable preferred stock obligations is dependent on future earnings and cash flows. The Senior Notes and preferred stock contain certain covenants that, among other things, limit the ability of the Company to incur additional indebtedness or pay cash dividends or certain other restricted payments. As of July 3, 1999, the Company, in compliance with all of the covenants, is not permitted to pay cash dividends on its common or preferred stock.
INFLATION AND GENERAL ECONOMIC CONDITIONS
The Company has historically been able to increase tuition to offset increases in its costs. During 1997 and 1998, a period of low to moderate inflation, the Company implemented selective increases in tuition rates,
based on geographic market conditions and class capacity utilization. The Company did not experience a material decline in attendance as a result of these increases.
On September 1, 1997, the Federal Minimum Wage increased from $4.75 to $5.15 per hour. This increase did not materially impact the Company's operations.
During fiscal 1999, the Company experienced inflationary pressures on average wage rates as hourly rates increased 7%. Management believes this is occurring industry wide and there is no assurance that such wage rate increases can be recovered through future increases in tuition.
A sustained recession with high unemployment may have a material adverse effect on the Company's operations. The recession during 1990 and 1991 adversely affected attendance.
MANAGEMENT INFORMATION SYSTEMS AND THE YEAR 2000
The arrival of the year 2000 is not expected to have an adverse impact on the Company's computerized information systems and the cost of compliance is expected to be immaterial. The most important new system for the Company has been the installation of its ADMIN system nationwide. ADMIN was written using a calendar dating system that is not sensitive to the year 2000 issue. For payroll processing, human resources information, general ledger/financial reporting, accounts payable disbursements, fixed assets record keeping and purchase order accounting, the Company utilizes software under licensing arrangements for systems that have already been upgraded and are currently year 2000 compliant. The costs of the upgrades were included as part of the annual licensing fees. Also, during 1999, the Company is testing and, if necessary, modifying its smaller applications to insure that any year 2000 issues are corrected on a timely basis.
The Company has not assessed the year 2000 readiness of its major suppliers or third-party funding agencies. Due to the general uncertainty inherent in addressing year 2000 readiness, the most likely worst case year 2000 scenario and the impact it may have on the Company is uncertain. In the event that major suppliers of curriculum material are unable to fulfill purchase orders for supplies, Academy Directors will need to buy necessary supplies from local retailers. This could have adverse cost consequences to the Company, but on the assumption that the banking system continues to function, should not have a material impact on operations. The Company also provides preschool and child-care services for children that are funded by various state and local government agencies. In the event that any such agency were unable to timely reimburse the Company for such services, it would have an adverse impact on the Company's cash flow. Such impact is not expected to be material and the Company generally has the option to discontinue providing such services for nonpayment.
OTHER INFORMATION
None.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On May 11, 1998, the Company recapitalized, providing for (a) Series B Senior Notes in the aggregate principal amount of $145 million, (b) a Term Loan Facility in the aggregate principal amount of $40 million and (c) a Revolving Credit Facility providing for revolving loans to the Company in an aggregate principal amount (including swingline loans and the aggregate stated amount of letters of credit) of $25 million. Borrowings under the Senior notes bear interest at 10% per annum. Borrowings under the Credit Agreement will bear interest at a rate per annum equal (at the Company's option) to: (a) an adjusted London inter-bank offered rate ("LIBOR") plus a percentage based on the Company's financial performance; or (b) a rate equal to the highest of The Chase Manhattan Bank's published prime rate, a certificate of deposit rate plus 1% or the federal funds effective rate plus 1/2 of 1%, known as the average banking rate ("ABR") plus, in each case a percentage based on the Company's financial performance. The borrowing margins applicable to the Credit Agreement are initially 3.25% for LIBOR loans and 2.25% for ABR loans. The Senior Notes will mature in May 2008 and the Credit Agreement will mature in May
2005. The term loan amortizes in an amount equal to $1.0 million in each of the first five years, $10.0 million in the sixth year and $25.0 million in the seventh year.
To reduce the impact of interest rate changes on the Term Loan Facility, the company entered into interest rate collar agreements during the second quarter. The collar agreements cover the LIBOR portion of the Term Loan Facility interest rate percentage, effectively setting maximum and minimum interest rates.
To reduce interest expense on the $145 million Series B Senior Notes, the Company entered into an interest rate swap transaction with an imbedded collar during the third quarter. The fixed rate debt was exchanged for a variable rate arrangement based on LIBOR plus a fixed percentage. The imbedded collar covers the LIBOR portion of variable rate swap, effectively setting maximum and minimum interest rates.
There were no initial costs associated with either the swap or the interest rate collar agreements as the floor and ceiling cap rates were priced to offset each other. Any differential paid or received based on the swap/collar agreements is recognized as an adjustment to interest expense. As of July 3, 1999, the notional value of such derivatives was $184.3 million with an unrealized loss of $1.2 million. A 1% change in an applicable index rate, after giving effect to the interest rate collars and swap agreement, would result in an interest expense increase of $1.8 million per year.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets as of July 3, 1999 and August 29, 1998
Consolidated Statements of Income for the 44 weeks ended July 3, 1999, 52 weeks ended August 29, 1998, and 52 weeks ended August 30, 1997
Consolidated Statements of Stockholders' Equity for the 44 weeks ended July 3, 1999, 52 weeks ended August 29, 1998, and 52 weeks ended August 30, 1997
Consolidated Statements of Cash Flows for the 44 weeks ended July 3, 1999, 52 weeks ended August 29, 1998, and 52 weeks ended August 30,
Notes to Consolidated Financial Statements
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors of LPA Holding Corp.
