As filed with the Securities and Exchange Commission on December 18, 2001
Registration No. 333-56239
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------------------
POST EFFECTIVE AMENDMENT NO. 4
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------------------------
LA PETITE ACADEMY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8351 43-1243221
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
---------------------------------------------
8717 WEST 110TH STREET,
SUITE 300,
OVERLAND PARK, KANSAS 66210
(913) 345-1250
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------------------------------------
LPA HOLDING CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 6719 48-1144353
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
---------------------------------------------
8717 WEST 110TH STREET,
SUITE 300,
OVERLAND PARK, KANSAS 66210
(913) 345-1250
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------------------------------------
LPA SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 6411 74-2849053
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
---------------------------------------------
8717 WEST 110TH STREET,
SUITE 300,
OVERLAND PARK, KANSAS 66210
(913) 345-1250
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------------------------------------
BRIGHT START, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 8351 41-1694581
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
---------------------------------------------
8717 WEST 110TH STREET,
SUITE 300,
OVERLAND PARK, KANSAS 66210
(913) 345-1250
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------------------------------------
JUDITH A. ROGALA
CHIEF EXECUTIVE OFFICER
8717 WEST 110TH STREET,
SUITE 300,
OVERLAND PARK, KANSAS 66210
(913) 345-1250
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------------------------------------
With a copy to:
ROSA A. TESTANI, ESQ.
O'SULLIVAN LLP
30 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10112
(212) 408-2400
---------------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC. As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
The Registrants hereby amend this Post-Effective Amendment to this Registration
Statement on Form S-4 on such date or dates as may be necessary to delay its
effective date until the Registrants shall file a further amendment which
specifically states that this Post-Effective Amendment to this Registration
Statement shall thereafter become effective in accordance with Section 8(c) of
the Securities Act of 1933 or until this Post-Effective Amendment to the
Registration Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(c), may determine.
================================================================================
SUBJECT TO COMPLETION, DATED DECEMBER 18, 2000
PROSPECTUS
LA PETITE ACADEMY, INC.
LPA HOLDING CORP.
$145,000,000 10% SERIES B SENIOR NOTES DUE 2008
-------------------
The 10% Series B Senior Notes due 2008 (referred to in this prospectus as
"notes") were issued by La Petite Academy and its parent company, LPA Holding
Corp. (together, the "issuers"), in 1998 in exchange for their previously
outstanding 10% Senior Notes due 2008,which are referred to in this prospectus
as "old notes."
We will pay interest on the notes semi-annually on May 15 and November 15 of
each year. The notes will mature on May 15, 2008. We may redeem the notes, in
whole or in part, after May 15, 2003. In addition, we may redeem up to 35% of
the notes with the net proceeds of one or more public equity offerings. Upon the
occurrence of a change of control, each holder of notes may require us to
repurchase all or any part of the notes. See "Description of Notes."
The notes are unsecured senior indebtedness and are effectively subordinate to
all our existing and future secured indebtedness. The notes rank equally with
all our existing and future senior indebtedness and senior to all our
subordinated obligations. Each of our existing subsidiaries fully and
unconditionally guarantees the notes on a senior basis. LPA Holding Corp. and
our existing subsidiaries have guaranteed our secured credit agreement and we
are all jointly and severally liable on a senior basis. At October 20, 2001, we
had $198.7 million of senior indebtedness outstanding, of which $53.7 million is
secured. See "Description of Notes--Ranking."
This prospectus has been prepared for use by J.P. Morgan Securities Inc., or
JPMSI, in connection with offers and sales related to market-making transactions
in the notes. The notes are not listed on any national securities exchange or
any quotation system. JPMSI may act as principal or agent in such transactions.
We do not receive any proceeds from any such purchases or sales. Such sales will
be made at prices related to prevailing market prices at the time of sale. See
"Plan of Distribution."
-----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES.
-------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS DECEMBER __, 2001.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the post-effective amendment to the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
TABLE OF CONTENTS
Page
----
Prospectus Summary ........................................................ 1
Risk Factors............................................................... 8
Use of Proceeds ........................................................... 14
The Transactions........................................................... 14
Capitalization ........................................................... 17
Selected Consolidated Financial and Other Data ............................ 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................. 20
Business .................................................................. 30
Management ................................................................ 39
Ownership of Securities.................................................... 45
Certain Relationships and Related Transactions............................. 47
Description of the Credit Agreement........................................ 48
Description of the Notes................................................... 50
Certain United States Federal Income Tax Considerations.................... 73
Book-Entry; Delivery and Form.............................................. 76
Plan of Distribution....................................................... 78
Legal Matters.............................................................. 78
Experts.................................................................... 78
Index to Financial Statements.............................................. F-1
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FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. We use words such as "may," "believe," "estimate,"
"expect," "plan," "intend," "anticipate" and similar expressions to identify
forward-looking statements. We have based these forward-looking statements on
our current expectations and projections about future events, activities or
developments. Forward-looking statements include statements relating to, among
other things:
- our growth strategy and plans regarding opening and acquiring new
Academies and expanding existing Academies;
- expected capital and other expenditures to open new and relocated
and/or expanded existing Academies;
- growth trends in the child care industry; and
- our expectations regarding competition.
Forward-looking statements are subject to numerous known or unknown risks,
uncertainties and assumptions, many of which are beyond our control. Actual
results could differ materially from those expressed in or implied by these
forward-looking statements. Important factors that could cause actual results to
be materially different from those anticipated in the forward-looking statements
are set forth under "Risk Factors" and throughout this prospectus including,
among other things:
- risks related to our ability to open and profitably operate
Academies;
- significant competition, including with respect to our pricing
strategy;
- seasonal fluctuations in our business;
- changes in industry and government regulations;
- the results of financing efforts;
- fluctuations in demand for child care services; and
- general economic conditions.
i
We undertake no obligation, and disclaim any obligation, to publicly update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. Prospective purchasers should not place
undue reliance on such forward-looking statements.
-----------------------
You should rely only on the information contained in this prospectus.
Neither we nor JPMSI have authorized any person to provide you any information
or represent anything to you other than the information contained in this
prospectus. You must not rely on any unauthorized information or
representations. This prospectus does not offer to sell or buy any of the
securities in any jurisdiction where it is unlawful to do so. You should assume
that the information appearing in this prospectus is accurate only as of the
date on the front cover of this prospectus. Our business, financial condition,
results of operations and prospects may have changed since that date.
Information in our promotional literature is not incorporated into this
document.
ii
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It is not complete and does not contain all the information that is important to
you. You should read the entire prospectus carefully, including the "Risk
Factors" section and our consolidated financial statements and notes to those
statements. All references to "La Petite Academy," "La Petite," "we," "our" or
"us" mean La Petite Academy, Inc., our consolidated subsidiaries and our
predecessor, unless the context indicates otherwise. All references to
"Academies" mean all residential and employer-based La Petite Academies and all
Montessori schools that we operate, unless the context indicates otherwise. All
references in this prospectus to fiscal years prior to 1999 refer to fiscal
years ending on the last Saturday in August of each year. On June 10, 1999, we
changed our fiscal year to be the 52 or 53 week period ending on the first
Saturday in July. As a result of this change, fiscal year 1999 was a 4- week
transition period. On April 18, 2001, we changed our fiscal year end from the 52
or 53-week period ending on the first Saturday in July to the 52 or 53-week
period ending on the Saturday closest to June 30. All references to market share
and demographic data in this prospectus are based on industry and government
publications and our estimates. All references to our parent are to LPA Holding
Corp., which is a co-issuer of the notes.
OVERVIEW
La Petite, founded in 1968, is the largest privately held and one of the
leading for-profit preschool educational facilities (commonly referred to as
Academies) in the United States based on the number of centers operated. We
provide center-based educational services and child care to children between the
ages of six weeks and 12 years.
We believe we differentiate ourselves through our superior educational
programs, which were developed and are regularly enhanced by our Curriculum
Department. Our focus on quality educational services allows us to capitalize on
the increased awareness of the benefits of premium educational instruction for
preschool and elementary school age children. At our residential and
employer-based Academies, we utilize our proprietary Journey(R) curriculum with
the intent of maximizing a child's cognitive and social development. We also
operate Montessori schools that employ the Montessori method of teaching, a
classical approach that features the programming of tasks with materials
presented in a sequence dictated by each child's capabilities.
As of October 20, 2001, we operated 725 Academies, including 661
residential Academies, 32 employer-based Academies and 32 Montessori schools,
located in 36 states and the District of Columbia. This represents a decrease of
24 schools for the same period of fiscal year 2001. This decrease is the result
of 35 closures and 11 openings. The closures resulted from management's decision
to close certain schools located in areas where the demographic conditions no
longer supported an economically viable operation. For the 16 weeks ended
October 20, 2001, we had an average attendance of approximately 72,000 full and
part-time children.
COMPETITIVE STRENGTHS
STRONG MARKET POSITION AND BRAND IDENTITIES. Based on the number of centers
operated, we are the largest privately-held and one of the leading providers of
for-profit preschool education and child care services in the United States.
Operating since 1968, we have built brand equity in the markets we serve through
the development of a network of Academies concentrated in clusters in
demographically desirable Metropolitan Statistical Areas ("MSAs"). We believe
that we benefit significantly from word-of-mouth referrals from parents,
educators and other school administrators.
FOCUSED EDUCATIONAL CURRICULUM. Our focus is on educating the child rather
than simply providing traditional child care services. Our proprietary
Journey(R) curriculum was originally developed in 1991 by La Petite educators
with the assistance of experts in early childhood education, with the intent of
maximizing a child's cognitive development while ensuring a positive experience
for the child. The curriculum emphasizes individuality and allows children to
progress at their own pace, building skills in a logical pattern using a
"hands-on" approach. We also operate Montessori schools, which target education
conscious parents, under the name Montessori Unlimited(R).
ATTRACTIVE BUSINESS MODEL. We are seeking to improve profitability at the
Academy level through a combination of factors, including:
- revenue enhancement and cost management at the individual Academies,
and
- the economies of scale and synergies realized through the clustering
of Academies in economically and demographically attractive areas.
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1
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During the 2001 year, we re-opened one Journey-based Academy and 5 new
employer-based Academies. Our Journey Academies average 5,900 square feet with a
license capacity of approximately 150 children and our Montessori schools
average 8,200 square feet with a license capacity of approximately 130 children.
GEOGRAPHICALLY DIVERSIFIED OPERATIONS. Our operations are geographically
diversified, with 725 Academies located throughout 36 states and the District of
Columbia as of October 20, 2001. The geographical diversity of our operations
and profitability mitigates the potential impact of regional economic downturns
or adverse changes in local regulations.
EXPERIENCED AND INCENTIVIZED MANAGEMENT TEAM. Our Division Vice Presidents
and Managing Directors average over 19 years and 12 years with us, respectively.
Our management owns or has the right to acquire, subject to certain performance
requirements, approximately 7.0% of the common stock of our parent company on a
fully diluted basis.
BUSINESS STRATEGY
We believe we are well positioned for future growth as one of the leading
providers of quality educational care to preschool aged children. Our objective
is to grow our higher margin businesses and continue to be a leader in the
markets in which we operate.
EMPHASIZE EDUCATIONAL CURRICULUM. Our curriculum department continually
evaluates and improves the quality of our educational materials and programs. We
have invested significant resources in developing our proprietary Journey(R)
curriculum, used at both our residential and employer-based Academies. Our
Montessori schools are staffed with certified Montessori lead teachers who
follow traditional Montessori methods that appeal to education conscious
parents.
CAPITALIZE ON REPUTATION FOR CUSTOMER DRIVEN SERVICE. We believe that our
knowledge of parents' objectives and desires for their children's education
differentiates us from other child care providers. To better understand customer
needs, we have conducted:
- focus groups with parents,
- customer and employee satisfaction surveys (conducted by us and third
parties), and
- interviews with parents.
INCREASE ACADEMY PROFITABILITY. We plan to improve Academy profitability by
increasing capacity utilization and tuition rates, managing costs and leveraging
our existing and newly built Academies to achieve economies of scale and
synergies. We intend to continue to increase capacity utilization by emphasizing
local marketing programs, expanding program offerings, and improving customer
retention and loyalty. Through an internally developed proprietary management
information system, we have the ability to maximize revenue by charging
customers a premium for services in high demand.
BUILD ACADEMIES IN ATTRACTIVE MARKETS. During the 2001 year, we re-opened
one Journey-based Academy and 5 new employer-based Academies. Our Academies are
approximately 6,000 square feet, built on sites of approximately one acre, have
a license capacity of approximately 150 children for Journey(R) curriculum based
Academies and 130 children for Montessori schools and incorporate a closed
classroom concept.
PURSUE STRATEGIC OPPORTUNITIES. In addition to new Academy development, we
will continue to seek to acquire existing child care centers where demographics
and facility conditions complement our business strategy. We believe our
competitive position, economies of scale and financial strength will enable us
to capitalize on selective acquisition opportunities in the fragmented child
care industry. We may also engage in cross-marketing opportunities with
manufacturers and marketers of educational products.
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2
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THE 1998 RECAPITALIZATION
Pursuant to a Merger Agreement dated March 17, 1998 among LPA Holding
Corp., our parent company, and LPA Investment LLC ("LPA"), a limited liability
company owned by an affiliate of J.P. Morgan Partners ("JPMP") and by an entity
controlled by Robert E. King, one of our directors, on May 11, 1998, our parent
company effected a recapitalization, pursuant to which the following
transactions occurred:
- a wholly-owned subsidiary of LPA was merged into our parent company;
- all of the then outstanding shares of preferred stock and common
stock of our parent company (other than the shares of common stock
retained by Vestar/LPT Limited Partnership (Vestar), and our
management) owned by its existing stockholders were converted into
cash;
- we entered into the credit agreement and issued the old notes; and
- LPA, in a transaction known as the "equity investment," purchased
approximately $72.5 million (less the value of options retained by
management) of common stock and $30 million of redeemable preferred
stock of our parent company, and received warrants to purchase shares
of common stock of our parent company which currently represents the
right to acquire 1.4% of our parent company's outstanding common
stock on a fully diluted basis.
Vestar retained common stock of our parent company having a value (based on
the amount paid by LPA for its common stock of our parent company) of $2.8
million (currently representing 0.7% of the outstanding parent company common
stock on a fully diluted basis). The 1998 management team retained common stock
of our parent company having a value (based on the amount paid by LPA for our
parent company common stock) of $4.4 million (currently representing 1.4% of the
common stock of our parent company on a fully diluted basis) and retained
existing options to acquire shares of our parent company's common stock which
currently represents the right to acquire 0.1% of our parent company's common
stock on a fully diluted basis. In addition, our parent company adopted a the
1998 option plan and granted or allocated for grant options to acquire shares of
its common stock, which currently represent the right to acquire 7.9% of our
parent company's common stock on a fully diluted basis. As of the date of this
prospectus, current management owns or has the right to acquire, subject to
certain performance requirements, approximately 7.0% of our parent company's
common stock on a fully diluted basis. See "Ownership of Securities."
We used the equity investment, the proceeds of the offering of the old
notes and borrowings under the Credit Agreement to finance the recapitalization,
to refinance substantially all of our outstanding indebtedness and outstanding
preferred stock and to pay related fees and expenses.
The refinancing transactions consisted of:
- the defeasance of all of our outstanding $85 million principal amount
of 9 5/8% Senior Secured Notes due 2001,
- the exchange of all outstanding shares of our parent company's Class
A Preferred Stock and accrued dividends thereon for $35.4 million in
aggregate principal amount of our 12 1/8% Subordinated Exchange
Debentures due 2003, and the immediate defeasance of these exchange
debentures, and
- the redemption of all our outstanding 6 1/2% Convertible Subordinated
Debentures due 2011.
In connection with the recapitalization and the refinancing transactions,
we and our parent company entered into a new Credit Agreement providing for a
$40 million term loan facility and a $25 million revolving loan facility, that
is available for our working capital requirements. See "Description of the
Credit Agreement."
The offering of the old notes, the recapitalization, the equity investment, the
borrowings under the Credit Agreement and the refinancing transactions are
collectively referred to in this prospectus as the Transactions.
THE 1999 INVESTMENT
On December 15, 1999, LPA acquired an additional $15.0 million of our
parent company's redeemable preferred stock and received warrants to purchase an
additional 3% of our parent company's common stock on a fully-diluted basis. The
$15.0 million proceeds received by our parent company were contributed to us as
common equity. We used the capital contribution to repay indebtedness incurred
under our revolving credit facility to finance our acquisition of Bright Start,
Inc. in July 1999. In addition, on December 14, 1999, our Credit Agreement was
amended to, among other things, amend the financial covenants to reflect our
then current and projected operating plans.
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3
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THE 2001 INVESTMENT
On November 13, 2001, our parent company offered all of its stockholders
the right to purchase up to their respective pro rata amount of a newly created
class of our parent company's convertible preferred stock and warrants to
purchase common stock. The convertible preferred stock is junior to the
redeemable preferred stock of our parent company in terms of dividends,
distributions, and rights upon liquidation. Up to $4.25 million of convertible
preferred stock of our parent company and warrants to purchase 562,500 shares of
common stock were offered. At any time, or from time to time, prior to May 14,
2002, as requested by our parent company, the stockholders of our parent company
participating in the offer are required to purchase the balance of the
convertible preferred stock being offered. All of the proceeds received by our
parent company will be contributed to us as common equity and will be used by us
for general working capital and liquidity purposes.
Pursuant to the offer, on November 15, 2001 LPA acquired $3.4 million of
our parent company's convertible preferred stock and received warrants to
purchase 452,343 shares of common stock. The proceeds were contributed to us as
common equity. In connection with such purchase, the banks waived their right
under the Credit Agreement to require that the proceeds be used to repay amounts
outstanding under the Credit Agreement, and the banks also agreed to waive
existing defaults under the Credit Agreement and to amend certain financial
covenant targets for fiscal years 2002, 2003 and 2004. LPA also committed to
purchase the balance of the $11.6 million of convertible preferred stock being
offered and not otherwise purchased by the other stockholders of our parent
company. After giving effect to the investment on November 15, 2001, LPA
beneficially owns approximately 90.0% of our parent company's outstanding common
stock on a fully diluted basis.
OWNERSHIP
As a result of the recapitalization and the December 1999 and November 2001
purchases of additional preferred stock and warrants of our parent company, LPA
Investment LLC beneficially owns approximately 90.0% of the common stock of our
parent company on a fully diluted basis, $45 million of redeemable preferred
stock of our parent company and $3.4 million of convertible preferred stock of
our parent company. An affiliate of JPMP owns a majority of the economic
interests of LPA and an entity controlled by Robert E. King owns a majority of
the voting interests of LPA. JPMP is the private equity division of J.P. Morgan
Chase & Co., one of the largest bank holding companies in the United States, and
is one of the largest private equity organizations in the United States, with
over $16.0 billion under management. Through its affiliates, JPMP invests in
leveraged buyouts, recapitalizations and venture capital opportunities by
providing equity and mezzanine debt capital. Since its inception in 1984, JPMP
has made over 1,000 direct investments in numerous industries.
-------------------
Our principal executive offices are located at 8717 West 110th Street,
Suite 300, Overland Park, Kansas 66210 and our telephone number is (913)
345-1250.
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4
SUMMARY DESCRIPTION OF THE NOTES
You should read the following summary together with "Description of Notes."
Issuers.....................................La Petite Academy, Inc. and LPA
Holding Corp.
Notes Outstanding...........................$145,000,000 aggregate principal
amount of 10% Series B Senior Notes
due 2008.
Maturity Date...............................May 15, 2008.
Interest Payment Dates......................May 15 and November 15 of each year.
Sinking Fund................................None.
Optional Redemption.........................We may redeem the notes at our
option, in whole or in part, at any
time on or after May 15, 2003, at
the redemption prices, plus accrued
and unpaid interest, if any, to the
redemption date. We may also redeem
up to 35% of the aggregate principal
amount of the notes at our option,
at any time prior to May 15, 2001,
at a redemption price equal to 110%
of the principal amount thereof,
plus accrued and unpaid interest, if
any, to the redemption date, with
the net cash proceeds of one or more
equity offerings, except that at
least 65% of the original aggregate
principal amount of the notes must
remain outstanding after such
redemption.
Change of Control...........................Upon the occurrence of a change of
control, each holder of the notes
may require us to purchase all or a
portion of the holder's notes at a
price equal to 101% of the aggregate
principal amount thereof, plus
accrued and unpaid interest, if any,
to the date of purchase.
Restrictive Covenants.......................The notes are issued under an
indenture which contains certain
covenants that, among other things,
limits our ability and the ability
of our restricted subsidiaries to:
- incur additional indebtedness,
- make investments,
- make restricted payments,
including dividends or other
distributions,
- incur liens,
- enter into certain
transactions with affiliates,
and
- enter into certain mergers
or consolidations or sell
all or substantially all of
the assets of the Company
and its subsidiaries
These covenants are subject to a
number of significant exceptions and
qualifications.
Guarantees..................................Each of our existing subsidiaries
fully and unconditionally guarantees
the notes. Our parent company and
our subsidiaries have guaranteed the
credit agreement and are jointly and
severally liable with us on a senior
basis. We have secured our
obligations under the credit
agreement by pledges of all of our
capital stock and the stock of our
subsidiaries, as well as security
interests in, or liens on,
substantially all of our tangible
and intangible assets and the assets
of our parent company and our
subsidiaries.
Ranking.....................................The notes are unsecured senior
indebtedness, effectively
subordinated in right of payment to
all of our existing and future
secured indebtedness. At October 20,
2001, we had $198.7 million of
senior indebtedness outstanding, of
which $53.7 million is secured.
Except for the guarantees of the
notes and the credit agreement, the
guarantors had no other senior
indebtedness outstanding.