We have audited the accompanying consolidated balance sheets of LPA Holding Corp. and its subsidiary (the "Company") as of July 3, 1999 and August 29, 1998, and the related consolidated statements of operations, stockholders' deficit and cash flows for the 44 weeks ended July 3, 1999, the 52 weeks ended August 29, 1998, and the 52 weeks ended August 30, 1997. Our audits also included the financial statement schedules listed in the Index at Item 14. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules 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, such consolidated financial statements present fairly, in all material respects, the financial position of LPA Holding Corp. and its subsidiary as of July 3, 1999 and August 29, 1998, and the results of their operations and their cash flows for the 44 weeks ended July 3, 1999, the 52 weeks ended August 29, 1998, and the 52 weeks ended August 30, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
Kansas City, Missouri September 3, 1999
LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED)
See notes to consolidated financial statements.
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS OF DOLLARS)
See notes to consolidated financial statements.
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS OF DOLLARS)
See notes to consolidated financial statements.
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF DOLLARS)
See notes to consolidated financial statements.
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Vestar/LPA Investment Corp. (Investment), a privately-held Delaware corporation, was formed in 1993 for the purpose of holding the capital stock of La Petite Holdings Corp. (Holdings), a Delaware corporation. Holdings was formed in 1993 for the purpose of holding the capital stock of La Petite Acquisition Corp. (Acquisition). On July 23, 1993, as a result of a series of transactions, Holdings acquired all the outstanding shares of common stock, par value $.01 (the Common Stock), of La Petite Academy, Inc., a Delaware corporation (La Petite). The transaction was accounted for as a purchase and the excess of purchase price over the net assets acquired is being amortized over 30 years. On May 31, 1997, Holdings was merged with and into La Petite with La Petite as the surviving corporation. On August 28, 1997, LPA Services, Inc. (Services), a wholly owned subsidiary of La Petite, was incorporated. Services provides third party administrative services on insurance claims to La Petite.
On March 17, 1998, LPA Investment LLC (the Investor), a Delaware limited liability company owned by an affiliate of Chase Capital Partners (CCP) and by an entity controlled by Robert E. King, a director of La Petite, and Investment, which was renamed LPA Holding Corp. (Parent), entered into an Agreement and Plan of Merger pursuant to which a wholly owned subsidiary of the Investor was merged into Parent (the Recapitalization). In the Recapitalization (i) all of the then outstanding shares of preferred stock and common stock of Investment (other than the shares of common stock retained by Vestar/LPT Limited Partnership and management of La Petite) owned by the existing stockholders of Investment (the Existing Stockholders) were converted into the right to receive cash and (ii) the Existing Stockholders received the cash of La Petite as of the date of the closing of the Recapitalization. As part of the Recapitalization, the Investor purchased $72.5 million (less the value of options retained by management) of common stock of the Parent (representing approximately 74.5% of the common stock of Parent on a fully diluted basis) and $30 million of redeemable preferred stock of Parent (collectively, the Equity Investment). In addition, in connection with the purchase of preferred stock of Parent, the Investor received warrants to purchase up to 6.0% of Parent's common stock on a fully diluted basis (resulting in an aggregate fully diluted ownership of 80.5% of the common stock of Parent). Transaction expenses included in operating expenses under the caption "Recapitalization Costs" for this period include approximately $1.5 million in transaction bonuses and $7.2 million for the cancellation of stock options and related taxes. The Recapitalization was completed May 11, 1998.
Parent, consolidated with La Petite and Services, is referred to herein as the Company.
The Company offers educational, developmental and child care programs, which are available on a full-time or part-time basis, for children between six weeks and twelve years old. The La Petite Academy schools are located in 35 states and the District of Columbia, primarily in the southern, Atlantic coastal, mid-western and western regions of the United States.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of Investment and its wholly-owned subsidiary, La Petite and its wholly-owned subsidiary, Services, after elimination of all significant inter-company accounts and transactions.
FISCAL YEAR END - On June 10, 1999, the Company changed its fiscal year to be the 52 or 53 week period ending on the first Saturday in July. Prior to this change the Company utilized a fiscal year consisting of the 52 or 53 week period ending on the last Saturday in August. The report covering the transition period is presented herein.
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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RECOGNITION OF REVENUES AND PRE-OPENING EXPENSES - The Company operates preschool education and child care Academies. Revenue is recognized as the services are performed. Expenses associated with opening new Academies are charged to expense as incurred.
DEPRECIATION AND AMORTIZATION - Buildings, furniture and equipment are depreciated over the estimated useful lives of the assets using the straight-line method. For financial reporting purposes, buildings are generally depreciated over 29 to 40 years, furniture and equipment over three to 10 years and leasehold improvements over five to 15 years.
Maintenance and repairs are charged to expense as incurred. The cost of additions and improvements is capitalized and depreciated over the remaining useful lives of the assets. The cost and accumulated depreciation of assets sold or retired are removed from the accounts, and any gain or loss is recognized in the year of disposal, except gains and losses on property and equipment which have been sold and leased back which are recognized over the terms of the related lease agreements.
RESTRICTED CASH INVESTMENTS - The restricted cash investment balance represents cash deposited in an escrow account as security for the self-insured portion of the Company's workers compensation and automobile insurance coverage.
EXCESS OF PURCHASE PRICE OVER THE NET ASSETS ACQUIRED - The excess of the purchase price over the fair value of tangible and identifiable intangible assets and liabilities acquired related to the acquisition of La Petite is being amortized over a period of 30 years on the straight-line method.
DEFERRED FINANCING COSTS - The costs of obtaining financing are included in other assets and are being amortized over the life of the related debt.
OTHER ASSETS - Other assets include the fair value of identifiable intangible assets acquired in connection with the acquisition of La Petite and are being amortized over periods ranging from two to 10 years on the straight-line method.
CASH EQUIVALENTS - The Company's cash equivalents consist of commercial paper and money market funds with original maturities of three months or less.