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5
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SUMMARY OF FINANCIAL AND OPERATING DATA
The following table contains summary financial and other data for our parent
company and us on a consolidated basis. Information for the fiscal years ended
June 30, 2001, July 1, 2000 and July 3, 1999 is derived from our financial
statements that have been audited by Deloitte & Touche LLP, independent
auditors. The consolidated financial statements for the 16 week periods ended
October 21, 2000 and October 20, 2001 come from our unaudited consolidated
financial statements included elsewhere in this prospectus. Historical results
are not necessarily indicative of the results to be expected in the future, and
results of interim periods are not necessarily indicative of the results for the
entire fiscal year. You should read this information together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and notes to those statements.
16 WEEKS
44 WEEKS 52 WEEKS 52 WEEKS ENDED
ENDED ENDED ENDED ----------------------------
JULY 3, JULY 1, JUNE 30, OCTOBER 21, OCTOBER 20,
1999(a) 2000 2001(a) 2000 2001
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(Dollars in thousands, except Academy data and ratios)
STATEMENT OF OPERATIONS DATA:
Operating revenue $ 281,072 $ 371,037 $ 384,837 $ 114,274 $ 117,307
Operating expenses 264,882 365,952 367,945 112,505 115,278
Operating income 16,190 5,085 16,892 1,769 2,028
Interest expense (b) 16,145 20,880 23,577 7,412 6,553
Net loss (797) (10,547) (6,312) (3,667) (3,020)
OTHER FINANCIAL DATA:
EBITDA (as defined)(c) $ 29,073 $ 28,920 $ 32,144 $ 6,567 $ 6,616
Cash flows from operating activities 10,320 5,597 2,792 335 1,733
Cash flows used for investing activities (19,204) (10,341) (14,705) (1,737) (2,566)
Cash flows from financing activities 6,588 4,180 12,983 568 1,182
Depreciation 10,911 13,500 12,423 3,926 3,719
Amortization of goodwill and other 1,972 2,835 2,829 873 869
intangibles
Capital expenditures 31,666 23,412 14,894 1,920 2,568
Ratio of earnings to fixed charges (d) 1.0x (d) (d) (d) (d)
ACADEMY DATA:
Number of Academies 743 752 734 749 725
Operating Capacity(e) 90,761 98,336 92,985 93,797 88,013
FTE Utilization (f) 65% 63% 63% 61% 62%
Average Weekly FTE Tuition (g) $ 109 $ 116 $ 122 $ 118 $ 127
BALANCE SHEET DATA:
Cash and cash equivalents $ 7,450 $ 4,008 $ 5,078 $ 3,174 $ 5,427
Working capital (23,171) (20,789) (21,052) (17,870) (21,205)
Total assets 169,468 165,647 165,373 169,142 169,064
Total long-term debt 187,999 182,319 194,648 188,034 197,770
Redeemable preferred stock 29,310 47,314 54,941 49,584 57,457
Stockholders' deficit (110,183) (123,653) (137,293) (130,998) (142,849)
See footnotes on next page.
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6
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footnotes for previous page
(a) On April 18, 2001, we changed our fiscal year end from the 52 or
53-week period ending on the first Saturday in July to the 52 or
53-week period ending on the Saturday closest to June 30. On June 10,
1999, we changed our fiscal year to be the period starting on the first
Saturday in July and ending on the first Saturday of July of the
subsequent year, resulting in a 44-week year for fiscal 1999 (see Note
1 in the consolidated financial statements).
(b) Interest expense includes $0.8 million, $1.1 million, and $1.1 million
of amortization of deferred financing costs for fiscal years 1999,
2000, and 2001, respectively. For the 16 weeks ended October 21, 2000
and October 20, 2001, interest expense included $0.6 million and $0.3
million of amortization of deterred financing costs, respectively.
(c) 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 management believes it
provides 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 our profitability or liquidity. EBITDA may not be comparable
to similarly titled measures used by other companies.
(d) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as income before income taxes and extraordinary
items, plus fixed charges. Fixed charges consists of interest expense
on all indebtedness, amortization of deferred financing costs, and
one-third of rental expense on operating leases representing that
portion of rental expense that we deemed to be attributable to
interest. For the 52 weeks ended July 1, 2000 and June 30, 2001,
earnings were inadequate to cover fixed charges, $15.6 million and $6.6
million, respectively. For the 16 weeks ended October 21, 2000 and
October 20, 2001, earnings were inadequate to cover fixed charges by
$5.6 million and $4.5 million, respectively.
(e) As a result of our targeted teacher-student ratios, the physical layout
of certain residential Academies and the typical layout of Montessori
Schools, our Academies have an operating capacity approximately 8%
below licensed capacity. Licensed capacity measures the overall
capacity of our Academies based upon applicable state licensing
regulations.
(f) FTE Utilization is the ratio of full-time equivalent (FTE) students to
the total operating capacity for all of our Academies. FTE attendance
is not a measure of the absolute number of students attending our
Academies. Rather, it is an approximation of the full-time equivalent
number of students based on our 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.
(g) We calculate the average weekly FTE tuition by dividing total operating
revenue by the number of weeks in the applicable period and by the
number of FTE students for the applicable period.
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7
RISK FACTORS
You should carefully consider these risk factors, together with all
information included in this prospectus. If any of the following risks, or other
risks not presently known to us or that we currently believe not to be
significant, develop into actual events, then our business, financial condition,
results of operations or prospect could be materially affected.
BECAUSE WE HAVE SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS, OUR SUCCESS
DEPENDS ON OUR ABILITY TO GENERATE CASH FLOW AND BE PROFITABLE.
As a result of the issuance of the notes and the borrowings under the
Credit Agreement, we have a highly leveraged capital structure and our
consolidated indebtedness is substantial in relation to our stockholders'
equity. As of October 20, 2001, we had consolidated indebtedness of $184.2
million (exclusive of unused commitments under the Credit Agreement) and a
stockholders' deficit of $142.9 million.
The degree to which we are leveraged could have important consequences to
the holders of the notes, including the following:
- a substantial portion of our cash flow from operations is dedicated to
the payment of principal and interest on our indebtedness, including
the notes, which reduces the funds available for other purposes;
- our ability to obtain additional financing in the future may be
significantly impaired, including our ability to obtain additional
financing for working capital, capital expenditures, acquisitions or
other corporate purposes and to obtain sale leaseback financing;
- some of our indebtedness is at variable rates of interest, which could
result in higher interest expense in the event of increases in interest
rates;
- all the indebtedness outstanding under the Credit Agreement is secured
by pledges of all our capital stock and the capital stock of our
existing subsidiaries, as well as the capital stock of all of our
future subsidiaries, and security interests in, or liens on,
substantially all of our other tangible and intangible assets including
our parent company and our existing subsidiaries, as well as all of our
future subsidiaries, and such indebtedness will mature prior to the
maturity of the notes;
- our ability to compete through capital improvement and expansion may be
limited; and
- our ability to adjust to changing market conditions and to withstand
competitive pressures could be limited, and we may be vulnerable in the
event of a downturn in general economic conditions or the business.
Our ability to make scheduled payments and to refinance our obligations
with respect to our indebtedness, including the notes, will depend upon our
future operating performance. In turn, this will be affected by general economic
and competitive conditions and by financial, business and other factors, many of
which are beyond our control. In connection with the Amendment to the Credit
Agreement and the $15.0 million of committed capital management is continuing to
review plans and actions that will enable us to improve future operations.
However, there can be no assurance that we will be able to do so. For the 16
weeks ended October 20, 2001, the 52 weeks ended June 30, 2001, the 52 weeks
ended July 1, 2000, and the 44 weeks ended July 3, 1999, our consolidated cash
interest expense was $3.2 million, $21.4 million, $19.7 million and $17.7
million, respectively. We anticipate that our cash flow, together with
borrowings under the Credit Agreement and capital contributions expected to be
received from our parent company in the amount of $11.6 million, will be
sufficient to meet our operating expenses and to service our debt requirements
for at least the next twelve months. If we are unable to generate sufficient
cash flow from operations in the future or borrow under the Credit Agreement in
an amount sufficient to meet our operating expenses and to service our debt
requirements as they become due, we will have to adopt an alternative strategy
that may include reducing or delaying capital expenditures, selling assets,
restructuring or refinancing our indebtedness, changing our corporate structure
or seeking additional equity capital. There can be no assurance that any of
these actions could be effected in a timely manner or on satisfactory terms, if
at all, or that any of these actions would enable us to continue to meet our
operating expenses and to service our debt requirements as they become due. In
addition, the terms of the agreements governing our existing and future
indebtedness, including the terms of the Credit Agreement and the indenture for
the notes, may prohibit us from taking any of these actions. The failure to
generate sufficient cash flow from operations, to borrow under the Credit
Agreement or to adopt an
8
alternative strategy could materially adversely affect our ability to pay
interest on, and to repay the principal of, the notes and adversely affect the
market value of the notes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
BECAUSE YOU HOLD UNSECURED NOTES AND GUARANTEES, YOU WILL NOT HAVE THE BENEFIT
OF COLLATERAL.
The indenture permits us, our parent company and our restricted
subsidiaries to incur secured indebtedness, including indebtedness under the
Credit Agreement, which is secured by security interests in, or liens on,
substantially all tangible and intangible assets of us, our parent company and
our existing subsidiary, as well as all of our future subsidiaries and a pledge
of all our capital stock and the capital stock of our subsidiary, as well as all
future subsidiaries. The notes and the guarantees are unsecured and therefore
will not have the benefit of any collateral. Accordingly, in the event of a
bankruptcy, liquidation, reorganization or similar proceeding relating to us,
our parent company or a guarantor, the lenders of such secured indebtedness
would have the right to foreclose upon such collateral to the exclusion of the
holders of the notes, notwithstanding the existence of an event of default with
respect to the notes. In such event, our assets and the assets of our parent
company and the guarantors would first be used to repay in full all amounts
outstanding under such secured indebtedness which would result in all or a
portion of these assets being unavailable to satisfy claims of holders of the
notes and other unsecured indebtedness.
OUR ABILITY TO COMPLY WITH THE RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
COULD CAUSE A DEFAULT UNDER THE CREDIT AGREEMENT OR INDENTURE.
The terms and conditions of the Credit Agreement impose restrictions on our
ability to:
- incur indebtedness or issue certain equity securities,
- incur liens,
- undergo certain fundamental changes,
- make loans or advances,
- incur guarantees or make acquisitions,
- undertake asset sales,
- engage in sale and leaseback transactions,
- enter into hedging agreements,
- pay dividends in respect of our capital stock
- make distributions on or repurchase or redeem capital stock or certain
indebtedness,
- enter into transactions with affiliates,
- enter into certain restrictive agreements,
- amend certain material documents, and
- make capital expenditures and engage in mergers and consolidations.
The Credit Agreement also requires us to maintain specified financial
ratios and satisfy certain tests, including a maximum leverage ratio, a fixed
charge coverage ratio and a minimum EBITDA test. The terms and conditions of the
indenture impose restrictions on our ability and the ability of our restricted
subsidiaries to:
- incur additional indebtedness,
- pay dividends on and redeem capital stock,
- redeem certain subordinated obligations,
- make investments,
- undertake sales of assets and subsidiary stock,
- grant liens on our assets and the assets of our parent company and our
restricted subsidiaries,
- engage in certain transactions with affiliates,
- sell or issue capital stock of our restricted subsidiaries, and
- engage in consolidations, mergers and transfers of all or substantially
all the assets of the issuers.
Our ability to comply with these and other terms and conditions of the
Credit Agreement and the indenture may be affected by general economic and
competitive conditions and by financial, business and other factors, many of
which are beyond our control. A breach of any of these covenants could result in
default under the Credit Agreement or the indenture. In such an event, the
lenders under the Credit Agreement could elect to declare all amounts
outstanding under the Credit Agreement, together with accrued and unpaid
interest, to be immediately due and payable. If we were unable to repay such
amounts, such lenders would have the right to proceed against the
9
collateral granted to them to secure such indebtedness and other amounts. During
the quarters ended June 30, 2001 and September 30, 2001, we failed to satisfy
the financial covenants contained in the Credit Agreement and were in default.
On November 14, 2001, we entered into an amendment to the Credit Agreement which
waived this existing default and revised certain financial covenant targets for
fiscal years 2002, 2003 and 2004. We expect to comply with the amended financial
covenants contained in the Credit Agreement through fiscal year 2002. However,
there can be no assurance that we will be able to do so. See "Description of the
Credit Agreement" and "Description of Notes."
WE MAY NOT HAVE THE ABILITY TO REPURCHASE THE NOTES UPON CHANGE OF CONTROL.
Upon the occurrence of a change of control, each holder of notes will have
the right to require us to repurchase all or any part of such holder's notes at
a purchase price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of repurchase. Certain events which would
constitute a change of control would also constitute an event of default under
the Credit Agreement. In addition, the Credit Agreement will effectively
prohibit our repurchase of the notes in the event of a change of control unless
all amounts outstanding under the Credit Agreement are repaid in full. Our
failure to repurchase any notes upon the occurrence of a change of control would
result in an event of default under the indenture. The inability to repay all
indebtedness outstanding under the Credit Agreement, if accelerated, would also
constitute an event of default under the indenture. In the event of a change of
control, there can be no assurance that we will have sufficient assets to
satisfy all obligations under the Credit Agreement and the indenture. Agreements
governing our future indebtedness may also contain prohibitions of certain
events and transactions that would constitute a change of control. See
"Description of Notes--Change of Control."
FAILURE BY AN ACADEMY TO COMPLY WITH LICENSING REQUIREMENTS AND GOVERNMENT
REGULATIONS COULD CAUSE THE REVOCATION OF THE ACADEMY'S LICENSE TO OPERATE.
Child care centers are subject to numerous state and local regulations and
licensing requirements, and we have policies and procedures in place in order to
comply with such regulations and requirements. Although state and local
regulations vary greatly from jurisdiction to jurisdiction, government agencies
generally review the ratio of staff to enrolled children, the safety, fitness
and adequacy of the buildings and equipment, the dietary program, the daily
curriculum, staff training, record keeping and compliance with health and safety
standards. In certain 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. In most jurisdictions, governmental agencies conduct scheduled and
unscheduled inspections of child care centers, and licenses must be renewed
periodically. Failure by an Academy to comply with applicable regulations can
subject it to state sanctions, which might include the Academy being placed on
probation or, in more serious cases, suspension or revocation of the Academy's
license to operate and could also lead to sanctions against our other Academies
located in the same jurisdiction. In addition, this type of action could lead to
negative publicity extending beyond that jurisdiction.
We believe we are in substantial compliance with all material regulations
and licensing requirements applicable to our businesses. However, there is no
assurance that a licensing authority will not determine a particular Academy to
be in violation of applicable regulations and take action against that Academy.
In addition, there may be unforeseen changes in regulations and licensing
requirements, such as changes in the required ratio of child center staff
personnel to enrolled children that could have material adverse effect on our
operations.
Although there are presently no federal licensing requirements, a child
care center must satisfy certain minimum standards to qualify for participation
in certain federal subsidy programs. We believe we have substantially satisfied
all material standards necessary to qualify for participation in the federal
subsidy programs relevant to our business.
THE LOSS OF GOVERNMENT FUNDING FOR CHILD CARE ASSISTANCE PROGRAMS WOULD
ADVERSELY IMPACT OUR OPERATING REVENUES.
During fiscal 2001, approximately 16% of our operating revenues were
generated from federal and state child care assistance programs. Funding for
such programs is subject to changes in federal and state environments and
governmental appropriations processes, which are unpredictable and beyond our
control. Accordingly, there is no assurance that funding for such federal and
state programs will continue at current levels and a significant reduction in
such funding may have an adverse impact on us. In addition, although the
Internal Revenue Code of 1986, as amended (the "Code"), makes certain tax
incentives available to parents utilizing child care programs, such provisions
of the Code are subject to change. See "Business--Government Regulation."
10
On the state level, while states are moving to increase funding for
preschool services, the for-profit sector has often been overlooked and
preschool funding has typically been targeted to the state public school system.
In particular, the California Department of Education is attempting to institute
a state-funded universal pre-kindergarten program that would largely exclude
for-profit providers. While no assurance can be given whether this legislation
or similar legislation will be adopted, the passage of this legislation would
have a significant negative impact on our schools in California and would set a
dangerous precedent for other state/federal preschool initiatives.
ADVERSE PUBLICITY CONCERNING ALLEGED CHILD ABUSE COULD AFFECT OUR ABILITY TO
OBTAIN OR INCREASE THE COST OF INSURANCE.
As a result of adverse publicity concerning reported incidents of alleged
child physical and sexual abuse at child care centers and the length of time
before the expiration of applicable statutes of limitations for the filing of
child abuse and personal injury claims (typically a number of years after the
child reaches the age of majority), many operators of child care centers have
had difficulty obtaining general liability insurance, child abuse liability
insurance or similar liability insurance or have been able to obtain such
insurance only at high rates. So far, we have obtained insurance in amounts we
believe to be appropriate. There is no assurance that our insurance premiums
will not increase in the future because of conditions in the insurance business,
our experience in particular, or that continuing publicity with respect to
alleged instances of child abuse will not result in our being unable to obtain
insurance. Like our competitors, we are periodically subject to claims of child
abuse arising out of alleged incidents at our Academies. In addition, any
adverse publicity concerning reported incidents of alleged physical or sexual
abuse of children at our Academies or at other child care centers could affect
occupancy levels at our Academies.
BECAUSE WE EXPERIENCE SEASONAL FLUCTUATIONS, OUR REVENUES WILL FLUCTUATE.
Our revenues and the initial success of new Academies are subject to
seasonal variation. New enrollments are generally highest in September and
January because children return to child care and/or school after summer and
holiday vacation. Academies which open at other times usually experience a lower
rate of enrollment during early months of operation. Enrollment generally
decreases 5% to 10% during holiday periods and summer months.
KING AND JPMP OWN A SIGNIFICANT PORTION OF OUR PARENT'S COMMON STOCK AND WILL BE
ABLE TO CONTROL OUR AFFAIRS.
All of our outstanding common stock is held by LPA Holding Corp., our
parent company. All of the outstanding shares of preferred stock of our parent
company are owned by LPA Investment LLC, and approximately 90.0% of the fully
diluted common stock of our parent company is owned by LPA. An affiliate of JPMP
owns a majority of the economic interests of LPA, and a majority of the voting
interests of LPA is owned by an entity controlled by Robert E. King, one of our
and our parent company's Directors. Mr. King is entitled to three votes as a
director. However, the terms of the LPA operating agreement give the JPMP
affiliate the right to elect a majority of the directors of LPA if certain
triggering events occur, and LPA may not take certain actions in respect of the
common stock of our parent company held by LPA without the consent of the JPMP
affiliate. Accordingly, if certain triggering events occur, the JPMP affiliate
will be able to elect a majority of the Board of Directors of our parent
company. See "Ownership of Securities."
Accordingly, LPA controls our affairs and has the power to elect all of our
directors (other than Judith A. Rogala, our President and Chief Executive
Officer), appoint new management and approve any action requiring the approval
of our stockholders, including adopting amendments to our certificate of
incorporation and approving mergers or sales of all or substantially all of our
assets. Circumstances may occur in which the interests of LPA, as the majority
stockholder of our parent company, may conflict with the interests of the
holders of notes. See "Management," "Ownership of Securities" and "Certain
Relationships and Related Transactions."
WE FACE SIGNIFICANT COMPETITION FROM LOCAL NURSERY SCHOOLS, CHILD CARE CENTERS,
AND HOME SERVICES.
The United States preschool education and child care industry is highly
fragmented and competitive. Our competition consists principally of local
nursery schools and child care centers, some of which are non-profit (including
religious-affiliated centers), providers of services that operate out of their
homes and other for profit companies which may operate a number of centers.
Local nursery schools and child care centers generally charge less for their
services. Many religious-affiliated and other non-profit child care centers have
no or lower rental costs than us and may receive donations or other funding to
cover operating expenses and may utilize volunteers for
11
staffing. Consequently, tuition rates at these facilities are often lower than
our rates. Additionally, fees for home-based care are normally lower than fees
for center-based care because providers of home care do not always have to
satisfy the same health, safety or operational regulations as our centers. Our
competition also consists of other large, national, for profit child care
companies that may have more aggressive tuition discounting and other pricing
policies than us.
A DECLINE IN GENERAL ECONOMIC CONDITIONS COULD LEAD TO REDUCED CONSUMER DEMAND
FOR CHILD CARE SERVICES.
Demand for our services may be subject to general economic conditions, and
our revenues depend, in part, on the number of working mothers and working
single parents who require child care services. Recessionary pressure on the
economy, and a consequent reduction in the size of the labor force, may
adversely impact our business, financial condition and results of operations as
a result of the general tendency of parents who are not employed to cease using
child care services.
BECAUSE OF FRAUDULENT CONVEYANCE STATUTES THE POSSIBILITY EXISTS THAT THE NOTES
AND THE GUARANTEE MAY BE VOIDED OR SUBORDINATED.
The notes were issued in exchange for the old notes. The incurrence by us,
our parent company, and the guarantor of the old notes and the guarantees in
connection with the Transactions may be subject to review under relevant federal
and state fraudulent conveyance and similar statutes in a bankruptcy or
reorganization case or lawsuit commenced by or on behalf of our creditors or the
creditors of our parent or our subsidiaries. Under these statutes, if a court
were to find that, after giving effect to the issuance of the old notes and the
incurrence of the guarantees, we, our parent company or a guarantor, as
applicable:
- incurred such indebtedness with the intent of hindering, delaying or
defrauding present or future creditors; or
- received less than the reasonably equivalent value in consideration for
incurring such indebtedness, and, at the time of the incurrence of such
indebtedness, we, our parent or a guarantor, as applicable:
- were insolvent or were rendered insolvent by reason of such
incurrence;
- were engaged or were about to engage in a business or transaction for
which our remaining unencumbered assets constituted unreasonably
small capital; or
- intended to incur, or did incur, or believed that we or they would
incur, debts beyond our or their ability to pay as they matured or
became due;
such court might subordinate the notes or the applicable guarantee to our, our
parent company's or a guarantor's, as applicable, presently existing or future
indebtedness, void the issuance of the notes or the incurrence of such guarantee
and direct the repayment of any amounts paid thereunder to our, our parent
company's or a guarantor's, as applicable, creditors or take other actions
detrimental to holders of the notes.