INCOME TAXES -The Company establishes deferred tax assets and liabilities, as appropriate, for all temporary differences, and adjusts deferred tax balances to reflect changes in tax rates expected to be in effect during the periods the temporary differences reverse. Management has evaluated the recoverability of the deferred income tax asset balances and has determined that the deferred balances will be realized based on future taxable income.
DISCLOSURES REGARDING FINANCIAL INSTRUMENTS - The carrying values of the Company's financial instruments, with the exception of the Company's Senior Notes, preferred stock, and financial derivatives, approximate fair value. The estimated fair values of Senior Notes and preferred stock at July 3, 1999 were $137.7 million and $34.3 million, respectively. The estimated fair values of Senior Notes and preferred stock at August 29, 1998 were $140.1 million and $31.1 million, respectively. The combined estimated fair value of the Company's interest rate contracts at July 3, 1999 was a liability of $1.2 million.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," as of the
beginning of its 1997 fiscal year. The Statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Statement also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. There was no impact on the Company's results of operations or financial condition upon adoption of Statement No. 121.
STOCK-BASED COMPENSATION - The Company has adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." The Statement encourages rather than requires companies to adopt a new method that accounts for stock compensation awards based on their estimated fair value at the date they are granted. Companies are permitted, however, to continue accounting for stock compensation awards under Accounting Principles Board ("APB") Opinion No. 25, which requires compensation cost to be recognized based on the excess, if any, between the quoted market price of the stock at the date of grant and the amount an employee must pay to acquire the stock. The Company has elected to continue to apply APB Opinion No. 25 and has disclosed the pro forma net income (loss), determined as if the method under SFAS No. 123 had been applied, in Note 12.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company utilizes swap and collar agreements to manage interest rate risks. The Company has established a control environment, which includes policies and procedures for risk assessment and the approval, reporting, and monitoring of derivative financial instrument activities. Company policy prohibits holding or issuing derivative financial instruments for trading purposes. Any differential paid or received based on the swap/collar agreements is recognized as an adjustment to interest expense. Amounts receivable or payable under derivative financial instrument contracts, when recognized are reported on the Consolidated Balance Sheet as both current and long term receivables or liabilities. Gains and losses on terminations of hedge contracts are recognized as other operating expense when terminated in conjunction with the termination of the hedged position, or to the extent that such position remains outstanding, deferred as prepaid expenses or other liabilities and amortized to interest expense over the remaining life of the position.
SEGMENT REPORTING - In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". This pronouncement establishes standards for the way that public business enterprises report information about operating segments in annual and interim financial statements. The Company adopted SFAS No. 131 during fiscal year 1999. The Company has determined that it currently operates entirely in one segment.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This Statement requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair value. The new standard becomes effective for the Company's fiscal year 2001. Management has not yet assessed the impact that the adoption of SFAS No. 133 will have on the Company's financial position or results of operations.
RECLASSIFICATIONS - Certain reclassifications to prior year amounts have been made in order to conform to the current year presentation.
2. OTHER ASSETS
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (in thousands of dollars)
a) The Senior Notes mature on May 15, 2008. Interest is payable semi-annually on May 15 and November 15 of each year. Commencing May 15, 2003, the Senior Notes are redeemable at various redemption prices at Parent and La Petite's option. The Senior Notes contain certain covenants that, among other things, limit Parent and La Petite's ability to incur additional debt, transfer or sell assets, and pay cash dividends.
To reduce interest expense on the $145 million Senior Notes, the Company entered into an interest rate swap transaction with an imbedded collar during the third quarter. The fixed rate debt was essentially exchanged for a variable rate arrangement based on LIBOR plus a fixed percentage. The imbedded collar covers the LIBOR portion of variable rate swap, effectively setting maximum and minimum interest rates. The notional value of this derivative was $145 million.
b) On May 11, 1998, Parent and La Petite entered into an agreement (the Credit Agreement) providing for a term loan facility in the amount of $40.0 million and a revolving credit agreement, for working capital and other general corporate purposes through May 2005, in the amount of $25 million. Borrowings under the Credit Agreement are secured by substantially all of the assets of the Parent, La Petite and its subsidiaries. Loans under the Credit Agreement will bear an interest rate per annum equal to (at Parent and La Petite's option): (i) a rate equal to an adjusted London inter-bank offered rate (LIBOR) plus a percentage based on La Petite's financial performance or (ii) a rate equal to the higher of Chase's prime rate, a certificate of deposit rate plus 1%, or the Federal Funds rate plus 1/2
of 1% plus in each case a percentage based on La Petite's financial performance. Parent and La Petite are required to pay fees of 0.5% per annum of the unused portion of the Credit Agreement plus letter of credit fees, annual administration fees, and agent arrangement fees. The Credit Agreement will mature in May 2005. The term loan amortizes in an amount equal to $1.0 million in each of the first five years, $10.0 million in the sixth year and $25.0 million in the seventh year.
To reduce the impact of interest rate changes on the Term Loan Facility, the Company entered into interest rate collar agreements during the second quarter. The collar agreements cover the LIBOR portion of the Term Loan Facility interest rate percentage, effectively setting maximum and minimum interest rates. As of July 3, 1999, the notional value of the interest rate collar agreements was $39.3 million.
Scheduled maturities and mandatory prepayments of long-term debt and capital lease obligations during the five years subsequent to July 3, 1999 are as follows (in thousands of dollars):
4. OTHER LONG-TERM LIABILITIES (in thousands of dollars)
In connection with the acquisition of the Company, an intangible liability for unfavorable operating leases was recorded, which is being amortized over the average remaining life of the leases.
The reserve for closed academies includes the long-term liability related to leases for Academies which were closed and are no longer operated by the Company.
5. INCOME TAXES
The provisions for income taxes recorded in the Consolidated Statements of Operations consisted of the following (in thousands of dollars):
The difference between the provision for income taxes, as reported in the Consolidated Statements of Income, and the provision computed at the statutory Federal rate of 34 percent is due primarily to state income taxes and nondeductible amortization of the excess of purchase price over the net assets acquired of $1.8 million, $2.1 million, and $2.1 million in the 44 weeks ended July 3, 1999, the 52 weeks ended August 29, 1998, and August 30, 1997, respectively. In addition, the 1999 fiscal year provision was impacted by the resolution of issues raised by the IRS regarding the Company's benefit plan. (see note 8 to the consolidated financial statements).
Deferred income taxes result from differences between the financial reporting and tax basis of the Company's assets and liabilities. The sources of these differences and their cumulative tax effects at July 3, 1999 and August 29, 1998 are estimated as follows (in thousands of dollars):
The Company has federal net operating loss carryforwards to offset future taxable income through the tax year 2012. Management believes that the deferred tax assets recorded on the balance sheet
are recoverable and no reserve is required. As of July 3, 1999, only the income tax returns for tax years subsequent to 1995 are open to examination.
6. LEASES
Academy facilities are leased for terms ranging from 15 to 20 years. The leases provide renewal options and require the Company to pay utilities, maintenance, insurance and property taxes. Some leases provide for annual increases in the rental payment and many leases require the payment of additional rentals if operating revenue exceeds stated amounts. These additional rentals range from 2% to 10% of operating revenue in excess of the stated amounts and are recorded as rental expense. Vehicles are also rented under various lease agreements, most of which are cancelable within 30 days after a one-year lease obligation. Substantially all Academy and vehicle leases are operating leases. Rental expense for these leases were $39.1 million, $46.5 million, and $44.9 million, for the 44 weeks ended July 3, 1999, and 52 weeks ended August 29, 1998 and August 30, 1997, respectively. Contingent rental expense of $1.4 million, $1.4 million, and $1.5 million were included in rental expense for the 44 weeks ended July 3, 1999, and the 52 weeks ended August 29, 1998 and August 30, 1997.
Aggregate minimum future rentals payable under facility leases as of July 3, 1999 were as follows (in thousands of dollars):
7. REDEEMABLE PREFERRED STOCK & STOCKHOLDERS' EQUITY
The authorized stock of Parent, as of July 3, 1999, consists of:
(i) 30,000 shares of Series A Redeemable Preferred Stock, $.01 par value, (the preferred stock) all of which were issued and outstanding. The carrying value of the preferred stock is being accreted to its redemption value of $30.0 million on May 11, 2008. The preferred stock is non-voting and mandatorily redeemable on May 11, 2008. Dividends at 12.0% are cumulative and if not paid on the June 30 or December 31 semi-annual preferred stock dividend dates are added to the liquidation value. The liquidation value per share was $1,143.444 as of July 3, 1999 and $1,036.558 as of August 29, 1998. The preferred stock may be exchanged for 12.0% Subordinated Exchange Debentures due 2008, at Parent's option, subject to certain conditions, in whole, but not in part, on any scheduled dividend payment date. The preferred stock contains certain restrictive provisions that limit the ability of Parent to pay cash dividends.
(ii) 950,000 shares of Class A Common Stock, $.01 par value, (the Class A Common Stock) of which 560,026 shares were issued and outstanding as of July 3, 1999.
(iii) 20,000 shares of Class B Common Stock, $.01 par value, (the Class B Common Stock) of which 20,000 shares were issued and outstanding as of July 3, 1999. The Class B Common Stock votes together with the Class A Common Stock as a single class, with the holder of each share of common stock entitled to cast one vote. The holders of the Class B Common Stock have the exclusive right, voting separately as a class, to elect one member to the
Board of Directors of Parent. Each share of the Class B Common Stock is convertible at the option of the holder, at any time, into one share of Class A Common Stock.
(iv) Warrants to purchase 42,180 shares of Class A Common Stock at a purchase price of $.01 per share any time on or before May 11, 2008. The Warrants were issued in connection with the sale of Series A Redeemable Preferred Stock; the Company recognized a discount on the preferred stock by allocating $5,645,000 to the Warrants representing the fair value of the Warrants when issued.
8. BENEFIT PLAN
The Company sponsors a defined contribution plan (the "Plan") for substantially all employees. Until January 1, 1998 eligible participants could make contributions to the Plan from 1% to 20% of their compensation (as defined). The Company also made contributions at the discretion of the Board of Directors. Contribution expense attributable to this Plan was $0.3 million, $0 million, and $0.4 million, for the 44 weeks ended July 3, 1999, and the 52 weeks ended August 29, 1998 and August 30, 1997.
The Plan was under audit by the Internal Revenue Service ("IRS") which raised several issues concerning the Plan's operation. All issues raised by the IRS have been satisfactorily resolved and the impact was not material. However, recognizing some inherit deficiencies in the Plan's design, the Company has petitioned the IRS for the right to terminate the plan effective May 31, 1999.
9. RELATED PARTY TRANSACTIONS
MANAGEMENT CONSULTING AGREEMENT - The Company had entered into an agreement for management consulting services with Vestar Management Partners ("Vestar") pursuant to which Vestar made available to the Company management consulting, corporate finance and investment advice for which the Company paid an annual fee of $500,000. The agreement was terminated on May 11, 1998.
TRANSACTIONS WITH CERTAIN FORMER INVESTORS - In 1992, the Company entered into a joint venture with Benesse Corp. ("Benesse"), formerly known as Fukutake Publishing Company, Ltd. The Company agreed in principle to grant to Benesse exclusive rights to develop and operate La Petite Academies in Japan. This agreement expired in March 1998 and was not renewed. The Company was reimbursed for all of its out-of-pocket expenses associated with assisting Benesse with the pilot program. Benesse was a stockholder of Investment and certain former directors of the Company were affiliates of Benesse until May 11, 1998.