The measure of insolvency under fraudulent conveyance statutes will vary
depending upon the law of the jurisdiction being applied. Generally, however, a
debtor will be considered insolvent if on the date it incurred the indebtedness
the sum of all its liabilities, including contingent liabilities, was greater
than the value of all its assets at fair valuation or if the present fair
saleable value of its assets was less than the amount required to repay its
probable liabilities, including contingent liabilities, as they become absolute
and matured.
If a court were to find that any component of the Transactions constituted
a fraudulent transfer, the court might find that we, our parent company or a
guarantor did not receive reasonably equivalent value in consideration for
incurring the indebtedness represented by the old notes and the guarantee. The
guarantee may be subject to the additional claim that, because the guarantee was
incurred for our benefit (and only indirectly for the benefit of the
guarantors), the obligations of a guarantor thereunder were incurred for less
than reasonably equivalent value.
We believe that we, our parent company and the guarantors received
equivalent value at the time the indebtedness under the old notes and the
guarantee was incurred. In addition, after giving effect to the Transactions we,
our parent company and the guarantors:
- believed that we and they were not insolvent or rendered insolvent;
- believed that we and they were not engaged or about to be engaged in a
business or transaction for which our collective remaining unencumbered
assets constitute unreasonably small capital; and
12
- believed that we and they did not intend to incur, did not incur, and
did not believe that we and they would incur, debts beyond our and
their ability to pay as the indebtedness matures or becomes due.
These beliefs and intentions were based upon analyses of internal cash flow
projections and estimated values of assets and liabilities at the time of the
offering. There can be no assurance, however, that a court passing on these
issues would make the same determination.
BECAUSE OF THE LACK OF A PUBLIC MARKET FOR YOUR NOTES, YOU MAY EXPERIENCE
DIFFICULTY IN RESELLING YOUR NOTES OR MAY BE UNABLE TO SELL THEM.
The notes are a new class of securities with no established trading market.
We do not intend to list the notes on any national securities exchange or to
seek the admission thereof to trading in the Nasdaq National Market. We have
been advised by JPMSI that JPMSI currently makes a market in the notes. JPMSI is
not obligated to do so, however, and any market-making activities with respect
to the notes may be discontinued at any time without notice. In addition, such
market-making activity is subject to the limits imposed by the Securities Act
and the Exchange Act. Accordingly, no assurance can be given that an active
public or other market will develop for the notes or as to the liquidity of the
trading market for the notes. If a trading market does not develop or is not
maintained, holders of the notes may experience difficulty in reselling the
notes or may be unable to sell them at all. If a market develops for the notes,
future trading prices of the notes will depend on many factors, including, among
other things, prevailing interest rates, our financial condition and results of
operations, and the market for similar notes. Depending on those and other
factors, the notes may trade at a discount from their principal amount.
13
USE OF PROCEEDS
We and our parent company did not receive any proceeds from the exchange
offer of the old notes for the notes. The net proceeds to us from the sale of
the old notes were approximately $140 million, after deducting the initial
purchasers' discounts and fees and expenses of the offering. We used such net
proceeds, together with the proceeds from the equity investment and borrowings
under the Credit Agreement, to consummate the recapitalization and the
refinancing transactions and to pay fees and expenses related to them.
This prospectus is delivered in connection with the sale of the notes by
JPMSI in market-making transactions. We will not receive any of the proceeds
from such sales.
THE TRANSACTIONS AND SUBSEQUENT EQUITY ISSUANCES
THE TRANSACTIONS
Pursuant to a Merger Agreement dated March 17, 1998 among LPA and our
parent company, on May 11, 1998, our parent company effected a recapitalization
pursuant to which the following transactions occurred:
- a wholly-owned subsidiary of LPA was merged into our parent company;
- all of the then outstanding shares of preferred stock and common stock
of our parent company (other than the shares of common stock retained
by Vestar and our management) owned by its existing stockholders were
converted into cash;
- we entered into the credit agreement and issued the old notes; and
- LPA, in a transaction known as the "equity investment," purchased
approximately $72.5 million (less the value of options retained by
management) of common stock and $30 million of redeemable preferred
stock of our parent company, and received warrants to purchase shares
of common stock of our parent company which currently represent the
right to acquire 1.4% of our parent company's outstanding common stock
on a fully diluted basis.
Vestar retained common stock of our parent company having a value (based on
the amount paid by LPA for its common stock of our parent company) of $2.8
million (currently representing 0.7% of the outstanding parent company common
stock on a fully diluted basis). The 1998 management team retained common stock
of our parent company having a value (based on the amount paid by LPA for our
parent company common stock) of $4.4 million (currently representing 1.4% of the
common stock of our parent company on a fully diluted basis) and retained
existing options to acquire shares of our parent company's common stock which
currently represent the right to acquire 0.1% of our parent company's common
stock on a fully diluted basis. In addition, our parent company adopted a new
option plan and granted or allocated for grant options to acquire shares of its
common stock, which currently represents the right to acquire 7.9% of our parent
company's common stock on a fully diluted basis. As of the date of this
prospectus, current management owns or has the right to acquire, subject to
certain performance requirements, approximately 7.0% of our parent company's
common stock on a fully diluted basis. See "Ownership of Securities."
We used the equity investment, the proceeds of the offering of the old
notes and borrowings under the Credit Agreement to finance the recapitalization,
to refinance substantially all of our outstanding indebtedness and outstanding
preferred stock and to pay related fees and expenses.
The refinancing transactions consisted of:
- the defeasance of all of our outstanding $85 million principal amount
of 9 5/8% Senior Secured Notes due 2001;
- the exchange of all outstanding shares of our parent company's Class A
Preferred Stock and accrued dividends thereon for $35.4 million in
aggregate principal amount of our 12 1/8% Subordinated Exchange
Debentures due 2003, and the immediate defeasance of these exchange
debentures; and
- the redemption of all our outstanding 6 1/2% Convertible Subordinated
Debentures due 2011.
14
In connection with the recapitalization and the refinancing transactions,
we entered into a new Credit Agreement providing for a $40 million term loan
facility and a $25 million revolving loan facility, that is available for our
working capital requirements. See "Description of the Credit Agreement."
THE 1999 INVESTMENT
On December 15, 1999, LPA acquired an additional $15.0 million of our
parent company's redeemable preferred stock and received warrants to purchase an
additional 3% of our parent company's outstanding common stock on a fully
diluted basis. The $15.0 million proceeds received by our parent company was
contributed to us as common equity. We used the capital contribution to repay
indebtedness incurred under our revolving credit facility to finance our
acquisition of Bright Start in July 1999. In addition, on December 14, 1999, our
Credit Agreement was amended to, among other things, amend the financial
covenants to reflect our then current and projected operating plans.
THE 2001 INVESTMENT
On November 14, 2001, we and certain of our senior secured lenders
entered into Amendment No. 3 to Credit Agreement and Waiver (the "Amendment").
The Amendment waived existing defaults in connection with our failure to satisfy
certain financial covenants for the quarterly periods ended June 30, 2001 and
September 30, 2001, and our failure to deliver timely financial information to
our senior secured lenders. Additionally, the Amendment revised certain future
financial covenants. The Amendment also provided for specific waivers necessary
to permit the issuance of a new class of our parent company's convertible
preferred stock. In consideration for the waiver and amendments, our parent
company is required to issue additional equity of $15.0 million prior to May 14,
2002, with $3.4 million to be issued prior to the effectiveness of the Amendment
and an additional $0.825 million to be issued prior to December 31, 2001. As
part of the Amendment, JPMP agreed to guarantee a portion of the bank debt if
LPA fails to satisfy its commitment to purchase the new equity prior to May 14,
2002, or earlier if the bank debt has been accelerated. The amount of such
guaranty equals the amount of LPA's unfunded commitment to purchase the new
equity, as adjusted from time to time.
Our parent company offered all of its stockholders the right to
purchase up to their respective pro rata amount of a newly created class of our
parent company's convertible preferred stock and warrants to purchase common
stock. The convertible preferred stock is junior to the redeemable preferred
stock of our parent company in terms of dividends, distributions, and rights
upon liquidation. Up to $4.25 million of convertible preferred stock of our
parent company and warrants to purchase 562,500 shares of common stock were
offered. At any time, or from time to time, prior to May 14, 2002, as requested
by our parent company, the stockholders of our parent company participating in
the offer are required to purchase the balance of the convertible preferred
stock being offered. All of the proceeds received by our parent company will be
contributed to us as common equity and will be used by us for general working
capital and liquidity purposes.
Pursuant to the offer, on November 15, 2001 LPA acquired $3.4 million
of our parent company's convertible preferred stock and received warrants to
purchase 452,343 shares of common stock. The proceeds were contributed to us as
common equity. In connection with such purchase, the banks waived their right
under the Credit Agreement to require that the proceeds be used to repay amounts
outstanding under the Credit Agreement. LPA also committed to purchase the
balance of the $11.6 million of convertible preferred stock being offered and
not otherwise purchased by our other stockholders. After giving effect to the
investment on November 15, 2001, LPA beneficially owns approximately 90.0% of
our parent company's outstanding common stock on a fully diluted basis.
LPA also committed to purchase the balance of the $11.6 million of convertible
preferred stock being offered and not otherwise purchased by our other
stockholders. After giving effect to the investment on November 15, 2001, LPA
beneficially owns approximately 90.0% of our parent company's outstanding common
stock on a fully diluted basis.
As a result of the recapitalization and the December 1999 and November
2001 purchases of the additional preferred stock and warrants, LPA owns 89.6% of
the common stock of our parent company (approximately 90.0% on a fully diluted
basis), $45 million of redeemable preferred stock of our parent company and $3.4
million of convertible preferred stock of our parent company. A majority of the
economic interests of LPA is owned by an affiliate of JPMP, and a majority of
the voting interests of LPA is owned by an entity controlled by Robert E. King,
one of our and our parent company's directors. However, pursuant to the LPA
operating agreement, LPA granted to
15
the JPMP affiliate the right to elect a majority of the directors of LPA if
certain triggering events occur and LPA agreed not to take certain actions in
respect of the common stock of our parent company held by LPA without the
consent of the JPMP affiliate. Accordingly, if certain triggering events occur,
the JPMP affiliate will be able to elect a majority of the Board of Directors of
our parent company. See "Ownership of Securities."
16
CAPITALIZATION
The following table sets forth the consolidated capitalization of our
parent company as of October 20, 2001, on a historical basis and as adjusted for
the issuance of convertible preferred stock on November 15, 2001. This table
should be read in conjunction with the information contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" as
well as our consolidated financial statements and the accompanying notes.
OCTOBER 20, 2001
------------------------
HISTORICAL AS ADJUSTED
------------------------
(DOLLARS IN THOUSANDS)
Cash, cash equivalents and restricted cash $ 6,376 $ 6,376
=======================
Long-term debt and capital lease obligations:
Revolving Credit Facility (a) $ 16,200 $ 16,200
Capital lease obligations (b) 544 544
Term Loan Facility 37,000 37,000
Senior Notes 145,000 145,000
-----------------------
Total debt 198,744 198,744
Less Current Maturities (974) (974)
-----------------------
Total Long-term debt and capital lease obligations 197,770 197,770
Series A Redeemable Preferred Stock (c) 57,457 57,457
Series B Convertible Preferred Stock (d) 3,418
Stockholders' Deficit (142,850) (142,850)
-----------------------
Total capitalization $ 112,377 $ 115,795
=======================
(a) The revolving credit facility provides for borrowings of up to $25.0
million. See "Management's Discussion and Analysis of Financial Condition
and Results of Operation" and "Description of the Credit Agreement."
(b) Consists of capital lease obligations arising from computer hardware and
vehicles.
(c) The carrying value of the preferred stock is being accreted to its
redemption value ($45.0 million at October, 20 2001) on May 11, 2008. The
preferred stock is non-voting and mandatorily redeemable on May 11, 2008.
Dividends accrue at a rate of 12.0% per annum, are cumulative, and if not
paid on the June 30 or December 31 semi-annual preferred stock dividend
payment dates are added to the carrying value.
(d) On November 15, 2001 LPA acquired $3.4 million of our parent company's
convertible preferred stock and received warrants to purchase 452,343
shares of common stock. Parent company contributed the proceeds it received
from LPA to La Petite, and La Petite used the proceeds for general working
capital and liquidity purposes. See "The Transactions and Subsequent Equity
Issuances - The 2001 Investment."
17
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The consolidated financial statements of our parent company and those of
its predecessor presented in the following table for the fiscal years ended June
30, 2001, July 1, 2000, July 3, 1999, August 29, 1998, and August 30, 1997 have
been audited by Deloitte & Touche LLP, independent auditors. The consolidated
financial statements for the 16 week periods ended October 21, 2000 and October
20, 2001 come from our unaudited consolidated financial statements included
elsewhere in this prospectus. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
accompanying notes.
52 WEEKS 52 WEEKS 44 WEEKS 52 WEEKS 52 WEEKS 16 WEEKS ENDED
ENDED ENDED ENDED ENDED ENDED ------------------------
AUGUST 30, AUGUST 29, JULY 3, JULY 1, JUNE 30, OCTOBER 21, OCTOBER 20,
1997 1998 1999 (a) 2000 2001 (a) 2000 2001
---------- ---------- --------- -------- -------- ----------- -----------
INCOME STATEMENT DATA
Operating revenue $ 302,766 $ 314,933 $ 281,072 $ 371,037 $ 384,837 $ 114,274 $ 117,307
Operating expenses:
Salaries, wages and benefits 159,236 166,501 150,052 205,665 216,018 65,011 65,039
Facility lease expense 38,094 38,403 33,670 46,573 44,751 13,689 13,985
Depreciation 13,825 13,892 10,911 13,500 12,423 3,926 3,719
Amortization of goodwill and other 3,474 3,122 1,972 2,835 2,829 873 869
intangibles
Recapitalization costs (b) 8,724
Restructuring charge (c) 7,500
Other 74,111 76,258 68,277 89,879 91,924 29,006 31,667
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses 288,740 306,900 264,882 365,952 367,945 112,505 115,279
--------- --------- --------- --------- --------- --------- ---------
Operating income 14,026 8,033 16,190 5,085 16,892 1,769 2,028
Interest expense (d) 9,245 14,126 16,145 20,880 23,577 7,440 6,638
Minority interest in net income
of subsidiary 3,693 2,849
Interest income (959) (885) (153) (163) (85) (28) (85)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes 2,047 (8,057) 198 (15,632) (6,600) (5,643) (4,525)
Provision (benefit) for income taxes 3,264 (254) 995 (5,085) (288) (1,976) (1,505)
--------- --------- --------- --------- --------- --------- ---------
Loss before extraordinary item (1,217) (7,803) (797) (10,547) (6,312) (3,667) (3,020)
Extraordinary loss on early retirement
of debt (e) (5,525)
--------- --------- --------- --------- --------- --------- ---------
Net loss $ (1,217) $ (13,328) $ (797) $ (10,547) $ (6,312) $ (3,667) $ (3,020)
========= ========= ========= ========= ========= ========= =========
BALANCE SHEET DATA (AT END OF PERIOD)
Total assets $ 171,160 $ 160,791 $ 169,468 $ 165,647 $ 165,373 $ 169,142 $ 169,064
Subordinated debt 903
Total long-term debt 85,903 185,727 187,999 182,319 194,648 188,034 197,770
Redeemable preferred stock 32,521 25,625 29,310 47,314 54,941 49,584 57,457
Stockholders' equity (deficit) 3,374 (105,701) (110,183) (123,653) (137,293) (130,998) (142,850)
OTHER DATA
EBITDA (as defined)(f) $ 31,325 $ 33,771 $ 29,073 $ 28,920 $ 32,144 $ 6,567 $ 6,616
Cash flows from operating activities 14,886 7,224 10,320 5,597 2,792 335 1,733
Cash flows from investing activities (6,848) (11,005) (19,204) (10,341) (14,705) (1,737) (2,566)
Cash flows from financing activities 3,142 (13,322) 6,588 4,180 12,983 568 1,182
Depreciation and amortization (g) 18,149 17,859 13,712 17,387 16,364 873 869
Capital expenditures 7,300 13,637 31,666 23,412 14,894 1,920 2,568
Ratio of earnings to fixed charges(h) 1.1x (h) 1.0x (h) (h) (h) (h)
Proceeds from sale of assets 452 2,632 12,462 23,432 189 183 2
Academies at end of period 745 736 743 752 734 749 725
FTE utilization during the period (i) 66% 65% 65% 63% 63% 61% 62%
(Footnotes on next page)
18
(Footnotes for previous page)
a) On April 18, 2001, we changed our fiscal year end from the 52 or 53-week
period ending on the first Saturday in July to the 52 or 53-week period
ending on the Saturday closest to June 30. On June 10, 1999, we changed our
fiscal year to be the period starting on the first Saturday in July and
ending on the first Saturday of July of the subsequent year, resulting in a
44-week year for fiscal 1999 (see Note 1 in the consolidated financial
statements).
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) In the third quarter of 2000, management committed to a plan to close
certain 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,
we recorded a $7.5 million restructuring charge ($4.5 million after tax) to
provide for costs associated with the Academy closures and restructuring of
49 Academies. The charge consisted principally of $5.9 million for the
present value of rent, real estate taxes, common area maintenance charges,
and utilities, net of anticipated sublease income, and $1.1 million for the
write-down of fixed assets to fair market value. At June 30, 2001, we had
an accrual for the closing of these Academies of $3.8 million.
d) Interest expense includes $0.9 million, $0.8 million, $0.8 million, $1.1
million, and $1.1 million of amortization of deferred financing costs for
fiscal years 1997, 1998, 1999, 2000, and 2001, respectively. For the 16
weeks ended October 21, 2000, and October 20, 2001, interest expense
included $0.6 million and $0.3 million, respectively.
e) On May 11, 1998, we incurred a $5.5 million extraordinary loss related to
(i) 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 our Class A Preferred Stock for $34.7 million in aggregate
principal amount of our 12 1/8% Subordinated Exchange Debentures due 2003,
and (iii) the retirement of all the 12 1/8% Subordinated Exchange
Debentures and the 6.5% Convertible Debentures. The loss principally
reflects the write off of premiums and related deferred financing costs,
net of applicable income tax benefit.
f) 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 management believes it provides
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 our profitability or
liquidity. EBITDA may not be comparable to similarly titles measures used
by other companies.
g) Depreciation and amortization includes amortization of deferred financing
costs and accretion of discount on the 6.5% Convertible Debentures that is
presented as interest expense on the statements of income.
h) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as income before income taxes and extraordinary items,
plus fixed charges. Fixed charges consists of interest expense on all
indebtedness, amortization of deferred financing costs, and one-third of
rental expense on operating leases representing that portion of rental
expense that we deemed to be attributable to interest. For the 52 weeks
ended August 29, 1998, July 1, 2000 and June 30, 2001, earnings were
inadequate to cover fixed charges by $8.1 million, $15.6 million and $6.6
million, respectively. For the 16 weeks ended October 21, 2000 and October
20, 2001, earnings were inadequate to cover fixed charges by $5.6 million
and $4.5 million, respectively.
i) FTE Utilization is the ratio of full-time equivalent (FTE) students to the
total operating capacity for all of our Academies. FTE attendance is not a
measure of the absolute number of students attending our Academies; rather,
it is an approximation of the full-time equivalent number of students based
on our 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.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND 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 prospectus.
16 WEEKS ENDED OCTOBER 20, 2001 COMPARED TO 16 WEEKS ENDED OCTOBER 21, 2000
Historically, our operating revenue has followed the seasonality of the
school year. The number of new children attending our educational facilities
(the "schools") is highest in September-October and January-February, generally
referred to as the fall and winter enrollment periods. Revenues tend to decline
during the calendar year-end holiday period and during the Summer. As a result
of this seasonality, results for one quarter are not necessarily indicative of
results for an entire year.
The we operated 725 schools at the end of the first quarter of fiscal year
2002 as compared to 749 schools for the same period of fiscal year 2001. The net
decrease of 24 schools is a result of 35 closures and 11 openings. The closures
resulted from management's decision to close certain schools located in areas
where the demographic conditions no longer supported an economically viable
operation. New schools, as defined by us, are schools open less than two years
at the start of the current fiscal year.
Full-time equivalent (FTE) attendance, as defined by us, is not a measure
of the absolute number of students attending our Academies, but rather is an
approximation of the full-time equivalent number of students based on our
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. The average weekly FTE tuition rate, as defined by the
us, is the tuition revenue divided by the FTE attendance for the respective
period.
Our operating results for the comparative 16-week periods were as follows
(in thousands of dollars):
16 WEEKS ENDED 16 WEEKS ENDED
----------------------------- -----------------------------
OCTOBER 20, PERCENT OF OCTOBER 21, PERCENT OF
2001 REVENUE 2000 REVENUE
------------ ------------ -------------- -------------
Operating revenue $117,307 100.0% $114,274 100.0%
Operating expenses:
Salaries, wages and benefits 65,039 55.4 65,011 56.9
Facility lease expense 13,985 11.9 13,689 12.0
Depreciation and amortization 4,588 3.9 4,798 4.2
Provision for doubtful accounts 882 0.7 888 0.8
Other 30,785 26.4 28,118 24.6
-------- ----- -------- -----
Total operating expenses 115,279 98.3 112,504 98.5
-------- ----- -------- -----
Operating income $ 2,028 1.7% $ 1,770 1.5%
-------- ----- -------- -----
EBITDA (as defined) $ 6,616 5.6% $ 6,568 5.7%
-------- ----- -------- -----
OPERATING REVENUE. Operating revenue increased $3.0 million or 2.7% from
the same period last year. This revenue increase is a result of a $5.4 million
increase at established academies, and a $1.0 million increase at new academies,
offset by a reduction in revenue from closed academies of $3.4 million. The
revenue increase at established academies is principally due to a 8.1% increase
in the average weekly FTE tuition rate, offset by a decline in the FTE
attendance of 4.5%. The increase in the average weekly FTE tuition rate was
principally due to selective price increases that were put into place in January
2001 and September 2001 based on geographic market conditions and class capacity
utilization. The decrease in FTE attendance was due to a 2.2% decline at our
established schools (schools which were open prior to the 2000 year) and a 87.7%
decline in schools closed during the 2000 and 2001 years, offset by a 22.2%
increase at our new schools.