10. CONTINGENCIES
The Company has litigation pending which arose in the ordinary course of business. Litigation is subject to many uncertainties and the outcome of the individual matters is not presently determinable. It is management's opinion that this litigation will not result in liabilities that would have a material adverse effect on the Company's financial statements.
11. EXTRAORDINARY LOSS
On May 11, 1998, the Company incurred a $5.5 million extraordinary loss related (i) to the retirement of all the outstanding $85.0 million principal amount of 9 5/8% Senior Notes due on 2001, (ii) the exchange of all outstanding shares of La Petite's Class A Preferred Stock for $34.7 million in aggregate principal amount of La Petite's 12 1/8% Subordinated Exchange Debentures due 2003 and (iii) the retirement of all the then outstanding exchange debentures. The loss principally reflects the write-off of premiums and related deferred financing costs, net of applicable income tax benefit.
12. STOCK-BASED COMPENSATION
From time to time, the Board of Directors of Investment in their sole discretion, granted non-qualified stock options, with respect to the common stock of Investment, to key executives of the Company. Options were granted pursuant to an agreement at the time of grant, and typically become exercisable in equal cumulative installments over a five-year period beginning one year after the date of grant. All such options granted expire on the tenth anniversary of the grant date. No market existed for the common stock of Investment, but options were granted at prices that, in the opinion of the Board of Directors, were equal to or greater than the fair value of the stock at the time of grant.
Effective May 11, 1998, the Board of Directors of LPA Holding Corp adopted the "1998 Stock Option Plan" and a separate "Stock Option Agreement" with the Chief Executive Officer (together the "Plans"). The Plans provide for the granting of Tranche A and Tranche B options to purchase up to 60,074 shares of the Company's common stock. Options to purchase 57,757 shares of the Company's common stock have been granted. Tranche A options were granted at $66.92 per share, which approximates the fair value of a share of common stock of the Company at the date of grant. These options expire ten years from the date of grant and become exercisable ratably over 48 months. Tranche B options were granted at $133.83 per share, expire ten years from the date of grant and are exercisable only in the event of a change in control or a registered public offering of common stock which provides certain minimum returns (as defined).
Stock option transactions during the past three years have been as follows:
The Company accounts for all options in accordance with APB Opinion No. 25, which requires compensation cost to be recognized only on the excess, if any, between the fair value of the stock at the date of grant and the amount an employee must pay to acquire the stock. Under this method, no compensation cost has been recognized for stock options granted.
Had compensation cost for these options been recognized as prescribed by SFAS No. 123, the Company's income (loss) would have been reduced by (in thousands) $37 in 1999, $17 in 1998 and $19 in 1997. The Company is privately owned and there is no market for its stock. The estimated compensation element is based on the time value of money at the U.S. Treasury rates assuming that the value of the stock will be at least equal to the grant price when fully exercisable. The estimated compensation expense above is assumed to be amortized over the vesting period.
13. SUBSEQUENT EVENT-ACQUISITION
On July 21, 1999 the Company acquired all the outstanding shares of Bright Start, Inc. ("Bright Start") for $9.3 million in cash and assumed approximately $2.0 million in debt. Bright Start operates 43 preschools in the states of Minnesota, Wisconsin, Nevada, and New Mexico. For the year ended August 31, 1998 Bright Start had operating revenue of $22.2 million and at August 31, 1998 total assets were $5.1 million. The acquisition will be accounted for under the purchase method of accounting.
* * * * * * * * *
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and current position held by the persons who are the directors and executive officers of the Company:
The business experience during the last five years and other information relating to each executive officer and director of the Company is set forth below.
James R. Kahl has been Chairman of the Board in May 1998. Mr. Kahl has been a Director of the Company since September 1993, the Chief Executive Officer of the Company since July 1993 and President since May 1997. Mr. Kahl was an Executive Vice President at Knott's Berry Farm from 1991 to February 1993. From 1988 to 1991, Mr. Kahl was the Senior Vice President, Operations of the Contract Food and Services Division, Health Care and Education Group at the Marriott Corporation in Washington, D.C. From 1982 to 1988, Mr. Kahl held various other executive positions with the Marriott Corporation. Prior to joining the Marriott Corporation, Mr. Kahl held various positions with Arthur Andersen & Co. between 1964 and 1982, including Partner and Managing Partner. He has an M.B.A. from the University of Wisconsin and is a Certified Public Accountant.
Susan M. Stanton became Chief Operating Officer of the Company in January 1999. From 1993 to 1998, Ms. Stanton was President and Chief Operating Officer of Payless Cashways, Inc. and had prior duties with Payless as Senior Vice President-Merchandising and Marketing from 1989 to 1993, Senior Vice President-Administration & Corporate Planning from 1986 to 1989, and Vice President Corporate Planning from 1984 to 1986. From 1981 to 1983, Susan was the Director of Administration for Jackson County, Missouri, Kansas City. Susan has a B.S. from the University of Santa Clara and an M.A. from the University of Houston.
Rebecca L. Perry has been Executive Vice President of Operations since May 1997. From July 1993 to May 1997, Ms. Perry was a Senior Vice President and Eastern Operating Officer. From 1988 to June 1993, she was Assistant Vice President of Operations with supervisory responsibility for the operations of the Company in 14 southern and Midwestern states. From 1985 to 1988, she served as Divisional Director of Florida and from 1981 to 1985, she served as Regional Director of Tampa.
David J. Anglewicz has been Senior Vice President, Facility Services since March 1997. From July 1993 to March 1997, Mr. Anglewicz was Executive Vice President-Property Development and Chief Administrative Officer. Mr. Anglewicz has been involved in the development of over 500 of the Academies throughout the United States since he joined the Company in 1985. Mr. Anglewicz has an M.B.A. from the University of Illinois and a B.S. from the Lawrence Technological University.
Phillip M. Kane has been Senior Vice President, Finance and Chief Financial Officer since 1994. From 1989 to 1993, Mr. Kane was the Chief Financial Officer of the U.S. Department of Housing and Urban Development. From 1974 to 1989, Mr. Kane held various financial management positions with Knight-Ridder, including Vice President and Controller. Prior to joining Knight-Ridder, Mr. Kane was associated with Arthur Andersen & Co. Mr. Kane has a B.A. from the University of Miami (Fla.) and is a Certified Public Accountant.
Mary Jean Wolf has been Senior Vice President, Organizational Services since August 1997. From September 1991 to August 1997, Ms. Wolf was an independent consultant specializing in executive transition and other human resources issues. From July 1987 to June 1991, she was a Senior Vice President and Chief Human Resource Officer with Dime Savings Bank of New York, and from September 1978 to December 1985, she was Vice President of Personnel with Trans World Airlines. Ms. Wolf has a B.S. from Drexel University and a M.B.A. from New York University Graduate School of Business. On August 13, 1999, Ms. Wolf separated from the Company.
Jeanette R. Carter has been Senior Vice President, Parent Services and Planning, since August 1998 with supervisory responsibility for marketing, strategic planning, curriculum and customer services. From October 1996 to August 1998, Ms. Carter served as Vice President, Marketing and Planning. Ms. Carter joined the company in December 1994. Previously, Ms. Carter held various account management positions with marketing and advertising firms working primarily on multi-site retail accounts. Ms. Carter has a B.A. from the University of Missouri.
Mitchell J. Blutt, M.D. has been a Director of the Company since May 1998. Dr. Blutt has been an Executive Partner of CCP since December 1992. From December 1988 to November 1992 he was a General Partner of CCP. Dr. Blutt has a B.A. and a M.D. from the University of Pennsylvania and a M.B.A. from The Wharton School of the University of Pennsylvania. He is a director of the Hanger Orthopedic Group, Vista Healthcare Asia, Pte., Ltd., Digital Entertainment Network, Medical Arts Press, Fisher Scientific International, Inc., DJ Orthopedics, Inc., and is a trustee of the University of Pennsylvania.
Robert E. King has been a Director of the Company since May 1998. Mr. King is Chairman of Salt Creek Ventures, LLC, a private equity company he founded in 1994. Salt Creek Ventures, LLC is an organization specializing in equity investments in technology companies. Mr. King has been involved over the past 33 years as a corporate executive and entrepreneur in technology-based companies. From 1983 to 1994, he was President and Chief Executive Officer of The Newtrend Group. Mr. King has participated as a founding investor in five companies. Mr. King has a B.A. from Northwestern University. He serves on the Board of Directors of DeVry, Inc., American Floral Services, Inc., COLLEGIS, Inc., Premier Systems Integrators, Inc. and eduprise.com, inc.
Stephen P. Murray has been a Director of the Company since May 1998. Mr. Murray has been a General Partner of CCP since June 1994. From November 1988 to June 1994, Mr. Murray was a Principal at CCP. Prior thereto, he was a Vice President with the Middle-Market Lending Division of Manufacturers Hanover. Mr. Murray has a B.A. from Boston College and an M.B.A. from Columbia Business School. He is a director of The Vitamin Shoppe, Vitamin Shoppe.com, Starbelly, Inc., Home Products, Inc., Futurecall Telemarketing, American Floral Services, The Cornerstone Group, Medical Arts Press and Regent Lighting Corporation.
Brian J. Richmand has been a Director of the Company since May 1998. Mr. Richmand has been a General Partner of CCP since August 1993. From 1986 to August 1993, Mr. Richmand was a partner with the law firm of Kirkland & Ellis. He has a B.S. from The Wharton School of the University of
Pennsylvania and a J.D. from Stanford Law School. Mr. Richmand is a director of Transtar Metals, L.L.C., Riverwood International Corp., Reiman Publishing, L.L.C., and American Media, Inc.
Terry D. Byers became a Director of the Company in December 1998. Ms. Byers has more than 17 years experience in information technology ranging from hands-on systems design and development to executive management. She has extensive experience in designing and architecting enterprise-level IT infrastructures, developing and integrating business information systems, implementing large ERP applications, and developing and deploying technology-based solutions to clients. Terry is a Sr. VP and the Chief Technology Officer for American Floral Services, Inc. located in Oklahoma City. She holds a bachelors of business administration degree in computer science from the University of Central Oklahoma.
Ronald L. Taylor became a Director of the Company in April 1999. Mr. Taylor is president and chief operating officer of DeVry, Inc. and Keller Graduate School of Management, Inc. He is chairman of the proprietary schools advisory committee for the Illinois Board of Higher Education; is a member of the Institutional Action Committee; is a commissioner for the Commission on Adult Learning and Educational Credentials, American Council on Education; is a mentor for the Next Generation Leadership Institute at Loyola University Chicago; is a member of the board of directors of the Illinois State Chamber of Commerce; serves on the board of directors of SPR, Inc., DeVry, Inc., and the Better Business Bureau of Chicago & Northern Illinois, Inc. Mr. Taylor has a bachelor's degree from Harvard and received his MBA from Stanford University.