20
SALARIES, WAGES, AND BENEFITS. Salaries, wages, and benefits were virtually
unchanged from the same period last year. As a percentage of revenue, labor
costs decreased to 55.4% from 56.9% in the prior year. The changes in salaries,
wages, and benefits include incremental labor costs of $2.1 million at
established academies, incremental labor costs of $0.6 million at new academies,
increased field management and corporate administration labor costs of $0.4
million, and increased costs for bonuses and benefits of $0.4 million, offset by
reduced incremental labor costs of $2.6 million at closed academies. The
increase in labor costs at established schools was mainly due to a 8.3% increase
in average hourly wage rates, offset by a 1.8% decline in labor hours compared
to the prior year.
FACILITY LEASE EXPENSE. Facility lease expense increased $0.3 million or
2.2% from the same period last year. This increase was principally due to the
increase of monthly lease payments on certain academies where operating
performance payments were eliminated.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased $0.2
million from the same period last year. This decrease was mainly due to the
closings that occurred in fiscal year 2001.
OTHER OPERATING COSTS. Other operating costs increased $2.6 million or 9.5%
from the same period last year. Other operating costs include repair and
maintenance, utilities, insurance, marketing, real estate taxes, food, supplies,
transportation, recruitment and training. The increase was due primarily to
higher marketing, insurance, utilities, property taxes, travel and meeting
costs, offset by decreases in food, repair and maintenance, and transportation
costs. As a percentage of revenue, other operating costs increased to 26.4% as
compared to 24.6% during the same period last year.
OPERATING INCOME AND EBITDA. As a result of the foregoing, we had operating
income of $2.0 million, an increase from last year of $0.3 million. EBITDA is
defined as net income before non-cash restructuring charges, extraordinary
items, net interest costs, income taxes, depreciation and amortization. EBITDA
was $6.7 million for the period ended October 21, 2001, an increase of $0.1
million from the prior year. The increase in EBITDA is principally due to
increased revenues offset by higher other operating expenses including
insurance, marketing, summer activity costs and management meeting costs. EBITDA
should not be considered in isolation or as a substitute for net income, cash
flow from operating activities and other consolidated income or cash flow
statement data prepared in accordance with the accounting principles generally
accepted in the United States of America or as a measure of the our
profitability or liquidity. EBITDA may not be comparable to similarly titled
measures used by other companies. In addition, we believe that certain investors
find EBITDA to be a useful tool for measuring our ability to service our debt.
EBITDA is not necessarily a measure of our ability to fund our cash needs.
NET INTEREST EXPENSE. Net interest expense decreased $0.9 million compared
to the same period last year. The decrease was principally due to lower interest
rates and the elimination of certain derivative investments held by us during
the first quarter of last year, offset by higher average borrowings under the
revolver.
INCOME TAX RATE. After adding back to pre-tax income permanent differences,
the effective income tax rate was approximately 41% for the current year
compared to an effective income tax rate of approximately 42.5% for last year.
2001 COMPARED TO 2000 RESULTS
On April 18, 2001, we changed our fiscal year end from the 52/53-week
period ending on the first Saturday in July to the 52/53-week period ending on
the Saturday closest to June 30 (See Note 1 of the consolidated financial
statements). The table below presents the results of the 52 weeks ended June 30,
2001 and the results of the 52 weeks ended July 1, 2000 (herein referred to as
the 2001 year and the 2000 year). The 52 weeks ended July 1, 2000 includes the
results of our acquisition of Bright Start from July 21, 1999, which was the
date of the acquisition.
Our operating results for the 2001 year are consistent and comparable with
the 2000 year, except for operating results associated with new educational
facilities (New Academies). We consider an Academy as new if it opened within
the current or previous fiscal year. These schools typically generate operating
losses during the first few months of operation until the Academies achieve
normalized occupancies. Included in operating income and EBITDA were New Academy
operating income of $0.3 million for the 2001 year and New Academy operating
losses of $1.9 million for the 2000 year.
21
Our operating results for the comparative 52-week periods were as follows
(in thousands of dollars):
52 WEEKS ENDED 52 WEEKS ENDED
------------------------------- -----------------------------
JUNE 30, PERCENT OF JULY 1, PERCENT OF
2001 REVENUE 2000 REVENUE
-------------- -------------- ------------- --------------
Operating revenue $ 384,837 100.0% $ 371,037 100.0%
Operating expenses:
Salaries, wages and benefits 216,018 56.1 205,665 55.4
Facility lease expense 44,751 11.6 46,573 12.6
Depreciation and amortization 15,252 4.0 16,335 4.4
Provision for doubtful accounts 4,531 1.2 2,931 0.8
Restructuring Costs 7,500 2.0
Other 87,393 22.7 86,942 23.4
-------------- -------------- ------------- --------------
Total operating expenses 367,945 95.6 365,952 98.6
-------------- -------------- ------------- --------------
Operating income $ 16,892 4.4% $ 5,085 1.4%
-------------- -------------- ------------- --------------
EBITDA $ 32,144 8.4% $ 28,920 7.8%
-------------- -------------- ------------- --------------
During the 2001 year, we opened six new schools and closed 24 schools. As a
result, we operated 734 schools on June 30, 2001. During fiscal year 2001, eight
of the closures resulted from management's decision to close certain schools
located in areas where the demographic conditions no longer supported an
economically viable operation, and the remaining 16 closures were due to
management's decision not to renew the leases or contracts of certain schools.
OPERATING REVENUE. Operating revenue increased $13.8 million or 3.7% during
the 2001 year as compared to the 2000 year. The increase in operating revenue
includes $18.4 million of incremental revenue from established schools, $7.8
million of incremental revenue from the new schools, most of which were opened
late in the 1999 year or early in the 2000 year, offset by $12.4 million of
reduced revenue from closed schools. Tuition revenue increased 3.8% during the
2001 year as compared to the 2000 year. The increase in tuition revenue reflects
an increase of the average weekly FTE tuition rates of 9.9% offset by a decrease
in full time equivalent (FTE) attendance of 5.6%.
The increase in average weekly tuition per FTE was principally due to
selective price increases, which were put into place in February of the 2000
fiscal year and in September of the 2001 fiscal year, based on geographic market
conditions and class capacity utilization. The decrease in FTE attendance was
due to a 3.4% decline at our established schools (schools which were open prior
to the 2000 year) and a 74.9% decline in schools closed during the 2000 and 2001
years, offset by a 41.8% increase at our new schools.
SALARIES, WAGES AND BENEFITS. Salaries, wages and benefits increased $10.4
million or 5.0% during the 2001 year as compared to the 2000 year. As a
percentage of revenue, labor costs were 56.1% for the 2001 year as compared to
55.4% during the 2000 year. The increase in salaries, wages and benefits
includes incremental labor costs at established schools of $12.5 million,
incremental labor costs at new schools of $3.2 million, increased field
management and corporate administration labor costs of $1.1 million, increased
benefit costs of $1.8 million, increased bonus costs of $1.1 million, offset by
reduced incremental labor costs at closed schools of $9.3 million. The increase
in labor costs at established schools was mainly due to a 7.8% increase in
average hourly wage rates and a 0.1% increase in labor hours. New schools
experience higher labor costs relative to revenue as compared to the established
schools.
FACILITY LEASE EXPENSE. Facility lease expense decreased $1.8 million or
3.9% during the 2001 year as compared the 2000 year. The decrease in facility
lease expense was mainly due to the closures late in the 2000 year, offset by
slightly increased lease expense on lease renewals.
DEPRECIATION AND AMORTIZATION. Depreciation expense decreased $1.0 million
or 6.6% during the 2001 year as compared to the 2000 year. This decrease was
mainly due to the closings that occurred in late fiscal year 2000.
22
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts
increased $1.6 million or 54.6%. The increase in the provision for doubtful
accounts is a result of increasing revenue, higher write-offs and an increase in
the bad debt reserve of $0.1 million.
RESTRUCTURING CHARGE. In the third quarter of 2000, management committed to
a plan to close certain schools located in areas where the demographic
conditions no longer support an economically viable operation and to restructure
our operating management to better serve the remaining schools. Accordingly, we
recorded a $7.5 million restructuring charge ($4.5 million after tax) to provide
for costs associated with the school closures and restructuring 49 schools. The
charge consisted principally of $5.9 million for the present value of rent, real
estate taxes, common area maintenance charges, and utilities, net of anticipated
sublease income and $1.1 million for the write-down of fixed assets to fair
market value.
OTHER OPERATING COSTS. Other operating costs increased $0.4 million or 0.5%
during the 2001 year as compared to the 2000 year. Other operating costs include
repair and maintenance, utilities, insurance, marketing, real estate taxes,
food, supplies, transportation, recruitment and training. The increase was due
primarily to higher expenses in repairs and maintenance, utilities, insurance,
real estate taxes, offset by decreases in food, supplies, recruitment, training
and other costs. As a percentage of revenue, other operating costs decreased to
22.7% in the 2001 year as compared to 23.4% in the 2000 year.
OPERATING INCOME AND EBITDA. As a result of the foregoing, operating income
was $16.9 million for the 2001 year as compared to $5.1 million during the 2000
year. Excluding the 2000 year restructuring costs, operating income increased
$4.3 million or 34.2% in the year 2001 as compared to the year 2000. The
increase in operating income is principally due to increased revenue and lower
non-labor operating costs. EBITDA is defined as net income before non-cash
restructuring charges, extraordinary items, net interest cost, taxes,
depreciation and amortization. EBITDA was $32.1 million for the year 2001 as
compared to $28.9 million for 2000, an increase of 11.1%. EBITDA should not be
considered in isolation or as a substitute for net income, cash flow from
operating activities and other consolidated income or cash flow statement data
prepared in accordance with the accounting principles generally accepted in the
United States of America or as a measure of our profitability or liquidity.
EBITDA may not be comparable to similarly titled measures used by other
companies.
INTEREST EXPENSE. Net interest expense for the 2001 year increased $2.8
million from the 2000 year. The increase was principally due to the $3.2 million
amortization of transition adjustment from other comprehensive income into
operations over the life of the derivative contracts.
INCOME TAX RATE. After adding back the permanent differences to pretax
income, the effective income tax rate for the 2001 year was approximately 41% as
compared to approximately 40% for the 2000 year.
2000 COMPARED TO 1999 RESULTS
On June 10, 1999, we changed our 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 consolidated financial statements). For
comparative purposes, the table below presents the results of the 52 weeks ended
July 1, 2000 and the results of the 52 weeks ended July 3, 1999 (herein referred
to as the 2000 year and the 1999 year). The subsequent discussion of results is
based on the 52 week comparison. The selected data for the 52 weeks ended July
3, 1999 is unaudited but reflects all adjustments, consisting of normal
recurring accruals, which in the opinion of management are necessary to fairly
present our results of operations for the unaudited period. The selected data
for the 52 weeks ended July 1, 2000 includes the results of our acquisition of
Bright Start from July 21, 1999, which was the date of acquisition.
Our operating results for the 2000 year were consistent and comparable with
the 1999 year, except for operating losses associated with new educational
facilities (New Academies) and the acquisition of the 43 Bright Start Academies.
We consider an Academy as new if it opened within the current or previous fiscal
year. These schools 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 $1.9 million
and $0.7 million for the 2000 year and 1999 year, respectively. Bright Start
contributed $2.1 million and $1.5 million to operating income and EBITDA for the
2000 year.
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Full-time equivalent (FTE) attendance is not a measure of the absolute
number of students attending our Academies, but rather is an approximation of
the full-time equivalent number of students based on our 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.
Our operating results for the comparative 52-week periods were as follows
(in thousands of dollars):
52 WEEKS ENDED 52 WEEKS ENDED
-------------------- --------------------
July 1, Percent of July 3, Percent of
2000 Revenue 1999 Revenue
Operating revenue $371,037 100.0% $328,763 100.0%
Operating expenses:
Salaries, wages and benefits 205,665 55.4 175,563 53.4
Facility lease payments 46,573 12.6 39,539 12.0
Depreciation 13,500 3.6 13,034 4.0
Amortization of goodwill
and other intangibles 2,835 0.8 2,330 0.7
Restructuring Costs 7,500 2.0
Other 89,879 24.2 79,914 24.3
-------- -------- --------- --------
Total operating expenses 365,952 98.6 310,380 94.5
-------- -------- --------- ---------
Operating income $ 5,085 1.4% $ 18,383 5.5%
======== ======== ========== =========
EBITDA $ 28,920 7.8% $ 33,747 10.3%
======== ======== ========== =========
During the 2000 year, we opened 16 new schools and acquired 43 schools
through the acquisition of Bright Start. During that same period, we closed 50
schools. As a result, we operated 752 schools on July 1, 2000. During fiscal
year 2000, 39 of the closures resulted from management's decision to close
certain schools located in areas where the demographic conditions no longer
supported an economically viable operation, and the remaining 11 closures were
due to management's decision not to renew the leases or contracts of certain
schools.
OPERATING REVENUE. Operating revenue increased $42.3 million or 12.9%
during the 2000 year as compared to the 1999 year. The increase in operating
revenued includes $24.0 million from the acquired Bright Start schools, $13.9
million of incremental revenue from established schools, $10.9 million of
incremental revenue from the new schools, most of which were opened late in the
1999 year or early in the 2000 year, offset by $6.5 million of reduced revenue
from closed schools. Tuition revenue increased 13.2% during the 2000 year as
compared to the 1999 year. The increase in tuition revenue reflected an increase
in full time equivalent (FTE) attendance of 7.1% and an increase of the average
weekly FTE tuition rates of 5.7%.
The increase in FTE attendance was due to the addition of the Bright Start
schools and the new schools offset by a 1.2% decline at our established schools
(schools which were open prior to the 1999 year). The increase in average weekly
tuition per FTE was principally due to selective price increases which were put
into place in February of fiscal years 1999 and 2000, based on geographic market
conditions and class capacity utilization.
SALARIES, WAGES AND BENEFITS. Salaries, wages and benefits increased $30.1
million or 17.1% during the 2000 year as compared to the 1999 year. As a
percentage of revenue, labor costs were 55.4% for the 2000 year as compared to
53.4% during the 1999 year. The increase in salaries, wages and benefits
includes incremental labor costs at established schools of $12.3 million, Bright
Start labor costs of $13.1 million, incremental labor costs at new schools of
$6.1 million, increased field management and corporate administration labor
costs of $0.9 million, increased benefit costs of $1.6 million, offset by
reduced incremental labor costs at closed schools of $3.9 million. The increase
in labor costs at established schools was mainly due to a 7.0% increase in
average hourly wage rates and a 1.3% increase in labor hours. New schools
experience higher labor costs relative to revenue as compared to established
schools.
24
FACILITY LEASE EXPENSE. Facility lease expense increased $7.0 million or
17.8% during the 2000 year as compared the 1999 year. The increase in facility
lease expense was mainly due to higher relative lease costs associated with the
Bright Start schools and the 28 new schools opened in late fiscal 1999 and early
fiscal year 2000, offset by the closures late in fiscal year 2000.
DEPRECIATION. Depreciation expense increased $0.5 million or 3.6% during
the 2000 year as compared to the 1999 year. The increase in depreciation was due
to the addition of the Bright Start schools.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. The amortization of
goodwill and other intangibles increased $0.5 million or 21.7% for the 2000 year
as compared the 1999 year. This increase was due to the amortization of goodwill
associated with the Bright Start acquisition.
RESTRUCTURING CHARGE. In the third quarter of 2000, management committed to
a plan to close certain schools 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 schools. Accordingly, we
recorded a $7.5 million restructuring charge ($4.5 million after tax) to provide
for costs associated with the school closures and restructuring 49 schools. The
charge consisted principally of $5.9 million for the present value of rent, real
estate taxes, common area maintenance charges, and utilities, net of anticipated
sublease income and $1.1 million for the write-down of fixed assets to fair
market value. At July 1, 2000, we had an accrual for the closing of these
Academies of $6.2 million. During fiscal year 2000, 39 schools were closed.
Subsequent to the end of the fiscal year, an additional four schools closed in
connection with the restructuring plan.
OTHER OPERATING COSTS. Other operating costs increased $10.0 million or
12.5% during the 2000 year as compared to the 1999 year. Other operating costs
included repair and maintenance, utilities, insurance, marketing, real estate
taxes, food, supplies and transportation. The increase was due primarily to
higher expenses in repairs and maintenance, utilities, real estate taxes, food
and supplies. As a percentage of revenue, other operating costs decreased to
24.2% in the 2000 year from 24.3% in the 1999 year.
OPERATING INCOME AND EBITDA. As a result of the foregoing, operating income
was $5.1 million for the 2000 year as compared to $18.4 million during the 1999
year. The decline in operating income was principally due to higher costs and
the restructuring charge offsetting the increased revenue. EBITDA is defined as
net income before non-cash restructuring charges, extraordinary items, net
interest cost, taxes, depreciation and amortization. EBITDA was $28.9 million
and $33.7 million for 2000 year and 1999 year, respectively. The decline in
EBITDA was attributed to higher costs offsetting increased revenue.
INTEREST EXPENSE. Net interest expense for the 2000 year increased $1.7
million from the 1999 year. The increase was mainly a result of additional
interest paid on the Senior Notes due to an interest rate swap arrangement,
higher average borrowings under the Revolving Credit facility resulting from the
acquisition of Bright Start, and reduced capitalized interest associated with
constructing new schools.
INCOME TAX RATE. After adding back the permanent differences to pretax
income, the effective income tax rate for the 2000 year was approximately 40% as
compared to approximately 49% for the 1999 year. The 1999 year effective income
tax rate was impacted by the resolution of issues raised by the IRS regarding
our benefit plan (see Note 8 to the consolidated financial statements).
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are from cash flows generated by
operations, borrowings on the revolving credit facility under the Credit
Agreement, and sale and leaseback financing for newly constructed schools and
$11.6 million in capital contributions expected to be received from our parent
company from the sale of our parent company's convertible preferred stock to LPA
pursuant to LPA's commitment. Our principal uses of liquidity are to meet our
debt service requirements, finance our capital expenditures and provide working
capital. We incurred substantial indebtedness in connection with the
Transactions.
We and our parent company have entered into the Credit Agreement, as
amended, consisting of the $40 million Term Loan Facility and the $25 million
Revolving Credit Facility. We and our parent company borrowed the entire $40
million available under the Term Loan Facility in connection with the
Transactions. The borrowings under the Credit Agreement, together with the
proceeds from the sale of the old notes and the equity investment, were used to
consummate the Transactions and to pay the related fees and expenses.
25
The Credit Agreement will terminate on May 11, 2005. The term loan
amortizes in an amount equal to $1.0 million per year in fiscal years 2002
through 2003, $7.8 million in fiscal year 2004, and $27.5 million in fiscal year
2005. The term loan is also subject to mandatory prepayment in the event of
certain equity or debt issuances or asset sales by us or any of our subsidiaries
and in amounts equal to specified percentages of excess cash flow (as defined).
On October 20, 2001, there was $37.0 million outstanding on the term loan and
$16.2 million outstanding on the revolving credit facility. We had outstanding
letters of credit in an aggregate amount equal to $7.8 million, and $1.0 million
was available for working capital purposes under the revolving credit facility.
However, prior to October 20, 2001 the agent bank under the Credit Agreement had
notified us that an event of default existed thereunder and that no additional
borrowings would be permitted. As discussed below, the lenders under the Credit
Agreement subsequently waived these defaults. Our Credit Agreement, notes and
preferred stock contain certain covenants that limit our ability to incur
additional indebtedness, pay cash dividends or make certain other restricted
payments.
On December 15, 1999, LPA acquired an additional $15.0 million of
redeemable preferred stock in our parent company and received warrants to
purchase an additional 3.0% of our parent company's outstanding common stock on
a fully diluted basis at that time. The proceeds of that investment were
contributed to us as common equity. In connection with such purchase and
contribution, the banks waived their right under the Credit Agreement to require
that such proceeds be used to repay amounts outstanding under the Credit
Agreement. The proceeds of such equity contribution were used to repay
borrowings under the revolving credit facility that were incurred to finance the
Bright Start acquisition.
Pursuant to a notice dated November 13, 2001, our parent company offered
all of its stockholders the right to purchase up to their respective pro rata
amount of a newly created class of convertible preferred stock and warrants to
purchase common stock of our parent company. The convertible preferred stock is
junior to the redeemable preferred stock of our parent company in terms of
dividends, distributions, and rights upon liquidation. Up to $4.25 million of
convertible preferred stock of our parent company and warrants to purchase
562,500 shares of common stock of our parent company were offered. Stockholders
of our parent company electing to participate in the offer were required to
commit to purchase a similar percentage of an additional aggregate amount of
convertible preferred stock equal to $10.75 million. At any time, or from time
to time, prior to May 14, 2002, as requested by our parent company, the
stockholders of our parent company participating in the preemptive rights offer
are required to purchase the balance of the convertible preferred stock being
offered thereby. All of the proceeds from the pre-emptive rights offer received
by our parent company will be contributed to us as common equity and will be
used by us for general working capital and liquidity purposes.
On November 14, 2001, we, our parent company and certain of our senior
secured lenders entered into an amendment to the Credit Agreement. The amendment
waived our and our parent company's existing defaults in connection with the
failure to satisfy certain financial covenants for the quarterly periods ended
June 30, 2001 and September 30, 2001, and the failure to deliver timely
financial information to the senior secured lenders. Additionally, the amendment
revised certain financial covenant targets for fiscal years 2002, 2003 and 2004.
We expect to comply with the financial covenants contained in the Credit
Agreement, as amended, throughout fiscal year 2002. However, there can be no
assurance that we will be able to do so. The amendment also addressed specific
waivers necessary to permit the issuance of a new class of convertible preferred
stock of our parent company. In consideration for the waiver and amendments, our
parent company is required to issue additional equity equal to $15.0 million
prior to May 14, 2002, with $3.4 million to be issued prior to the effectiveness
of the amendment and an additional $0.825 million to be issued prior to December
31, 2001. Additionally, as part of the amendment, JPMP agreed to guaranty a
portion of the bank debt if LPA fails to satisfy its commitment to purchase the
new equity prior to May 14, 2002 or earlier if the bank debt has been
accelerated. The amount of such guaranty equals the amount of LPA's unfunded
commitment to purchase the new equity, as adjusted from time to time.
Pursuant to the November 13, 2001 preemptive notice, on November 15, 2001
LPA acquired $3.4 million of our parent company's convertible preferred stock
and received warrants to purchase 452,343 shares of common stock. The proceeds
of that $3.4 million investment were contributed to us as common equity. In
connection with such purchase, the banks waived their right under the Credit
Agreement to require that the proceeds be used to repay amounts outstanding
under the Credit Agreement.
LPA also committed to purchase the balance of the $11.6 million of
convertible preferred stock being offered and not otherwise purchased by the
other stockholders of our parent company. Prior to December 31, 2001, LPA is
required to purchase an amount of convertible preferred stock equal to the
difference between $0.8 million and the
26
value of the amount of the convertible preferred stock purchased by other
stockholders in connection with the November 13, 2001 preemptive notice. After
December 31, 2001, the balance of the convertible preferred stock of our parent
company to be purchased by LPA will, as applicable, be purchased at any time, or
from time to time, prior to May 14, 2002 at the request of our parent company.
If our parent company has not requested that LPA fund its commitment to purchase
the balance of the convertible preferred stock prior to May 14, 2002, LPA has
the right to cause our parent company to issue the balance of the convertible
preferred stock to LPA. After giving effect to the investment on November 15,
2001, LPA beneficially owns approximately 90.0% our parent company's outstanding
common stock on a fully diluted basis.
In connection with the amendment to the Credit Agreement and the $15.0
million of committed capital, management is continuing to review plans and
actions that will enable us to improve future operations. However, there can be
no assurance that we will be able to do so.
Cash flows from operating activities were $1.7 million during the 16 weeks
ended October 20, 2001 as compared to cash flows from operating activities of
$0.3 million during the same period in fiscal year 2001. The $1.4 million
increase in operating cash flow is principally due a $5.6 million increase in
accounts payable and other current liabilities, a $1.8 million decrease in
accounts receivable and a $1.3 million change in other assets and liabilities,
offset by a $5.6 million increase in prepaid expenses and supplies, a $1.1
million increase in deferred taxes and a decrease in accrued interest of $1.0
million.
Cash flows used for investing activities were $2.6 million during the 16
weeks ended October 20, 2001, as compared to cash flows used of $1.7 million
during the 16 weeks ended October 21, 2000. The $0.8 million increase in cash
flows used for investing activities was principally due to an increase of $0.6
million for maintenance and development.
Cash flows from financing activities were $1.2 million during the 16 weeks
ended October 20, 2001, compared to cash flows from financing activities of $0.6
million during the same period of fiscal year 2001. The $0.6 million increase in
cash flows from financing activities was principally due to a $3.1 million
decrease in restricted cash investments; a decrease in debt and capital lease
payments of $0.3 million, offset by an decrease in borrowings on the revolver.
Restricted cash investments represents cash deposited in escrow accounts to be
utilized for the expected claim payout under our workers compensation insurance
coverage.
Cash flows from operating activities were $2.8 million during the 52 weeks
ended June 30, 2001, (2001 year) as compared to cash flows from operating
activities of $5.6 million during the 52 weeks ended July 1, 2000, (2000 year).
The $2.8 million decrease in cash flows from operations was mainly due to a $4.2
million decrease in net loss, a $5.1 million change in deferred income taxes, a
$3.2 million amortization of transaction adjustment into operations, offset by
the non-cash restructuring charge of $7.5 million in 2000, a $7.0 million net
change in other assets and liabilities and a $0.8 million net change in working
capital.
Cash flows used for investing activities were $14.7 million during the 2001
year as compared to cash flows used of $10.3 million during the 2000 year. The
$4.4 million increase in cash flows used for investing activities was
principally due to a $4.5 million increase in maintenance capital expenditures,
a $23.2 million decrease in proceeds from new school sale lease-backs, a $12.9
million decrease in new school development, and a $10.4 million decrease used
for the Bright Start acquisition.
Cash flows from financing activities were $13.0 million during the 2001
year compared to cash flows from financing activities of $4.2 million during the
2000 year. The $8.8 million increase in cash flows from financing activities was
principally due to a $0.7 million net decrease in restricted cash requirements,
a $13.0 million increase in net borrowings and a $1.2 million increase in bank
overdrafts related to the timing of monthly expense payments. Restricted cash
investments represent cash deposited in escrow accounts as collateral for the
self-insured portion of our workers compensation insurance coverage.
We opened four new corporate sites and two new school additions to existing
schools during the 16 weeks ended October 20, 2001. The cost to open a new
school ranges from $1.0 million to $1.5 million, of which approximately 85% is
typically financed through a sale and leaseback transaction. Alternatively, the
school may be constructed on a build to suit basis, which reduces the working
capital requirements during the construction process. We intend to explore other
efficient real estate financing transactions in the future as needed. As of
October 20, 2001, we had $2.5 million invested in new school development in
excess of amounts received from sale and leaseback transactions.
27
Purchasers of schools 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 their capitalized cost over the term of
the lease. In addition, many of our leases provide for contingent rentals if the
school's operating revenue exceeds certain levels. Although we expect sale and
leaseback transactions to continue to finance our expansion, no assurance can be
given that such funding will always be available.
Total capital expenditures for the 52 weeks ended June 30, 2001 and the 16
weeks ended October 20, 2001, were $14.9 million and $2.6 million, respectively.
The increase in total capital expenditures is a result of increased spending on
the maintenance and the development of new schools. We view all capital
expenditures, other than those incurred in connection with the development of
new schools, to be maintenance capital expenditures. Maintenance capital
expenditures for the 52 weeks ended June 30, 2001 and the 16 weeks ended October
20, 2001 were $14.9 million and $1.9 million, respectively.
In addition to maintenance capital expenditures, we expend additional funds
to ensure that our facilities are in good working condition. Such funds are
expensed in the periods in which they are incurred. The amounts of such expenses
for the 52 weeks ended June 30, 2001 and the 16 weeks ended October 20, 2001
were $12.5 million and $3.7 million, respectively.
INFLATION AND GENERAL ECONOMIC CONDITION
During the past three years (a period of low inflation), we implemented
selective increases in tuition rates based on geographic market conditions and
class capacity utilization. During the 2001 year, we experienced inflationary
pressures on average wage rates, as hourly rates increased approximately 8%.
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 our operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Current indebtedness consists of notes in the aggregate principal amount of
$145 million, the term loan under the Credit Agreement in the aggregate
principal amount of $37.0 million at October 20, 2001 and the revolving credit
facility under the Credit Agreement providing for revolving loans to us in an
aggregate principal amount (including swingline loans and the aggregate stated
amount of letters of credit) of $25 million. Borrowings under the notes bear
interest at 10% per annum. Borrowings under the Credit Agreement bear interest
at a rate per annum equal (at our option) to: (a) an adjusted London inter-bank
offered rate ("LIBOR") not to be less than an amount equal to 2.50% per annum,
plus a percentage based on our financial performance; or (b) a rate equal to the
higher 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% plus, in
each case, a percentage based on our financial performance. The borrowing
margins applicable to the Credit Agreement are currently 3.25% for LIBOR loans
and 2.25% for ABR loans. The 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 fiscal year 2002 through 2003, $7.8 million in fiscal year 2004
and $27.5 million in fiscal year 2005. The term loan is also subject to
mandatory prepayment in the event of certain equity or debt issuances or asset
sales by us or any of our subsidiaries in amounts equal to specified percentage
of excess cash flow (as defined).
To reduce the impact of interest rate changes on the term loan, we entered
into interest rate collar agreements during the second quarter of fiscal year
1999. The collar agreements cover the LIBOR interest rate portion of the term
loan, effectively setting maximum and minimum interest rates of 9.5% and 7.9%.
To reduce interest expense on the $145 million of notes, we entered into an
interest rate swap transaction with an imbedded collar during the third quarter
of fiscal year 1999. The effect of this transaction is that 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 of 10.9% and 9.2%.
On January 11, 2001, we entered into an agreement with the counter party to
terminate the interest rate swap on the notes. The termination agreement
required us to pay the counter party $575,000 on February 28, 2001.
28
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 October 20,
2001, the notional value of such derivatives was $18.5 million.
A 1% increase in the applicable index rate, after giving effect to the
interest rate collar, would result in an interest expense increase of $0.3
million per year. A 1% decrease in the applicable index rate, after giving
effect to the interest rate collars, would result in an interest expense
decrease of $0.3 million per year.
29
BUSINESS
GENERAL
La Petite, founded in 1968, is the largest privately held and one of the
leading for-profit preschool educational facilities (commonly referred to as
Academies) in the United States based on the number of centers operated. We
provide center-based educational services and child care to children between the
ages of six weeks and 12 years.
We believe we differentiate ourselves through our superior educational
programs, which were developed and are regularly enhanced by our Curriculum
Department. Our focus on quality educational services allows us to capitalize on
the increased awareness of the benefits of premium educational instruction for
preschool and elementary school age children. At our residential and
employer-based Academies, we utilize our proprietary Journey(R) curriculum with
the intent of maximizing a child's cognitive and social development. We also
operate Montessori schools that employ the Montessori method of teaching, a
classical approach that features the programming of tasks with materials
presented in a sequence dictated by each child's capabilities.
As of October 20, 2001, we operated 725 Academies, including 661
residential Academies, 32 employer-based Academies and 32 Montessori schools,
located in 36 states and the District of Columbia. This represents a decrease of
24 schools for the same period of fiscal year 2001. This decrease is a result of
35 closures and 11 openings. The closures resulted from management's decision to
close certain schools located in areas where the demographic conditions no
longer supported an economically viable operation. For the 16 weeks ended
October 20, 2001, we had an average attendance of approximately 72,000 full and
part-time children.
COMPETITIVE STRENGTHS
STRONG MARKET POSITION AND BRAND IDENTITIES. Based on the number of centers
operated, La Petite Academy is the largest privately-held and one of the leading
providers of for-profit preschool education and child care services in the
United States. Operating since 1968, we have built brand equity in the markets
we serve through the development of a network of Academies concentrated in
clusters in demographically desirable MSAs. Our Academy clusters maintain close
ties with local neighborhoods through public relations efforts, parent
newsletters and brochures and support of community activities. We believe that
we benefit significantly from word-of-mouth referrals from parents, educators
and other school administrators. Our advertising reinforces our community-based
reputation for quality service principally through targeted direct mailings and
radio air time. Our high, customer-driven standards and well-trained and caring
staff strengthens our image as an innovative education provider.
FOCUSED EDUCATIONAL CURRICULUM. Our focus is on educating the child rather
than simply providing traditional child care services. Our proprietary
Journey(R) curriculum was originally developed in 1991 by La Petite educators
with the assistance of experts in early childhood education, with the intent of
maximizing a child's cognitive development while ensuring a positive experience
for the child. The curriculum emphasizes individuality and allows each child to
progress at their own pace, building skills in a logical pattern using a
"hands-on" approach. All programs and activities are developmentally
appropriate, promote a child's intellectual, physical, emotional and social
development and are enhanced by on-site efforts of our educational staff. In
addition, we recently began adding monthly curriculum enhancements to Journey to
help continue to improve program implementation and increase on-going
communication with parents. We also operate Montessori schools, which target
education conscious parents under the name Montessori Unlimited(R). The
Montessori method is a classical approach that provides specific task-oriented
educational materials or "apparatus" presented in a sequence determined by each
child's natural capabilities. Each activity in the prepared environment of the
Montessori classroom has its roots in early development and serves as a
foundation for future, more complex developments.
ATTRACTIVE BUSINESS MODEL. We are seeking to improve profitability at the
Academy level through a combination of revenue enhancement and cost management
at the individual Academies and economies of scale and synergies realized
through the clustering of Academies in economically and demographically
attractive areas. During the 2001 year, we re-opened one Journey-based Academy
and 5 new employer-based Academies. Our Journey Academies average 5,900 square
feet with a license capacity of approximately 150 children and our Montessori
schools average 8,200 square feet with a license capacity of approximately 130
children. In addition, our Montessori schools have proved to be successful with
higher student retention, tuition averaging approximately 45% more than at our
residential and employer-based Academies and more favorable student-teacher
ratios, resulting in increased profitability. We have focused on providing our
Academies with the systems to improve
30
capacity utilization and operational efficiency. In March 1998, La Petite
completed the installation in all of its residential Academies of a newly
developed proprietary management information system, ADMIN, and in September
1999, this was expanded to include all Montessori schools. ADMIN is a unique
point of sale system which enables us to more effectively monitor attendance,
increase revenues and gather information throughout all of its markets. ADMIN
currently handles the tuition billing process, allowing Academy Directors to
concentrate on communicating and interacting with parents, supervising staff and
spending time with children. ADMIN also provides management with timely access
to detailed accurate information on our operations. Our size and scope also
allows us to cost-effectively purchase supplies, conduct advertising and
marketing outreach programs and train employees.
GEOGRAPHICALLY DIVERSIFIED OPERATIONS. Our operations are geographically
diversified, with 725 Academies located throughout 36 states and the District of
Columbia as of October 20, 2001. Although the highest number of our Academies
are located in Texas, Florida, California, Georgia and Virginia, these states
account for less than half of the our Academies. The geographical diversity of
our operations and profitability mitigates the potential impact of regional
economic downturns or adverse changes in local regulations.
EXPERIENCED AND INCENTIVIZED MANAGEMENT TEAM. Our three Division Vice
Presidents and 41 Managing Directors average over 19 years and 12 years with us,
respectively. Management has successfully reduced employee turnover, closed or
revitalized underperforming Academies, implemented operational data systems and
improved operating margins. As of the date of this prospectus, management owns
or has the right to acquire, subject to certain performance requirements,
approximately 7.0% of the common stock of our parent company on a fully diluted
basis.
BUSINESS STRATEGY
Management believes we are well positioned for future growth as one of the
leading providers of quality educational care to preschool aged children. Our
objective is to grow our higher margin businesses and continue to be a leader in
the markets in which it operates.
EMPHASIZE EDUCATIONAL CURRICULUM. Our curriculum department continually
evaluates and improves the quality of our educational materials and programs. We
have invested significant resources in developing our proprietary Journey(R)
curriculum, utilized at both our residential and employer-based Academies. In
addition, we recently began adding monthly curriculum enhancements to help
continue to improve program implementation and increase on-going communication
with parents. We invested in additional classroom facilities and educational
materials to enhance the delivery of the Journey(R) curriculum at 312 of our
Academies, impacted in the fall of 1999. Our Montessori schools are staffed with
certified Montessori lead teachers who follow traditional Montessori methods
that appeal to education conscious parents.
CAPITALIZE ON REPUTATION FOR CUSTOMER DRIVEN SERVICE. We believe that our
knowledge of parents' objectives and desires for their children's education
differentiates us from other child care providers. In order to better understand
customer needs, we conduct:
- focus groups with parents;
- customer and employee satisfaction surveys (conducted by us and third
parties); and
- interviews with parents.
Our program includes a video and a monthly newsletter that explain the
curriculum being provided to the children and guarantees the delivery of daily
or weekly (depending on the age of the child) individual progress reports. We
continually strive to improve our customer retention and increase loyalty by
interacting with parents on a daily basis and focusing on meeting and, if
possible, exceeding their expectations.
INCREASE ACADEMY PROFITABILITY. We plan to improve Academy profitability by
increasing capacity utilization and tuition rates, managing costs and leveraging
our existing and newly built Academies to achieve economies of scale and
synergies. We intend to continue to increase capacity utilization by emphasizing
local marketing programs and improving customer retention and loyalty. We
believe we are an industry leader in our commitment to ongoing qualitative and
quantitative research to determine customer needs and expectations. Academy
Directors use their understanding of the markets in which they operate to cost
effectively target parents through customer referrals, the support of community
activities and print media and spot radio advertising. In addition, with the
implementation of ADMIN, which provides us with the information necessary to
implement targeted pricing, we have the ability to maximize revenue by charging
customers a premium for services in high demand. The ability to
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control revenue and increase operating efficiency at the point of sale through
the implementation of ADMIN also presents an opportunity for us to better
allocate an Academy Director's time. We achieve local economies of scale by
employing a cluster strategy of either building in markets where we have
existing Academies or entering new markets through the construction of a minimum
number of Academies.
BUILD ACADEMIES AND MONTESSORI SCHOOLS IN ATTRACTIVE MARKETS. During the
2001 year, we re-opened one Journey based Academy and 5 new employee-based
Academies. Academies are approximately 6,000 square feet, built on sites of
approximately one acre, have a license capacity of approximately 150 children
for Journey(R) curriculum based Academies and 130 children for Montessori
schools and incorporate a closed classroom concept.
PURSUE STRATEGIC OPPORTUNITIES. In addition to accelerating new Academy
development, we may seek to acquire existing child care centers where
demographics and facility conditions complement its business strategy.
Management believes our competitive position, economies of scale and financial
strength will enable us to capitalize on selective acquisition opportunities in
the fragmented child care industry. We may also engage in cross-marketing
opportunities with manufacturers and marketers of educational products.
CURRICULUM
RESIDENTIAL AND EMPLOYER-BASED ACADEMIES. In 1991, La Petite, with the
assistance of outside educational experts, designed and developed the Journey(R)
curriculum to not only maximize children's cognitive development but also to
provide a positive learning experience for the children. We believe the
Journey(R) curriculum is unsurpassed by the educational materials of any of the
major child care providers or our other competitors, many of whom purchase
educational materials from third party vendors.
Journey is an integrated approach to learning, giving children
opportunities to learn through all of their senses while stimulating development
and learning in all areas. Children progress at their own pace, building skills
and abilities in a logical pattern. The Journey(R) curriculum covers children of
all ages that we serve. Each level of the curriculum includes:
- a parent component;
- built-in teacher training;
- carefully selected age appropriate materials, equipment and activities;
and
- a well planned and developed environment.
For infants and toddlers, Journey provides activities for a variety of
developmental areas such as listening and talking, physical development,
creativity and learning from the world around them. As infants become toddlers,
more activities focus on nurturing their need for independence and practicing
small motor skills that help them learn to feed themselves, walk and communicate
with others. Journey provides songs, fingerplay, art ideas, storytelling tips,
building activities and many activities to develop the bodies of toddlers
through climbing, pushing and pulling. These activities also build the
foundation for social skills such as how to get along with others and how to
share.
The Journey preschool program includes a balance of teacher-directed and
child-directed activities that address both the physical and intellectual
development of preschool children. Physical activities are designed to increase
physical and mental dexterity, specifically hand-eye and large and small muscle
coordination. Preschool children also engage in creative and expressive
activities such as painting, crafts and music. Intellectual activities are
designed to promote language development, pre-reading, writing and thinking
skills, imagination through role playing, pretending and problem solving. In
addition, Journey enables the children to experience the world around them
through geography, Spanish, mathematics and sensorial activities.
The Journey(R) curriculum for SuperStars, children ages 5 through 12,
consists of providing:
- quiet, private space for them to do homework;
- social interaction with children of their own age;
- participation in enrichment programs such as arts and crafts and fitness
activities; and
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- transportation to and from their elementary schools.
MONTESSORI SCHOOLS. Montessori is a non-traditional method of education in
which children work and learn in a highly individualized environment. Montessori
materials, combined with our certified Montessori instructors, create a learning
environment in which children become energized to explore, investigate and
learn. Children work in mixed age group classrooms with attractive,
state-of-the-art Montessori materials that have been designed to stimulate each
child's interest in reading, mathematics, geography and science. In addition to
the Montessori method, Montessori schools provide enrolled children foreign
language and computer learning.
ACADEMY NETWORK
We operate three types of child care centers: residential Academies,
employer-based Academies and Montessori schools. Academies generally operate
year-round, five days a week and typically are open from 6:30 AM to 6:30 PM. A
child may be enrolled in any of a variety of program schedules from a full-time,
five-day-per-week plan to as little as two or three half-days a week. A child
attending full-time typically spends approximately nine hours a day, five days
per week, at an Academy. Our SuperStars program for children ages five to 12
provides extended child care before and after the elementary school day and
transportation to and from the elementary school.
Academy employees include Academy Directors, Assistant Directors (who are
generally teachers), full-time and part-time teachers, temporary and substitute
teachers, teachers' aides, and non-teaching staff. On average, there are 15 to
20 employees per Academy. Each Academy is managed by an Academy Director. An
Academy Director implements company policies and procedures, but has the
autonomy to individualize local operations. Responsibilities of Academy
Directors include curriculum implementation, the establishment of daily, weekly
and monthly operating schedules, staffing, marketing to develop and increase
enrollment and control of operating expenses. Personnel involved in operations
as Academy Director and above are compensated in part on the basis of the
profitability and level of parent and employee satisfaction of each Academy for
which they have managerial responsibility.