Barbara S. Feigin became a Director of the Company in August 1999. Ms. Feigin is a consultant specializing in strategic marketing and branding. She served as Executive Vice President and Worldwide Director of Strategic Services and was as a member of the Agency Policy Council for Grey Advertising, Inc. from 1983 to 1999. Ms. Feigin is a director of Circuit City Stores, Inc., VF Corporation, and Vitamin Shoppe.com. Ms. Feigin is a graduate of Whitman College, where she has served as a member of the Board of Overseers, and of the Harvard Radcliffe Program in Business Administration.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The members of the Board of Directors are reimbursed for out-of-pocket expenses related to their service on the Board of Directors or any committee thereof. In addition, members of the Board of Directors who are neither officers of the Company nor affiliated with CCP or the Investor are entitled to receive an attendance fee of $1,000 for each meeting attended.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table provides certain summary information concerning compensation earned for the 44 weeks ended July 3, 1999 ("1999"), for the 52 weeks ended August 29, 1998 ("1998"), and the 52 weeks ended August 30, 1997 ("1997"), on behalf of the Company's Chief Executive Officer and the other most highly compensated executive officers whose salary and bonus exceeded $100,000 for the fiscal year:
(1) Represents Recapitalization bonuses paid to certain members of management by selling shareholders out of sales proceeds. Perquisites and other personal benefits for the fiscal years 1999, 1998, and 1997 paid to the named officers did not, as to any of them, exceed the lesser of $50,000 or 10 percent of the sum of their respective salary and bonus.
(2) Represents reimbursement for tax consequences on the exercise and sale of stock options in accordance with Mr. Kahl's employment contract.
(3) 1999 compensation covers 25 weeks from January 11, 1999 through July 3, 1999.
(4) 1997 compensation covers 3 weeks from August 11, 1997 through August 30, 1997.
The following tables present information relating to grants to executive officers of options to purchase common stock of Company:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUES
(1) Pursuant to the Recapitalization, certain key executives simultaneously exercised options at various prices and sold the related shares at $133.83 per share (the transaction price). Those options not exercised were retained by the key executives. All of these options became fully exercisable as a result of the Recapitalization. (2) Effective May 18, 1998 the Board of Directors granted to certain key executives Tranche A options at $66.92 per share, an amount which approximates the fair value of a share of common stock of the Company at the date of the grant. These options become exercisable ratably over forty-eight months and expire ten years from the date of grant. (3) Effective May 18, 1998 the Board of Directors granted to certain key executives Tranche B options at $133.83 per share. These options are exercisable only in the event of a change in control or a registered public offering of common stock, which provides certain minimum returns (as defined) over the transaction price. (4) Effective January 11, 1999 the Board of Directors granted Susan Stanton 4,500 Tranche A options at $66.92 per share and 1,200 Tranche B options at $133.83 per share. (5) The equity of the Company is not traded and there is no market for pricing the value of the options. "In the Money" calculations are based on the enterprise value from the May 11, 1998 Recapitalization
adjusted for the new debt, preferred stock, common shares issued and retired, warrants and options and an adjustment for a control premium related to the Recapitalization.
OPTIONS/SAR GRANTS
(1) Tranche A options (2) Tranche B options (3) The potential realizable value of the options granted in fiscal year 1999 was calculated by multiplying those options by the excess of (a) the assumed fair value of a share of common stock at the end of the option's ten year term, based on a 5% or 10% annual increase in value from the fair value at date of issue over (b) the base price shown. This calculation does not take into account any taxes or other expenses which might be owed. The assumed fair value at a 5% assumed annual appreciation rate over the 10-year term is $109.91 and such value at a 10% assumed annual appreciation rate over that term is $173.57. The 5% and 10% appreciation rates are set forth in the Securities and Exchange Commission rules and no representation is made that the common stock will appreciate at these assumed rates or at all.
EMPLOYMENT CONTRACTS
The Company has entered into employment agreements with James R. Kahl, Susan Stanton, Rebecca L. Perry and Phillip M. Kane. The Employment Agreements provide for Mr. Kahl, Ms. Stanton, Ms. Perry and Mr. Kane to receive a base salary, subject to annual performance adjustments, of $312,500, $250,000, $181,000 and $177,000, respectively, plus a bonus of up to 180%, 120%, 75% and 75%, respectively, of base salary. The terms of the Employment Agreement are as follows: for Mr. Kahl, four years from May 11, 1998, for Ms. Stanton, Ms. Perry, and Mr. Kane, one year, in each case subject to one year automatic renewals. Each Employment Agreement also provides that the executive is entitled to participate in the health and welfare benefit plans available to the Company's other senior executives. The Employment Agreements provide for severance in the case of a termination without 'cause' or a resignation with 'good reason' (each as defined in the applicable Employment Agreement) in an amount equal to the base salary plus bonus for Mr. Kahl, and in an amount equal to the base salary for Ms. Stanton, Ms. Perry and Mr. Kane. If Mr. Kahl terminates his employment with good reason after a change of control, Mr. Kahl would be entitled to two years' base salary and bonus. The Employment Agreements also contain customary non-disclosure, non-competition and non-solicitation provisions.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not applicable.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See pages 18 to 34 of this Annual Report on Form 10-K for financial statements of LPA Holding Corp. as of July 3, 1999 and August 29, 1998 and for the 44 weeks ended July 3, 1999, and 52 weeks ended August 30, 1998 and 52 weeks ended August 30, 1997.
(a) 2. Financial Statement Schedules
The following additional financial data should be read in conjunction with the consolidated financial statements for the 44 weeks ended July 3, 1999, and 52 weeks ended August 29, 1998 and 52 weeks ended August 30, 1997. The condensed financial information of LPA Services, Inc. is not presented do to its immateriality. Other schedules not included with these additional financial statement schedules have been omitted because they are not applicable or the required information is contained in the consolidated financial statements or notes thereto.