Academy Directors are supervised by a Managing Director. Managing Directors
have an average of 12 years of experience with us, typically are responsible for
six to 30 Academies and report to one of three Divisional Vice Presidents.
Managing Directors visit their Academies regularly and are in frequent contact
with Academy Staff to help make decisions and improvements to program quality
and profitability. Our Divisional Vice Presidents average in excess of 19 years
of experience with us.
RESIDENTIAL ACADEMIES. As of October 20, 2001, we operated 661 residential
Academies. Residential Academies are typically located in residential, middle
income neighborhoods, and are usually one-story, air-conditioned buildings
located on three-quarters of an acre to one acre of land. A typical residential
Academy also has an adjacent playground designed to accommodate the full age
range of children attending the school. Our residential Academies are
approximately 6,000 square feet, built on sites of approximately one acre, have
a license capacity of approximately 150 children and incorporate a closed
classroom concept. We continue to improve, modernize and renovate existing
residential Academies to improve efficiency and operations, to better compete,
to respond to the requests of parents and to support the Journey(R) curriculum.
Residential Academies generally have programs to care for children from
toddlers to 12 years old arranged in five age groups. In addition, over half of
our residential Academies offer child care for infants as young as six weeks
old. Teacher-student ratios vary depending on state requirements but generally
decrease with the older child groups.
EMPLOYER-BASED ACADEMIES. As of October 20, 2001, we operated 23
employer-based Academies, which are similar to residential Academies, but are
designed to offer businesses, including government employers and hospitals,
on-site employer-sponsored child care. So far, our focus has been principally on
developing on-site centers, operating employers' on-site centers through
management contracts and providing consulting services for developing and
managing centers. At most of our employer-based Academies, tuition is collected
from our students in the same way as at residential Academies. At some of our
employer-based Academies, additional payments or support services from the
sponsoring employer are received. At other employer-based Academies, a fee in
addition to tuition may be received.
MONTESSORI SCHOOLS. As of October 20, 2001, we operated 32 Montessori
schools. Montessori schools are typically located in upper-middle income areas
and feature brick facades and closed classrooms. The Montessori
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schools typically have lower staff turnover, and their lead teachers are
certified Montessori instructors, many of whom are certified through our own
training program. In addition, unlike students at residential Academies,
Montessori students are enrolled for an entire school year, pay tuition monthly
in advance and pay higher tuition rates.
SEASONALITY
Historically, our 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 our Academies is generally highest in
September-October and January-February; therefore, we attempt to concentrate our
marketing efforts 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.
NEW ACADEMY DEVELOPMENT
We intend to expand within existing markets and to enter new markets with
Academies and Montessori schools concentrated in clusters. In our existing
markets, management believes it has developed an effective selection process to
identify attractive markets for prospective Academy sites. In evaluating the
suitability of a particular location, we concentrate on the demographics of our
target customer within a two mile radius for residential Academies and a six
mile radius for Montessori schools. We target MSA's with benchmark demographics
which indicate parent education levels and family incomes combined with high
child population growth, and consider the labor supply, cost of marketing and
the likely speed and ease of development of Academies in the area.
Newly constructed Academies are generally able to open approximately 36
weeks after the real estate contract is signed. Because a location's early
performance is critical in establishing its ongoing reputation, our Academy
staff is supported with a variety of special programs to help achieve quick
enrollment gains and development of a positive reputation. These programs
include special compensation for the Academy Director who opens the new site and
investment in local marketing prior to the opening.
During the 2001 year, we re-opened one Journey-based Academy and 5 new
employer-based Academies.
TUITION
Academy tuition depends upon a number of factors including, but not limited
to, location of an Academy, age of the child, full or part-time attendance and
competition. We also provide various tuition discounts primarily consisting of
our sibling, staff, and corporate referral programs. We adjust tuition for
Academy programs by child age-group and program schedule within each Academy on
an annual basis each September. Parents also pay an annual registration fee,
which is reduced for families with more than one child attending an Academy.
Tuition and fees are payable weekly and in advance for most residential and
employer-based Academies and monthly and in advance for Montessori schools.
Management estimates that state governments pay the tuition for approximately
16% of the children under our care.
MARKETING AND ADVERTISING
In 2000, we embarked on a branding and marketing initiative that we believe
will enhance the value of the La Petite Academy name. A series of focus groups
were conducted to study different graphical elements of parent communications
and a new logo design. We introduced a new logo and identity package. The new
Apple design retains a previous theme but adds a contemporary feel. The new logo
brings an attractive design element yet retains the brand equity found in the
previous Apple style. The new logo and other graphic elements were used to
develop a complete package of parent communications, print advertising, and
other collateral material. The design elements are now being incorporated into
other branding efforts including signage and additional advertising mediums.
We continue to focus on retention as the greatest asset to business
stability and growth. In July 2000, we introduced an innovative employee cash
incentive bonus program. This program rewards Academy employees for achieving
utilization targets and in-turn, providing high levels of customer service. We
believe that parents view the program as a highly positive means of improving
teacher retention and adding value.
34
A heavy emphasis has been placed on expanding corporate partner
relationships and growing our "Preferred Employer Program." This Program allows
us to build quality relationships with large corporations by providing preferred
pricing for their employees who enroll their children at our Academies.
INFORMATION SYSTEMS
Our financial and management reporting systems are connected through a
Virtual Private Network (VPN) that connects all Academies, field management and
support center employees. Through the use of our point of sale software product,
called ADMIN, and the implementation of the VPN, information such as financial
reporting, enrollments, pricing, labor, receivables, and attendance are
available at all levels of the organization.
We continue to review our management information systems to ensure it
reports on meaningful, specific and measurable performance indicators as well as
provide consistent access.
To improve the management of our labor and human resources, we implemented
the first phase of a new Payroll and Human Resource system that focuses on
employee self-service and analytic capabilities. We anticipate significant
savings with the automation of payroll collection and with the ability to manage
our human resources for the first time with automated capabilities.
COMPETITION
The United States preschool education and child care industry is highly
fragmented and competitive. Our competition consists principally of local
nursery schools and child care centers, some of which are non-profit (including
religious-affiliated centers), providers of services that operate out of their
homes and other for profit companies which may operate a number of centers.
Local nursery schools and child care centers generally charge less for their
services. Many religious-affiliated and other non-profit child care centers have
no or lower rental costs than we have, may receive donations or other funding to
cover operating expenses and may utilize volunteers for staffing. Consequently,
tuition rates at these facilities are commonly lower than our rates.
Additionally, fees for home-based care are normally lower than fees for
center-based care because providers of home care are not always required to
satisfy the same health, safety or operational regulations as our Academies. The
competition also consists of other large, national, for profit child care
companies that may have more aggressive tuition discounting and other pricing
policies than those we utilize. We compete principally by offering trained and
qualified personnel, professionally planned educational and recreational
programs, well-equipped facilities and additional services such as
transportation. In addition, we offer a challenging and sophisticated program
that emphasizes the individual development of the child. Based on focus group
research, the majority of parents rank the qualities of staff as the most
important deciding factor in choosing a child care facility. Following teacher
qualification were such items as safety, cleanliness, programs, and curriculum.
Price typically played a minimal role in the decision process, assuming price
was within a reasonable variance. For some potential customers, the non-profit
status of certain competitors may be a significant factor in choosing a child
care provider.
GOVERNMENT REGULATION
Child care centers are subject to numerous state and local regulations and
licensing requirements, and we have policies and procedures in place in order to
comply with such regulations and requirements. Although state and local
regulations vary greatly from jurisdiction to jurisdiction, government agencies
generally review the ratio of staff to enrolled children, the safety, fitness
and adequacy of the buildings and equipment, the dietary program, the daily
curriculum, staff training, record keeping and compliance with health and safety
standards. In certain 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. In most jurisdictions, governmental agencies conduct scheduled and
unscheduled inspections of child care centers, and licenses must be renewed
periodically. Failure by an Academy to comply with applicable regulations can
subject it to state sanctions, which might include the Academy being placed on
probation or, in more serious cases, suspension or revocation of the Academy's
license to operate and could also lead to sanctions against our other Academies
located in the same jurisdiction. In addition, this type of action could lead to
negative publicity extending beyond that jurisdiction.
Management believes we are in substantial compliance with all material
regulations and licensing requirements applicable to our businesses. However,
there is no assurance that a licensing authority will not determine a particular
Academy to be in violation of applicable regulations and take action against
that Academy. In addition,
35
there may be unforeseen changes in regulations and licensing requirements, such
as changes in the required ratio of child center staff personnel to enrolled
children that could have material adverse effect on our operations.
Certain tax incentives exist for child care programs. Section 21 of the
Code provides a federal income tax credit ranging from 20% to 30% of certain
child care expenses for "qualifying individuals" (as defined in the Code). The
fees paid to us for child care services by eligible taxpayers qualify for the
tax credit, subject to the limitations of Section 21 of the Code. In addition to
the federal tax credits, various state programs provide child care assistance to
low income families. Management estimates approximately 16% of operating revenue
is generated from such, federal and state programs. Although no federal license
is required at this time, there are minimum standards that 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 we participate.
The Federal Americans with Disabilities Act (the "Disabilities Act")
prohibits discrimination on the basis of disability in public accommodations and
employment. The Disabilities Act became effective as to public accommodations in
January 1992 and as to employment in July 1992. Since effectiveness of the
Disabilities Act, we have not experienced any material adverse impact as a
result of the legislation.
In 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. We currently maintain a fleet of approximately 1,300 fifteen-passenger
vans and 120 school buses for use in transportation of children which management
believes are safe and effective vehicles for that purpose. Our current fleet
meets all necessary federal, state, and local safety requirements. In accordance
with the new NHTSA requirements, all new fleet additions or replacements will
meet school bus standards.
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 our financial condition or results of operations.
TRADEMARKS
We have various registered trademarks covering the name La Petite Academy,
its logos, and a number of other names, slogans and designs, including, but not
limited to: La Petite Journey, Parent's Partner, SuperStars, Journey (R)
Curriculum and Montessori Unlimited(R). A federally registered trademark in the
United States is effective for ten years subject only to a required filing and
the continued use of the mark by the registrant. A federally registered
trademark provides the presumption of ownership of the mark by the registrant in
connection with its goods or services and constitutes constructive notice
throughout the United States of such ownership. In addition we have registered
various trademarks in Japan, Taiwan and the Peoples Republic of China. We
believe that our name and logos are important to our operations and intend to
continue to renew the trademark registrations thereof.
INSURANCE AND CLAIMS ADMINISTRATION
We maintain insurance covering comprehensive general liability, automotive
liability, workers' compensation, property and casualty, crime and directors and
officers insurance. The policies provide for a variety of coverage, are subject
to various limits, and include substantial deductibles or self-insured
retention. There is no assurance that claims in excess of, or not included
within, coverage will not be asserted, the effect of which could have an adverse
effect on us.
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EMPLOYEES
As of June 30, 2001, we employed approximately 12,000 full time associates.
Our employees are not represented by any organized labor unions or employee
organizations and management believes relations with employees are good.
PROPERTIES
As of October 20, 2001, we operated 725 Academies, 654 of which were leased
under operating leases, 47 of which were owned and 24 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 us 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.
Because of different licensing requirements and design features, Academies
vary in size and licensed capacity. Academies typically contain 5,400, 6,700,
7,800 or 9,500 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.
The following table summarizes Academy openings and closings for the
indicated periods.
Fiscal Year
FISCAL YEAR 16 Weeks Ended --------------------------------------------------------
----------- October 20, 2001 2001 2000 1999 1998 1997
------------------- --------- ---------- ---------- ---------- ---------
Academies;
Open at Beginning of Period 734 752 743 736 745 751
Opened During Period 6 6 59 13 1 3
Closed During Period (15) (24) (50) (6) (10) (9)
------------------- --------- ---------- ---------- ---------- ---------
Open at End of Period 725 734 752 743 736 745
=================== ========= ========== ========== ========== =========
During the 16 weeks ended October 20, 2001, we opened four new corporate
sites and two new school additions to existing schools. During that same period,
we closed 15 schools located in areas where the demographic conditions no longer
supported economically viable operations.
During the 2001 fiscal year, we re-opened one residential Academy, and
opened five employer-based Academies. During that same period, we closed 24
schools. Eight of the closures resulted from management's decision to close
certain schools located in areas where the demographic conditions no longer
supported economically viable operations, and the remaining 16 closures were due
to management's decision not to renew the leases or contracts of certain
schools.
The following table shows the number of locations operated by the Company as
of October 20, 2001:
Alabama (14) Indiana (18) Nevada (17) Texas (108)
Arizona (24) Iowa (7) New Jersey (2) Utah (4)
Arkansas (5) Kansas (23) New Mexico (20) Virginia (36)
California (53) Kentucky (4) North Carolina (28) Washington, DC (1)
Colorado (23) Louisiana (1) Ohio (16) Washington (14)
Connecticut (1) Maryland (15) Oklahoma (21) Wisconsin (14)
Delaware (1) Minnesota (5) Oregon (7) Wyoming (1)
Florida (85) Mississippi (3) Pennsylvania (6)
Georgia (44) Missouri (25) South Carolina (19)
Illinois (23) Nebraska (10) Tennessee (27)
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The leases have initial terms expiring as follows:
YEARS INITIAL LEASE TERMS EXPIRE NUMBER OF ACADEMIES
2002 104
2003 105
2004 124
2005 65
2006 95
2007 and later 161
--------------
654
--------------
We currently lease 654 Academies from approximately 425 lessors. We have
generally been successful when we have sought to renew expiring Academy leases.
LEGAL PROCEEDINGS
We have litigation pending which arose in the ordinary course of business.
In management's opinion, none of the litigation in which we are currently
involved will result in liabilities that will have a material adverse effect on
our financial condition or results of operations.
38
MANAGEMENT
The following table sets forth the name, age and current position held by
the persons who are our and our parent company's directors and executive
officers.
Name Age Position
- ---- --- --------
Stephen P. Murray .....................38 Chairman of the Board and Director
Judith A. Rogala.......................60 Chief Executive Officer, President
and Director
Mitchell J. Blutt, M.D ................44 Director
Terry D. Byers ........................47 Director
Robert E. King ........................65 Director
Brian J. Richmand .....................47 Director
Ronald L. Taylor ......................57 Director
Damaris M. Campbell ...................48 Vice President, Eastern Region
Jeffrey J. Fletcher ...................49 Chief Financial Officer
Brian J. Huesers ......................40 Chief Information Officer
Lisa J. Miskimins .....................41 Vice President, Central Region
Rebecca L. Perry ......................46 Vice President Operations
Bill Buckland .........................55 Vice President, People
Amy Larson ...........................38 Vice President, Marketing
The business experience during the last five years and other information
relating to each executive officer and director listed above is set forth below.
Stephen P. Murray became the Chairman of the Board in January 2000 and has
been a Director since May 1998. Mr. Murray has been a General Partner of JPMP
since 1994. From 1988 to 1994 Mr. Murray was a Principal at JPMP. Prior thereto,
he was a Vice President with the Middle-Market Lending Division of Manufacturers
Hanover. Mr. Murray has a BA from Boston College and a MBA from Columbia
Business School. He also serves as director of The Vitamin Shoppe, Vitamin
Shoppe.com, Starbelly, Inc., Home Products, Inc., Futurecall Telemarketing,
American Floral Services, The International Cornerstone Group, Medical Arts
Press and Regent Lighting Corporation.
Judith A. Rogala became a director and the Chief Executive Officer and
President in January 2000. From 1997 to 1999 Ms. Rogala was President of ARAMARK
Uniform Services. She was an Executive Vice President of Office Depot from 1994
to 1997. From 1992 to 1994 she was President and Chief Executive Officer of EQ
(the Environmental Quality Company) and from 1990 to 1992 Ms. Rogala was
President and Chief Executive Officer of Flagship Express. From 1980 to 1990 she
was a Senior Vice President at Federal Express. Ms. Rogala has a BS from
Roosevelt University and a MBA from the University of New Mexico.
Mitchell J. Blutt, M.D. has been a Director since May 1998. Dr. Blutt has
served as an Executive Partner of JPMP since 1992. From 1988 to 1992 he was a
General Partner of JPMP. Dr. Blutt has a BA and a MD from the University of
Pennsylvania and a MBA from the Wharton School of the University of
Pennsylvania. He is an Adjunct Professor of Medicine at the New York
Hospital/Cornell Medical School. Dr. Blutt is a director of the Hanger
Orthopedic Group, Senior Psychology Services Corporation, Fisher Scientific
Corporation, dj Orthopedics, Inc., dj Orthopedics, LLC, Medsite.com, Palm
Entertainment Corporation, and on the Advisory Boards of the DS Polaris Fund,
Dubilier & Co., The Tinicum Fund, the Global Academy for the Human Genome Human
Being and the Cornell Center for Complementary and Integrative Medicine. He is a
member of the Board of Trustees of the University of Pennsylvania and a member
of the Board of Overseers of the University of Pennsylvania's School of Arts and
Sciences. Dr. Blutt also serves on the International Board of Governors of the
Peres Center for Peace.
Terry D. Byers has been a Director since 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 infra-structures, developing and
integrating business information systems, implementing large ERP applications,
and developing and deploying technology-based solutions to clients. Since 1996,
Ms Byers has been a Senior Vice President and the Chief Technology Officer
39
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.
Robert E. King has been a Director 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.
Brian J. Richmand has been a Director since May 1998. Mr. Richmand became a
Special Partner of JPMP in January 2000. He was a General Partner of JPMP from
1993 to 2000. From 1986 to August 1993 Mr. Richmand was a partner with the law
firm of Kirkland & Ellis. He has a BS from The Wharton School of the University
of Pennsylvania and a JD 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.
Ronald L. Taylor has been a Director since April 1999. Mr. Taylor has been
President and Chief Operating Officer of DeVry, Inc since 1987. He is Chairman
of the Proprietary Schools Advisory Committee for the Illinois Board of Higher
Education; a member of the Institutional Action Committee for the North Central
Association of Colleges and Schools; a Commissioner for the Commission on Adult
Learning and Educational Credentials, American Council on Education; a mentor
for the Next Generation Leadership Institute at Loyola University Chicago; a
member of the Board of Directors of the Illinois State Chamber of Commerce. He
also serves on the Board of Directors of DeVry, Inc. and the Better Business
Bureau of Chicago & Northern Illinois, Inc. Mr. Taylor has a BA from Harvard
University and received his MBA from Stanford University.
Damaris M. Campbell became our Vice President of the Eastern Region in June
2000. She is responsible for the supervision of 14 states. From 1997 to 2000,
Ms. Campbell was an Area Vice President with supervisory responsibility for our
operations in five states. She was a Divisional Director of 54 schools in three
states from 1993 to 1997. From 1983 to 1993, she supervised 13 academies in the
Charlotte, NC Region. She began her career with La Petite in 1980 as a teacher.
Jeffrey J. Fletcher became our Chief Financial Officer in June 2000. From
1998 to 2000, Mr. Fletcher was Chief Financial Officer for Hirsh Industries,
Inc. From 1995 to 1998, he provided strategic, finance and operations consulting
services to a variety of businesses including manufacturers, Internet start-ups,
medical services and retailers. Mr. Fletcher served as Chief Financial Officer
of the Environmental Quality Company from 1992 to 1995. Prior to 1992, Mr.
Fletcher served in various financial capacities at Gaylord Container. Mr.
Fletcher began his career with Coopers & Lybrand and Deloitte & Touche. Mr.
Fletcher has a B.S. from the University of Iowa and a M.M. from the Kellogg
Graduate School of Management at Northwestern University.
Brian J. Huesers became our Chief Information Officer in June 2000. From
1999 to 2000, Mr. Huesers was the Chief Information Officer for the Kansas City,
Missouri School District. Mr. Huesers was the Assistant Vice President for
Technical Services at H&R Block, Inc. from 1997 to 1999. From 1984 to 1996, Mr.
Hueser's held various positions at H&R Block Tax Services. Mr. Huesers has a BA
from Washburn University.
Lisa J. Miskimins became our Vice President of the Central Region in June
2000. She is responsible for the supervision of 13 states. From 1997 to 2000,
Ms. Miskimins was an Area Vice President with supervisory responsibility for our
operations in eight midwestern states. She was a Divisional Director of 50
schools in three states from 1994 to 1997. She began her career with La Petite
in 1983 as a Preschool Teacher. Ms. Miskimins has a BA in Elementary Education
and English.
Rebecca L. Perry became our Vice President of Operations in April 2000. She
was the Executive Vice President of Operations from 1997 to 2000. From 1993 to
1997, Ms. Perry was a Senior Vice President and Eastern Operating Officer. From
1988 to 1993, she was Assistant Vice President of Operations with supervisory
responsibility for the operations of 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.
Bill Buckland became our Vice President, People in July 2001. From 1993 to
2001 Mr. Buckland was Vice President, Human Resources of Allied Van Lines, Inc.
From 1990 to 1992 he was the Director, Human Resources
40
for SuperAmerica Group, a subsidiary of Ashland Oil. From 1969 to 1990 Mr.
Buckland held various positions in the Human Resources Department with the
Montgomery Ward Company. He has a B.B.A. from the University of Kentucky.
Amy Larson became our Vice President, Marketing in August 2001. From 2000
to 2001 Ms. Larson was Vice President, Customer Experience Marketing, for
iExplore. From 1999 to 2000 Ms. Larson was Sr. Marketing Manager for Peapod.
From 1998 to 1999 she was Vice President, Marketing for the Travel Payment
Services Division of Citigroup. From 1991 to 1998 Ms. Larson held various
managerial positions with the Whirlpool Corporation. Ms. Larson has an M.B.A. in
Finance and Marketing from the University of Illinois, and a B.S. in Business
Information Systems from Illinois State University.
BOARD COMMITTEES AND COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Board of Directors has an Audit Committee consisting of Robert E. King
and Stephen P. Murray, and a Compensation Committee consisting of Stephen P.