SCHEDULES
Schedule I - Condensed Financial Statements of Registrants
Schedule II - Valuation and Qualifying Accounts
(a) 3. Exhibits
EXHIBIT NUMBER DESCRIPTION
3.1* Amended and Restated Certificate of Incorporation of LPA Holding Corp. 3.2* Certificate of Designations, Preferences and Rights of Series A Redeemable Preferred Stock of LPA Holding Corp. 3.3* Bylaws of LPA Holding Corp. 3.4* Amended and Restated Certificate of Incorporation of La Petite Academy, Inc. 3.5* Bylaws of La Petite Academy, Inc. 4.1* Indenture among LPA Holding Corp., La Petite Academy, Inc., LPA Services, Inc. and PNC Bank, National Association dated as of May 11, 1998 10.1* Purchase Agreement among Vestar/LPA Investment Corp., La Petite Academy, Inc., LPA Services, Inc., Chase Securities Inc. and NationsBanc Montgomery Securities LLC dated May 6, 10.2* Exchange and Registration Rights Agreement among La Petite Academy, Inc., LPA Holding Corp., LPA Services, Inc., Chases Securities Inc., NationsBanc Montgomery Securities LLC dated May 11, 1998 10.3* Merger Agreement by and between LPA Investment LLC and Vestar/LPA Investment Corp. dated as of March 17, 1998 10.5* Stockholders Agreement among LPA Holding Corp., Vestar/LPT Limited Partnership, LPA Investment LLC and the management stockholders dated as of May 11, 1998 10.6* 1998 Stock Option Plan and Stock Option Agreement for LPA Holding Corp. dated as of May 18, 1998 10.7* Preferred Stock Registration Rights Agreement between LPA Holding Corp. and LPA Investment LLC dated May 11, 1998
EXHIBIT NUMBER DESCRIPTION
10.8* Registration Rights Agreement among LPA Holding Corp., Vestar/LPT Limited Partnership, the stockholders listed therein and LPA Investment LLC, dated May 11, 1998 10.9* Employment Agreement among LPA Holding Corp., La Petite Academy, Inc. and James R. Kahl 10.10* Employment Agreement among LPA Holding Corp., La Petite Academy, Inc. and Rebecca Perry 10.11* Employment Agreement among LPA Holding Corp., La Petite Academy, Inc. and Phillip Kane 10.12* Credit Agreement dated as of May 11, 1998 among La Petite Academy, Inc., LPA Holding Corp., Nationsbank, N.A., and The Chase Manhattan Bank 10.13* Pledge Agreement among La Petite Academy, Inc., LPA Holding Corp., Subsidiary Pledgors and Nationsbank, N.A. dated as of May 11, 1998 10.14* Security Agreement among La Petite Academy, Inc., LPA Holding Corp., Subsidiary Guarantors and Nationsbank, N.A. dated as of May 11, 1998 10.15* Parent Guarantee Agreement among LPA Holding Corp. and Nationsbank, N.A. dated as of May 11, 1998 10.16* Subsidiary Guarantee Agreement among Subsidiary Guarantor of La Petite Academy, Inc., LPA Services, Inc. and Nationsbank, N.A. dated as of May 11, 1998 10.17* Indemnity, Subrogation and Contribution Agreement among La Petite Academy, Inc., LPA Services, Inc., as Guarantor and Nationsbank, N.A. dated as of May 11, 1998 10.18** James Kahl option agreement 10.19** 1998 Stock Option Plan 12.1* Statement regarding computation of ratios 21.1* Subsidiaries of Registrant 23.2* Consent of Deloitte & Touche LLP 24.1* Powers of Attorney (included on the signature page) 27.1 Financial Data Schedule
* Incorporated by reference to the Exhibits to La Petite Academy, Inc.'s Registration Statement on Form S-4, Registration No. 333-56239, filed with the Securities and Exchange Commission on June 5, 1998.
** Incorporated by reference to the Exhibits to La Petite Academy, Inc.'s 10-K filed with the Securities and Exchange Commission on November 24, 1998.
(b) Reports on Form 8-K
Current report on Form 8-K filed on June 25, 1999 reporting the change of the Company's fiscal year to be the period starting on the first Sunday in July and ending on the first Saturday in July in the subsequent year.
LPA HOLDING CORP.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
See notes to consolidated financial statements included in Part II of the Annual Report on Form 10-K.
LPA HOLDING CORP. SCHEDULE I- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (IN THOUSANDS OF DOLLARS)
LPA HOLDING CORP.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (IN THOUSANDS OF DOLLARS)
See notes to consolidated financial statements included in Part II of the Annual Report on Form 10-K.
LPA HOLDING CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS OF DOLLARS)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(a) During the fourth quarter of fiscal 1996, the company performed an audit of its third party receivable balances and wrote off substantially all of its uncollectible accounts. In addition, the Company implemented new procedures and controls to ensure write-offs are recorded on a a timely basis. (continued)
LPA HOLDING CORP. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS OF DOLLARS)
RESERVE FOR CLOSED ACADEMIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on September 30, 1999.
LPA Holding Corp. /s/ James R. Kahl ------------------------------- By: James R. Kahl Chairman of the Board, Chief Executive Officer, President and Director and duly Authorized representative of the registrant
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed by the following persons on behalf of the registrant and in the capabilities indicated on September 30, 1999.
/s/ James R. Kahl /s/ Stephen P. Murray - ------------------------------------ ----------------------------------- By: James R. Kahl By: Stephen P. Murray Chairman of the Board, Chief Executive Director Officer, President and Director
/s/ Mitchell J. Blutt, M.D. /s/ Brian J. Richmand - ------------------------------------ ----------------------------------- By: Mitchell J. Blutt, M.D. By: Brian J. Richmand Director Director
/s/ Robert E. King /s/ Terry D. Byers - ------------------------------------ ----------------------------------- By: Robert E. King By: Terry D. Byers Director Director
/s/ Ronald L. Taylor /s/ Barbara Feigin - ------------------------------------ ----------------------------------- By: Ronald L. Taylor By: Barbara Feigin Director Director
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on September 30, 1999.
La Petite Academy, Inc.
/s/ Phillip M. Kane ----------------------------------- By: Phillip M. Kane Senior Vice President, Chief Financial Officer and duly authorized representative of the registrant
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on September 30, 1999.
LPA Services, Inc.
/s/ Phillip M. Kane ----------------------------------- By: Phillip M. Kane Vice President of Finance, Chief Financial Officer and duly authorized representative of the registrant