Murray and Brian J. Richmand. The Audit Committee reviews the scope and results
of audits and internal accounting controls and all other tasks performed by our
independent public accountants. The Compensation Committee determines
compensation for the executive officers and will administer our 1998 Option
Plan. None of our executive officers have served as a director or member of the
compensation committee (or other committee forming an equivalent function) of
any other entity, whose executive officers served as a director of or member of
the Compensation Committee of our Board of Directors.
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 La Petite nor employed by JPMP or any of its partners are entitled to receive
an attendance fee of $1,000 for each meeting attended.
On August 19, 1999, our parent company adopted the LPA Holding Corp. 1999
Stock Option Plan for Non-Employee Directors (1999 Plan). The purpose of the
1999 Plan is to provide a means for attracting, retaining, and incentivizing
qualified directors. Under the terms of the 1999 Plan, 10,000 shares of our
parent company's Class A common stock are reserved for issuance to our
non-employee directors.
Non-employee directors may exercise their options to purchase shares of our
parent company's Class A common stock once those options have vested. One-forty
eighth of the options become vested on the last day of each month following the
date of grant, if the person is a director on that day. Each option entitles the
director to purchase one share of our parent company's Class A common stock. The
exercise price is equal to the fair market value on the date of grant of the
option to the non-employee director. Vested options and shares of common stock
may be repurchased from any non-employee director who ceases to be a director
for any reason. Any options that have not vested at the time the non-employee
director ceases to be a director are forfeited. For the 52 weeks ended June 30,
2001, options to purchase 182,285 shares of our parent company's common stock
have been granted under the plan.
COMPENSATION OF EXECUTIVE OFFICERS
The following table provides certain summary information concerning compensation
earned for the 52 weeks ended June 30, 2001 (2001), for the 52 weeks ended July
1, 2000 (2000), and for the 44 weeks ended July 3, 1999 (1999), by our Chief
Executive Officer and the four other most highly compensated executive officers
whose salary and bonus exceeded $100,000 for the fiscal year:
41
SUMMARY COMPENSATION TABLE
COMPENSATION FOR THE PERIOD
ANNUAL LONG-TERM ALL OTHER
COMPENSATION COMPENSATION COMPENSATION
------------ ------------ ------------
NUMBER OF
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTION/SAR AWARDS
- --------------------------- ---- ------ ----- -----------------
Judith A. Rogala 2001 $350,000 $175,000 49,810
Chief Executive Officer & President 2000 180,385(1) 87,500
Jeffrey J. Fletcher 2001 160,150 64,000 20,000
Chief Financial Officer 2000 7,385(2) 25,000
Rebecca L. Perry 2001 151,438 2,000
Vice President Operations 2000 183,729
1999 155,490
Brian J. Huesers 2001 140,000 20,000
Chief Information Officer 2000 10,769(3)
Lisa J. Miskimins 2001 115,780 19,325 $14,879(4)
Vice President, Central Region 2000 74,703 2,000
1999 68,310 750
- ---------------
(1) 2000 compensation covers 27 weeks from December 21, 1999 through July 1,
2000.
(2) 2000 compensation covers three weeks from June 8, 2000 through July 1,
2000.
(3) 2000 compensation covers four weeks from June 1, 2000 through July 1, 2000.
(4) Represents payments made to Ms. Miskimins related to her relocation to the
Chicago, IL area.
42
The following tables present information relating to grants to the named
executive officers of options to purchase our common stock:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION/SAR VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF IN-THE-MONEY
OPTIONS/SARS AT FY END (#) OPTIONS/SARS AT FY END (2)
NAME EXERCISABLE/UNEXCERCISABLE EXERCISABLE/UNEXCERCISABLE
Judith A. Rogala 18,679/31,131(1) 0/0
Jeffrey J. Fletcher 5,000/15,000(1) 0/0
Rebecca L. Perry 3,275/2,325(1) 0/0
Brian J. Huesers 5,000/15,000(1) 0/0
Lisa J. Miskimins 5,352/14,648(1) 0/0
- ---------------
(1) Our Board of Directors granted to certain key executives Tranche A options
at $66.92 per share, an amount which approximates the fair value of a share
of our common stock at the date of the grant. These options become
exercisable ratably over forty-eight months and expire ten years from the
date of grant.
(2) Our equity is not traded and there is no market for pricing the value of
the options. "In the Money" calculations are based on our estimated
enterprise value adjusted for debt, preferred stock, common shares issued
and retired, warrants and options and adjustments for market liquidity and
a control premium.
OPTIONS/SAR GRANTS
IN LAST FISCAL YEAR
NUMBER OF POTENTIAL REALIZABLE
SECURITIES % OF TOTAL VALUE (2) AT ASSUMED ANNUAL
UNDERLYING OPTIONS/SAR'S EXERCISE OR RATES OF STOCK PRICE
OPTIONS/SAR'S GRANTED TO BASE PRICE EXPIRATION APPRECIATION FOR OPTION TERM
NAME GRANTED EMPLOYEES ($/SHARE) DATE 5% ($) 10% ($)
---- ------- --------- --------- ---- ------ -------
Judith A. Rogala 49,810(1) 27% $66.92 December, 2009 $2,096,285 $5,312,398
Jeffrey J. Fletcher 20,000(1) 11% $66.92 June, 2010 841,713 2,133,065
Rebecca Perry 2,000(1) 1% $66.92 June, 2010 84,171 213,306
Brian J. Huesers 20,000(1) 11% $66.92 June, 2010 841,713 2,133,065
Lisa J. Miskimins 19,325(1) 11% $66.92 June, 2010 813,305 2,061,074
- ---------------
(1) Tranche A options
(2) The potential realizable value of the options granted in fiscal year 2001
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.
43
EMPLOYMENT CONTRACTS
We have entered into an employment agreement with Judith A. Rogala. The
employment agreement provides for Ms. Rogala to receive a base salary, subject
to annual performance adjustments, of $350,000 plus a bonus of up to 150% of
base salary. Ms. Rogala is also entitled to receive a cash interim bonus with
respect to our fiscal year ending in July 2000 equal to $87,500 and a signing
incentive bonus of $1.5 million, vesting at 25% per year, payable on the fourth
anniversary date of employment. The term of the employment agreement is three
years subject to one year automatic renewals. The employment agreement also
provides that the executive is entitled to participate in the health and welfare
benefit plans available to our other senior executives. The employment agreement
provides for severance in the case of termination without 'cause' or a
resignation with 'good reason' in an amount equal to one year of base salary
plus a prorated bonus as described in the agreement and a cash lump sum equal to
(a) any compensation payments deferred by Ms. Rogala, together with any
applicable interest or other accruals; (b) any unpaid amounts, as of the date of
such termination, in respect of the bonus for the fiscal year ending before the
fiscal year in which such termination occurs; (c) the signing incentive bonus
(to the extent not already paid) and (d) the pro rata bonus as described in the
employment agreement. Included in the severance in the case of termination
without 'cause' or resignation with 'good reason' is one year of coverage under
and participation in our employee benefit program. The employment agreement also
contains customary non-disclosure, non-competition and non-solicitation
provision.
1998 OPTION PLAN
Our parent company adopted the 1998 Plan pursuant to which options, which
currently represent 7.6% of our parent company's common stock on a fully diluted
basis, are available for grant. The 1998 Plan also provides for the granting of
Tranche A and Tranche B options to purchase up to 60,074 shares of our common
stock. The options will be allocated in amounts to be agreed upon between LPA
and our parent company. Seventy-five percent of the options will vest over four
years and twenty-five percent of the options will vest if certain transactions
are consummated which generate certain minimum returns to LPA. The exercise
price for the time-vesting options will be 50% of the per share price paid by
LPA for its common stock of our parent company and the exercise price for the
remaining options will be 100% of the per share price paid by LPA for the common
stock of our parent company. The options expire 10 years from the date of grant.
During fiscal year 2001, we amended the 1998 Plan, increasing to 230,000
the number of options available for grant. Options to purchase 190,210 shares of
our parent company's common stock have been granted under the 1998 Plan.
44
OWNERSHIP OF SECURITIES
GENERAL
All of our common stock is held by our parent company. As of November 27,
2001, LPA Investment LLC, or LPA, owned approximately 89.6% of the outstanding
common stock of our parent company (approximately 90.0% on a fully diluted
basis, including the warrants described below) and Vestar, the former principal
stockholder, and our current and former management own approximately 3.6%, 1.8%
and 5.0% respectively, of the outstanding common stock of our parent company
(approximately 1.0%, 7.0% and 1.0%, respectively, on a fully diluted basis). In
connection with the purchases of preferred stock of our parent company,
described below, LPA received warrants to purchase shares of our parent's
company's common stock that currently represents the right to acquire 17.7% of
our parent's company's common stock on a fully diluted basis.
In connection with the recapitalization LPA purchased redeemable preferred
stock of our parent company and warrants to purchase shares of our parent
company's common stock on a fully diluted basis for aggregate cash consideration
of $30.0 million, the proceeds of which were contributed by our parent company
to common equity. On December 15, 1999, LPA acquired an additional $15.0 million
of our parent company's redeemable preferred stock and received warrants to
purchase an additional 3.0% of our parent company's common stock on a fully
diluted basis. The $15.0 million proceeds received by our parent company were
contributed to us as common equity.
The preferred stock is not redeemable at the option of the holder prior to
the maturity of the notes and dividends are not payable in cash prior to the
seventh anniversary of the consummation of the transactions. Thereafter, our
parent company may pay dividends in cash subject to any restrictions contained
in our indebtedness, including the Credit Agreement and the indenture.
Following the consummation of the recapitalization, our parent company and
its stockholders, including all holders of options and warrants, entered into a
Stockholders' Agreement. The Stockholders' Agreement contains restriction on the
transferability of our parent company's common stock, subject to certain
exceptions. The Stockholders' Agreement also contains provisions regarding the
designation of members of the Board of Directors and other voting arrangements.
The Stockholders' Agreement will terminate at such time as our parent company
consummates a qualified public offering.
Pursuant to a notice dated November 13, 2001, our parent company offered
all of its stockholders the right to purchase up to their respective pro rata
amount of a newly created class of convertible preferred stock and warrants to
purchase common stock of our parent company. The convertible preferred stock is
junior to the redeemable preferred stock of our parent company in terms of
dividends, distributions, and rights upon liquidation. Up to $4.25 million of
convertible preferred stock of our parent company and warrants to purchase
562,500 shares of common stock of our parent company were offered. Stockholders
of our parent company electing to participate in the offer were required to
commit to purchase a similar percentage of an additional aggregate amount of
convertible preferred stock equal to $10.75 million. At any time, or from time
to time, prior to May 14, 2002, as requested by our parent company, the
stockholders of our parent company participating in the pre-emptive rights offer
are required to purchase the balance of the convertible preferred stock being
offered thereby. All of the proceeds from the pre-emptive rights offer received
by our parent company will be contributed to us as common equity and will be
used by us for general working capital and liquidity purposes.
Pursuant to the pre-emptive offer, on November 15, 2001 LPA acquired $3.4
million of our parent company 's convertible preferred stock and received
warrants to purchase 452,343 shares of common stock. The proceeds of that $3.4
million investment were contributed to us as common equity. In connection with
such purchase, the banks waived their right under the Credit Agreement to
require that the proceeds be used to repay amounts outstanding under the Credit
Agreement.
LPA also committed to purchase the balance of the $11.6 million of
convertible preferred stock being offered and not otherwise purchased by the
other stockholders of our parent company. Prior to December 31, 2001 LPA is
required to purchase an amount of convertible preferred stock equal to the
difference between $0.8 million and the value of the amount of the convertible
preferred stock purchased by other stockholders in connection with the
pre-emptive offer. After December 31, 2001, the balance of the convertible
preferred stock of our parent company to be purchased by LPA will, as
applicable, be purchased at any time, or from time to time, prior to May 14,
2002 at the request of our parent company. If our parent company has not
requested that LPA fund its commitment to purchase
45
the balance of the convertible preferred stock prior to May 14, 2002, LPA has
the right to cause our parent company to issue the balance of the convertible
preferred stock to LPA. After giving effect to the investment on November 15,
2001, LPA beneficially owns approximately 90.0% of our parent company's
outstanding common stock on a fully diluted basis.
STOCKHOLDERS' AGREEMENT
The Stockholders' Agreement restricts transfers of common stock of our
parent company by, among other things:
- granting rights to all stockholders to tag along on certain sales of
stock by LPA and management,
- granting rights to LPA to force the other stockholders to sell their
common stock on the same terms as sales of common stock by LPA, and
- granting preemptive rights to all holders of 2% or more of our parent
company's common stock in respect of sales by other stockholders.
The Stockholders' Agreement provides that the Board of Directors of our
parent company shall consist of 5 to 8 persons as determined pursuant to the
Stockholders' Agreement. The Stockholders' Agreement further provides that LPA
is entitled to designate four of the directors, one of whom is entitled to three
votes as a director. Messrs. Murray, Blutt, Richmand and King have been elected
as directors pursuant to this provision with Mr. King being entitled to three
votes as a director. Certain management stockholders of our parent company are
entitled to elect one director, currently Ms. Rogala. The Stockholders'
Agreement further provides that the ensuing directors of our parent company
shall be designated by mutual consent of LPA and the management stockholders.
The Stockholders' Agreement also contains covenants in respect of the
delivery of certain financial information to our parent company's stockholders
and granting access to our parent company's records to holders of more than 2%
of our parent company's common stock.
A majority of the economic interests of LPA is owned by J.P. Morgan
Partners (23A SBIC), LLC ("JPMP (23A SBIC)"), formerly known as CB Capital
Investors, LLC, an affiliate of JPMP, and a majority of the voting interests of
LPA is owned by an entity controlled by Robert E. King, one of our parent
company's Directors. However, pursuant to the LPA Operating Agreement, LPA has
granted to JPMP (23A SBIC) the right to elect a majority of the directors of LPA
if certain triggering events occur and LPA agreed not to take certain actions in
respect of the common stock of our parent company held by LPA without the
consent of JPMP (23A SBIC). Accordingly, if certain triggering events occur,
through its control of LPA, JPMP (23A SBIC) would be able to elect a majority of
the Board of Directors of our parent company. As a licensed small business
investment company, or SBIC, JPMP (23A SBIC) is subject to certain restrictions
imposed upon SBICs by the regulations established and enforced by the United
States Small Business Administration. Among these restrictions are certain
limitations on the extent to which an SBIC may exercise control over companies
in which it invests. As a result of these restrictions, unless certain events
described in the operating agreement occur, JPMP (23A SBIC) may not own or
control a majority of the outstanding voting stock of LPA or designate a
majority of the members of the Board of Directors. Accordingly, while JPMP (23A
SBIC) owns a majority of the economic interests of LPA, JPMP (23A SBIC) owns
less than a majority of LPA's voting stock.
REGISTRATION RIGHTS AGREEMENT
In connection with the recapitalization, our parent company and its
stockholders following consummation of the recapitalization entered into a
Registration Rights Agreement. The Registration Rights Agreement grants
stockholders demand and incidental registration rights with respect to shares of
capital stock held by them and contains customary terms and provisions with
respect to such registration rights.
46
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
J.P. Morgan Securities Inc., or JPMSI, one of the initial purchasers of the
old Senior Notes, is an affiliate of JPMorgan Chase Bank (formerly known as The
Chase Manhattan Bank), an agent and a lender to us under the Credit Agreement of
the Senior Notes, LPA, an affiliate of JPMP and JPMSI, owns 89.6% of the
outstanding common stock of our parent company (approximately 90.0% on a fully
diluted basis). LPA owns $45 million of our parent company's redeemable
preferred stock, $3.4 million of our parent company's convertible preferred
stock, and warrants to purchase 43.0% of the common stock of our parent company
on a fully diluted basis. Certain partners of JPMP are members of our Board of
Directors (see Item 10). In addition JPMSI, JPMorgan Chase Bank and their
affiliates perform various investment banking and commercial banking services on
a regular basis for our affiliates.
In connection with the recapitalization, JPMP (23A SBIC) entered into an
Indemnification Agreement with Robert E. King, one of our parent company's
Directors, pursuant to which JPMP (23A SBIC) has agreed to indemnify Mr. King
for any losses, damages or liabilities and all expenses incurred or sustained by
Mr. King in his capacity as a manager, officer or director of LPA or any of its
subsidiaries, including us and our parent company.
Banc of America Securities LLC, one of the initial purchasers of the old
notes, is an affiliate of Bank of America, an agent and lender under the Credit
Agreement.
In December 1999 and November 2001, our parent company sold additional
equity to LPA. See "Ownership of Securities."
47
DESCRIPTION OF THE CREDIT AGREEMENT
The following is a summary of the material terms of our Credit Agreement,
as amended, among us, our parent company, certain financial institutions party
thereto, Bank of America, or BankAm, as administrative agent, and, The Chase
Bank of Texas, National Association (formerly known as The Chase Manhattan Bank)
or JPMorgan Chase, as syndication agent. The following summary should be read in
conjunction with the Credit Agreement, which is filed as an exhibit to this
Registration Statement.
THE FACILITIES
STRUCTURE. The Credit Agreement provides for the term loan in an aggregate
principal amount of $40 million, all of which was borrowed in connection with
the closing of the Transactions, and the revolving credit facility providing for
revolving loans, swingline loans and the issuance of letters of credit for our
account in an aggregate principal amount (including swingline loans and the
aggregate stated amount of letters of credit) of $25 million.
AVAILABILITY. Availability under the revolving credit facility is subject
to various conditions precedent typical of bank loans, and the commitment of
Chase, BankAm, and the other lenders to provide financing under the Credit
Agreement is also subject to, among other things, the absence of any event,
condition or circumstance that has had or is reasonably likely to have a
material adverse effect on the business, operations, properties, assets,
liabilities or financial condition of our parent company, us and our
subsidiaries, taken as a whole. As of October 20, 2001, $16.2 million was
outstanding under the revolving credit facility.
INTEREST
Borrowings under the Credit Agreement will bear interest at a rate per
annum equal (at our option) to: a) an adjusted London inter-bank offered rate,
or LIBOR, not to be less than an amount equal to 2.5% per annum, plus a
percentage based on our financial performance or b) a rate (the "ABR") equal to
the highest of BankAm's published prime rate, a certificate of deposit rate plus
1% or the Federal Funds effective rate plus 1/2 of 1%, plus in each case a
percentage based on our financial performance. The borrowing margins applicable
to the Credit Agreement are initially 4.25% for LIBOR loans and 3.25% for ABR
loans. Amounts outstanding under the Credit Agreement not paid when due bear
interest at a default rate equal to 2.00% above the rates otherwise applicable
to the loans under the Credit Agreement.
FEES
We have agreed to pay certain fees with respect to the Credit Agreement,
including a) fees equal to 1/2 of 1% per annum on the undrawn portion of the
commitments of the lenders in respect of the Credit Agreement (subject to a
reduction based on our financial performance); b) letter of credit fees on the
aggregate face amount of outstanding letters of credit equal to the then
applicable borrowing margin for LIBOR loans under the revolving credit facility
and a 1/4 of 1% per annum issuing bank fee for the letter of credit issuing
bank; c) annual administration fees; and 4) agent, arrangement and other similar
fees.
SECURITY; GUARANTEES
Our obligations under the Credit Agreement are irrevocably guaranteed,
jointly and severally, by our parent company and by each of our existing and
subsequently acquired or organized subsidiaries. In addition, the Credit
Agreement and the guarantees are secured by substantially all of our assets and
the assets of our parent company and our domestic subsidiaries, including but
not limited to:
- a perfected first priority pledge of all our capital stock and of each
of our existing and subsequently acquired or organized subsidiaries;
and
- a perfected first priority security interest in, and mortgage on,
substantially all of our tangible and intangible assets and the assets
of the guarantors (including, but not limited to, accounts receivable,
documents, inventory, equipment, investment property, general
intangibles, real property, cash and cash accounts and proceeds of the
foregoing, but excluding leasehold interests), in each case subject to
certain exceptions.
Additionally, as part of Amendment No. 3 to the Credit Agreement dated as
of November 14, 2001, JPMP agreed to guaranty a portion of the bank debt if LPA
fails to satisfy its commitment to purchase new equity prior to
48
May 14, 2002 or earlier if the bank debt has been accelerated. The amount of
such guaranty equals the amount of LPA's unfounded commitment to purchase the
new equity, as adjusted from time to time but shall not exceed $15,000,000 at
any time.
COMMITMENT REDUCTIONS AND REPAYMENTS
The Credit Agreement will mature on May 11, 2005. The term loan amortizes
in an amount equal to $1.0 million in fiscal years 2001 through 2003, $7.8
million in fiscal year 2004 and $27.5 million in fiscal year 2005. In addition,
the term loan is subject to mandatory prepayment and reductions in an amount
equal to (a) 100% of the net cash proceeds of certain equity issuances by our
parent company, us or any of our subsidiaries, (b) 100% of the net cash proceeds
of certain debt issuances of our parent company, us or any of our subsidiaries,
(c) 75% of our excess cash flow (subject to a reduction to 50% based on our
financial performance) and (d) 100% of the net cash proceeds of certain asset
sales or other dispositions of property by our parent company, us or any of our
subsidiaries, in each case subject to certain exceptions. The mandatory
prepayment provision of the term loan was waived in connection with the
purchases of the additional $15.0 million of preferred stock and related
warrants on December 15, 1999 and of the additional $15.0 million of preferred
stock and related warrants over the November 2001 to May 2002 period.
AFFIRMATIVE, NEGATIVE AND FINANCIAL COVENANTS
The Credit Agreement contains a number of covenants that, among other
things, restrict the ability of our parent company, us and our subsidiaries to
dispose of assets, incur additional indebtedness, incur or guarantee
obligations, prepay other indebtedness or amend other debt instruments, pay
dividends, create liens on assets, make investments, loans or advances, make
acquisitions, engage in mergers or consolidations, change the business conducted
by us and our subsidiaries, make capital expenditures change our fiscal year, or
engage in certain transactions with affiliates and otherwise restrict certain
corporate activities. In addition, the Credit Agreement requires our parent
company to comply with specified financial ratios and tests, including a maximum
leverage ratio, a minimum fixed charge coverage ratio and a minimum EBITDA test.
The Credit Agreement also contains provisions that will prohibit any
modifications of the indenture in any manner adverse to the lenders under the
Credit Agreement and that limit our ability to refinance or otherwise prepay the
notes without the consent of such lenders.
EVENTS OF DEFAULT
The Credit Agreement contains customary events of default, including
non-payment of principal, interest or fees, violation of covenants, inaccuracy
of representations or warranties in any material respect, cross default to
certain other indebtedness, bankruptcy, ERISA events, material judgments and
liabilities, actual or asserted invalidity of any material security interest and
change of control.
49
DESCRIPTION OF NOTES
GENERAL
The old notes and notes were issued under an indenture among us, our parent
company, the guarantors and PNC Bank, National Association, as trustee. The
terms of the notes are identical in all respects to the old notes, except that
the notes have been registered under the Securities Act and, therefore, do not
bear legends restricting their transfer and do not contain provisions providing
for the payment of liquidated damages under certain circumstances relating to
the Registration Rights Agreement, which provisions terminated upon the
consummation of the exchange offer of the notes for the old notes. The following
summary of the material provisions of the indenture does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the Trust Indenture Act of 1939, as amended, and to all of the provisions of the
indenture, including the definitions of certain terms therein and those terms
made a part of the indenture by reference to the Trust Indenture Act, as in
effect on the date of the indenture. The definitions of certain capitalized
terms used in the following summary are set forth below under "Certain
Definitions." For purposes of this section, the terms "La Petite" and "La Petite
Academy" refer only to La Petite Academy, Inc and not any of its subsidiaries.
Principal of, premium, if any, and interest on the notes is payable, and
the notes may be exchanged or transferred, at the office or agency of the
issuers in the Borough of Manhattan, The City of New York, except that, at the
option of the issuers, payment of interest may be made by check mailed to the
registered holders of the notes at their registered addresses.
The notes are issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
will be made for any registration of transfer or exchange of notes, but the
issuers may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
The indenture provides for the issuance of up to $100 million aggregate
principal amount of additional notes having terms and conditions identical to
those of the notes offered hereby, subject to compliance with the covenants
contained in the indenture. Any additional notes will be part of the same issue
as the notes offered hereby and will vote on all matters with the notes offered
hereby. Unless the context otherwise requires, for purposes of this "Description
of Notes," references to the notes include additional notes.
TERMS OF THE NOTES
The notes are unsecured senior obligations of the issuers, limited to $145
million aggregate principal amount, and mature on May 15, 2008. Each notes bears
interest at a rate of 10% per annum from May 11, 1998, or from the most recent
date to which interest has been paid or provided for, payable semiannually to
holders of record at the close of business on the May 1 or November 1
immediately preceding the interest payment date on May 15 and November 15 of
each year, commencing November 15, 1998. We will pay interest on overdue
principal at 1% per annum in excess of such rate, and it will pay interest on
overdue installments of interest at such higher rate to the extent lawful.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the notes are not
redeemable at our option prior to May 15, 2003. From and after May 15, 2003, the
notes will be redeemable at our option, in whole or in part, on not less than 30
nor more than 60 days' prior notice, at the following redemption prices
(expressed as percentages of principal amount), plus accrued and unpaid
interest, if any, to the redemption date (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date), if redeemed during the 12-month period commencing on May
15 of the years set forth below:
YEAR REDEMPTION PRICE
---- ----------------
2003 ............................... 105.000%
2004 ............................... 103.333%
2005 ............................... 101.667%
2006 and thereafter ................ 100.000%
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In addition, at any time and from time to time prior to May 15, 2001, the
issuers may redeem up to a maximum of 35% of the original aggregate principal
amount of the notes (calculated giving effect to any issuance of additional
notes) with the proceeds of one or more of our Public Equity Offerings or our
parent company following which there is a Public Market, at a redemption price
equal to 110% of the principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the redemption date (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date); provided, however, that after giving effect to any such
redemption, at least 65% of the original aggregate principal amount of the notes
(calculated giving effect to any issuance of additional notes) remains
outstanding. Any such redemption shall be made within 60 days of such Public
Equity Offering upon not less than 30 nor more than 60 days' notice mailed to
each holder of notes being redeemed and otherwise in accordance with the
procedures set forth in the indenture.
SELECTION
In the case of any partial redemption, selection of the notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no note of $1,000 in original principal amount or less
will be redeemed in part. If any note is to be redeemed in part only, the notice
of redemption relating to such note shall state the portion of the principal
amount thereof to be redeemed. A new note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the holder thereof upon
cancellation of the original note. On and after the redemption date, interest
will cease to accrue on notes or portions thereof called for redemption so long
as the issuers have deposited with the Paying Agent funds sufficient to pay the
principal of, plus accrued and unpaid interest (if any) on, the notes to be
redeemed.
RANKING
The indebtedness evidenced by the notes is unsecured senior indebtedness of
the issuers, ranks pari passu in right of payment with all existing and future
senior indebtedness of the issuers and is senior in right of payment to all
existing and future subordinated obligations of the issuers. The notes are
effectively subordinated to any Secured Indebtedness of the issuers and their
respective Subsidiaries to the extent of the value of the assets securing such
Indebtedness.
As of October 20, 2001, (i) the outstanding senior indebtedness of La
Petite Academy and our parent company was $198.8 million, of which $53.7 million
was Secured Indebtedness (exclusive of unused commitments under the Credit
Agreement), and (ii) the guarantor had no senior indebtedness outstanding
(exclusive of guarantees of Indebtedness under the Credit Agreement (all of
which would have been Secured Indebtedness) and the guarantee). Although the
indenture will contain limitations on the amount of additional Indebtedness
which we may Incur, under certain circumstances the amount of such Indebtedness
could be substantial and, in any case, such Indebtedness may be senior
indebtedness and may be Secured Indebtedness. See "--Certain
Covenants--Limitation on Indebtedness."
GUARANTEES
Our existing Subsidiary has and certain of our future Subsidiaries will, as
primary obligors and not merely as sureties, jointly and severally irrevocably
and unconditionally guaranteed on an unsecured senior basis the performance and
full and punctual payment when due, whether at Stated Maturity, by acceleration
or otherwise, of all obligations of the issuers under the indenture and the
notes, whether for payment of principal of, or interest on, and liquidated
damages, if any, in respect of, the notes, expenses, indemnification or
otherwise (all such obligations guaranteed by such guarantors being herein
called the Guaranteed Obligations). Such guarantors agree to pay, in addition to
the amount stated above, any and all costs and expenses (including reasonable
counsel fees and expenses) incurred by the Trustee or the holders in enforcing
any rights under any guarantee. Each guarantee will be limited in amount to an
amount not to exceed the maximum amount that can be guaranteed by the applicable
guarantor without rendering the guarantee, as it relates to such guarantor,
voidable under applicable laws relating to fraudulent conveyance or fraudulent
transfer or similar laws affecting the rights of creditors generally. After the
Closing Date, we will cause each of our Domestic Subsidiaries to execute and
deliver to the Trustee a guarantee pursuant to which such Domestic Subsidiary
will guarantee payment of the notes. See "--Certain Covenants--Future
Guarantors."
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Each guarantee is a continuing guarantee and shall (a) remain in full force
and effect until payment in full of all the Guaranteed Obligations, (b) be
binding upon each guarantor and its successors and (c) inure to the benefit of,
and be enforceable by, the Trustee, the holders and their successors,
transferees and assigns.
CHANGE OF CONTROL
Upon the occurrence of any of the following events, each a Change of
Control, each holder will have the right to require the issuers to repurchase
all or any part of such holder's notes at a purchase price in cash equal to 101%
of the principal amount thereof plus accrued and unpaid interest, if any, to the
date of repurchase (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date):
(i) prior to the earlier to occur of (A) the first public offering of
common stock of our parent company or (B) the first public offering
of our common stock, the Permitted Holders cease to be the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act), directly or indirectly, of a majority in the
aggregate of the total voting power of the La Petite's Voting Stock,
whether as a result of issuance of securities of our parent company
or us, any merger, consolidation, liquidation or dissolution of our
parent company or us, any direct or indirect transfer of securities
by any Permitted Holder or otherwise (for purposes of this clause
(i) and clause (ii) below, the Permitted Holders shall be deemed to
beneficially own any Voting Stock of an entity (the "specified
entity") held by any other entity (the "parent entity") so long as
the Permitted Holders beneficially own (as so defined), directly or
indirectly, in the aggregate a majority of the voting power of the
Voting Stock of the parent entity);
(ii) (A) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act), other than one or more Permitted Holders, is
or becomes the beneficial owner (as defined in clause (i) above,
except that for purposes of this clause (ii) such person shall be
deemed to have "beneficial ownership" of all shares that any such
person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or
indirectly, of more than 35% of the total voting power of the La
Petite's Voting Stock and (B) the Permitted Holders "beneficially
own" (as defined in clause (i) above), directly or indirectly, in
the aggregate a lesser percentage of the total voting power of the
La Petite's Voting Stock than such other person and do not have the
right or ability by voting power, contract or otherwise to elect or
designate for election a majority of the Board of Directors (for the
purposes of this clause (ii), such other person shall be deemed to
beneficially own any Voting Stock of a specified entity held by a
parent entity, if such other person is the beneficial owner (as
defined in this clause (ii)), directly or indirectly, of more than
35% of the voting power of the Voting Stock of such parent entity
and the Permitted Holders "beneficially own" (as defined in clause
(i) above), directly or indirectly, in the aggregate a lesser
percentage of the voting power of the Voting Stock of such parent
entity and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority
of the board of directors of such parent entity);
(iii) during any period of two consecutive years, individuals who at the
beginning of such period constituted our Board of Directors or the
Board of Directors of our parent company, as the case may be
(together with any new directors whose election by such Board of
Directors or whose nomination for election by our shareholders or
the shareholders of our parent company, as applicable, was approved
(x) in accordance with the Stockholders Agreement, (y) by the
Permitted Holders or (z) by a vote of 66 2/3% of our directors or
our parent company, as applicable, then still in office who were
either directors at the beginning of such period or whose election
or nomination for election was previously so approved), cease for
any reason to constitute a majority of our Board of Directors or the
Board of Directors of our parent company, as applicable, then in
office;
(iv) the adoption of a plan relating to the liquidation or dissolution of
La Petite or our parent company; or
(v) the merger or consolidation of La Petite or our parent company with
or into another Person or the merger of another Person with or into
us or our parent company, or the sale of all or substantially all of
our assets or the assets of our parent company to another Person
(other than a Person that is controlled by the Permitted Holders),
and, in the case of any such merger or consolidation, our securities
or the securities of our parent company, as the case may be, that
are outstanding immediately prior to such transaction and which
represent 100% of the aggregate voting power of our or our parent
company's voting stock, as applicable, are changed into or exchanged
for cash, securities or property, unless pursuant to such
transaction such securities are changed into or exchanged for, in
addition to any other consideration, securities of the
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surviving Person or transferee that represent, immediately after
such transaction, at least a majority of the aggregate voting power
of the Voting Stock of the surviving Person or transferee.
Within 30 days following any change of control, the issuers shall mail a
notice to each holder with a copy to the Trustee, the change of control offer
stating: (1) that a change of control has occurred and that such holder has the
right to require the issuers to purchase such holder's notes at a purchase price
in cash equal to 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of repurchase (subject to the right of Holders of
record on the relevant record date to receive interest on the relevant interest
payment date); (2) the circumstances and relevant facts and financial
information regarding such change of control; (3) the repurchase date (which
shall be no earlier than 30 days nor later than 60 days from the date such
notice is mailed); and (4) the instructions determined by the issuers,
consistent with this covenant, that a holder must follow in order to have its
notes purchased.
The issuers will not be required to make a change of control offer upon a
change of control if a third party makes the change of control offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the indenture applicable to our change of control offer and purchases all
notes validly tendered and not withdrawn under such change of control offer.
The issuers will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of this covenant, the issuers will comply with the applicable
securities laws and regulations and will not be deemed to have breached their
obligations under this covenant by virtue thereof.
The change of control purchase feature is a result of negotiations between
the issuers and the initial purchasers of the old notes. Management has no
present intention to engage in a transaction involving a change of control,
although it is possible that we or our parent company would decide to do so in
the future. Subject to the limitations discussed below, the issuers could, in
the future, enter into certain transactions, including acquisitions,
refinancings or other recapitalizations, that would not constitute a change of
control under the indenture, but that could increase the amount of indebtedness
outstanding at such time or otherwise affect our or our parent company's capital
structure or credit ratings. Restrictions on the ability of the issuers to incur
additional Indebtedness are contained in the covenant described under "--Certain
Covenants--Limitation on Indebtedness". Such restrictions can only be waived
with the consent of the holders of a majority in principal amount of the notes
then outstanding. Except for the limitations contained in such covenants,
however, the indenture will not contain any covenants or provisions that may
afford Holders of the notes protection in the event of a highly leveraged
transaction.
The occurrence of certain of the events which would constitute a change of
control would constitute a default under the Credit Agreement. Future senior
indebtedness of the issuers may contain prohibitions of certain events which
would constitute a change of control or require such senior indebtedness to be
repurchased upon a change of control. Moreover, the exercise by the holders of
their right to require the issuers to repurchase the notes could cause a default
under such senior indebtedness, even if the change of control itself does not,
due to the financial effect of such repurchase on the issuers. Finally, the
issuers' ability to pay cash to the holders upon a repurchase may be limited by
the issuers' then existing financial resources. There can be no assurance that
sufficient funds will be available when necessary to make any required
repurchases. The provisions under the indenture relative to the issuers'
obligation to make an offer to repurchase the notes as a result of a change of
control may be waived or modified with the written consent of the holders of a
majority in principal amount of the notes.
CERTAIN COVENANTS
The indenture contains covenants including, among others, the following:
LIMITATION ON INDEBTEDNESS. (a) The indenture provides that La Petite will
not, and will not permit any of our Restricted Subsidiaries to, Incur, directly
or indirectly, any Indebtedness; provided, however, that we or any of our
Restricted Subsidiaries may Incur Indebtedness if on the date of such Incurrence
and after giving effect thereto the Consolidated Coverage Ratio would be greater
than 2.00:1.00.
(b) Notwithstanding the foregoing paragraph (a), La Petite and our
Restricted Subsidiaries may Incur the following Indebtedness:
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(i) Bank Indebtedness Incurred pursuant to the Credit
Agreement in an aggregate principal amount not to exceed
$65.0 million less the aggregate amount of all prepayments
of principal applied to permanently reduce any such
Indebtedness;
(ii) Indebtedness of La Petite owed to, and held by, any Wholly
Owned Subsidiary or Indebtedness of a Restricted
Subsidiary owed to, and held by, us or any Wholly Owned
Subsidiary; provided, however, that (i) any subsequent
issuance or transfer of any Capital Stock or any other
event that results in any such Wholly Owned Subsidiary
ceasing to be a Wholly Owned Subsidiary or any subsequent
transfer of any such Indebtedness (except to us or a
Wholly Owned Subsidiary) shall be deemed, in each case, to
constitute the Incurrence of such Indebtedness by the
issuer thereof and (ii) if we are the obligor on such
Indebtedness, such Indebtedness is expressly subordinated
to the prior payment in full in cash of all obligations
with respect to the notes;
(iii) Indebtedness (A) represented by the notes (not including
any additional notes) and the guarantees, (B) outstanding
on the Closing Date (other than the Indebtedness described
in clauses (i) and (ii) above), (c) consisting of
Refinancing Indebtedness Incurred in respect of any
Indebtedness described in this clause (iii) or clause (v)
(including Indebtedness Refinancing, Refinancing
Indebtedness) or the foregoing paragraph (a) or (D)
consisting of guarantees of any Indebtedness permitted
under clauses (i) and (ii) of this paragraph (b);
(iv) Indebtedness (A) in respect of performance bonds, bankers'
acceptances, letters of credit and surety or appeal bonds
provided by us and the Restricted Subsidiaries in the
ordinary course of their business and (B) under Interest
Rate Agreements entered into for bona fide hedging
purposes of La Petite in the ordinary course of business;
provided, however, that such Interest Rate Agreements do
not increase our Indebtedness outstanding at any time
other than as a result of fluctuations in interest rates
or by reason of fees, indemnities and compensation payable
thereunder;
(v) Purchase Money Indebtedness (including Capitalized Lease
Obligations) in an aggregate principal amount not in
excess of $10.0 million at any time outstanding;
(vi) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar
instrument inadvertently (except in the case of daylight
overdrafts) drawn against insufficient funds in the
ordinary course of business; provided, however, that such
Indebtedness is extinguished within two Business Days of
its incurrence;
(vii) Indebtedness arising from our agreements or of a
Restricted Subsidiary providing for indemnification,
adjustment of purchase price or similar obligations, in
each case, incurred or assumed in connection with the
disposition of any business, assets or a Subsidiary, other
than guarantees of Indebtedness incurred by any Person
acquiring all or any portion of such business, assets or a
Subsidiary for the purpose of financing such acquisition;
provided, however, that (a) such Indebtedness is not
reflected on our balance sheet or the balance sheet of any
of our Restricted Subsidiaries (provided that contingent
obligations referred to in a footnote to financial
statements and not otherwise reflected on the balance
sheet will be deemed not to be reflected on a balance
sheet for purposes of this clause (a)) and (b) the maximum
assumable liability in respect of all such Indebtedness
shall at no time exceed the gross proceeds, including
noncash proceeds (the fair market value of such noncash
proceeds being measured at the time it is received and
without giving effect to any subsequent changes in value),
actually received by us and our Restricted Subsidiaries in
connection with such disposition; or
(viii) Indebtedness (other than Indebtedness permitted to be
Incurred pursuant to the foregoing paragraph (a) or any
other clause of this paragraph (b)) in an aggregate
principal amount on the date of Incurrence that, when
added to all other Indebtedness Incurred pursuant to this
clause (viii) and then outstanding, shall not exceed $10.0
million.
(c) Notwithstanding the foregoing, we may not Incur any Indebtedness
pursuant to paragraph (b) above if the proceeds thereof are used,
directly or indirectly, to repay, prepay, redeem, defease,
54
retire, refund or refinance any subordinated obligations unless
such Indebtedness will be subordinated to the notes to at least
the same extent as such subordinated obligations.
(d) Notwithstanding any other provision of this covenant, the maximum
amount of Indebtedness that we or any of our Restricted
Subsidiaries may Incur pursuant to this covenant shall not be
deemed to be exceeded solely as a result of fluctuations in the
exchange rates of currencies. For purposes of determining the
outstanding principal amount of any particular Indebtedness
Incurred pursuant to this covenant, (i) Indebtedness Incurred
pursuant to the Credit Agreement prior to or on the Closing Date
shall be treated as Incurred pursuant to clause (i) of paragraph
(b) above, (ii) Indebtedness permitted by this covenant need not
be permitted solely by reference to one provision permitting such
Indebtedness but may be permitted in part by one such provision
and in part by one or more other provisions of this covenant
permitting such Indebtedness and (iii) in the event that
Indebtedness meets the criteria of more than one of the types of
Indebtedness described in this covenant, we in our sole
discretion, shall classify such Indebtedness and only be required
to include the amount of such Indebtedness in one of such
clauses.
LIMITATION ON RESTRICTED PAYMENTS. (a) The indenture provides that La
Petite Academy will not, and will not permit any Restricted Subsidiary, directly
or indirectly, to (i) declare or pay any dividend or make any distribution on or
in respect of its Capital Stock (including any payment in connection with any
merger or consolidation involving us) or similar payment to the direct or
indirect holders of its Capital Stock except dividends or distributions payable
solely in its Capital Stock (other than Disqualified Stock) and except dividends
or distributions payable to us or another Restricted Subsidiary (and, if such
Restricted Subsidiary has shareholders other than La Petite or other Restricted
Subsidiaries, to its other shareholders on a pro rata basis), (ii) purchase,
redeem, retire or otherwise acquire for value any of our Capital Stock or any
Capital Stock of a Restricted Subsidiary held by Persons other than us or
another Restricted Subsidiary, (iii) purchase, repurchase, redeem, defease or
otherwise acquire or retire for value, prior to scheduled maturity, scheduled
repayment or scheduled sinking fund payment any Subordinated Obligations (other
than the purchase, repurchase or other acquisition of Subordinated Obligations
purchased in anticipation of satisfying a sinking fund obligation, principal
installment or final maturity, in each case due within one year of the date of
acquisition) or (iv) make any Investment (other than a Permitted Investment) in
any Person (any such dividend, distribution, purchase, redemption, repurchase,
defeasance, other acquisition, retirement or Investment being herein referred to
as a "Restricted Payment") if at the time we or such Restricted Subsidiary makes
such Restricted Payment: (1) a Default will have occurred and be continuing (or
would result therefrom); (2) we could not Incur at least $1.00 of additional
Indebtedness under paragraph (a) of the covenant described under "--Limitation
on Indebtedness"; or (3) the aggregate amount of such Restricted Payment and all
other Restricted Payments (the amount so expended, if other than in cash, to be
determined in good faith by the Board of Directors, whose determination will be
conclusive and evidenced by a resolution of the Board of Directors) declared or
made subsequent to the Closing Date would exceed the sum of: (A) 50% of the
Consolidated Net Income accrued during the period (treated as one accounting
period) from the beginning of the fiscal quarter immediately following the
fiscal quarter during which the Closing Date occurs to the end of the most
recent fiscal quarter ending at least 45 days prior to the date of such
Restricted Payment (or, in case such Consolidated Net Income will be a deficit,
minus 100% of such deficit); (B) the aggregate Net Cash Proceeds received by us
from the issue or sale of our Capital Stock (other than Disqualified Stock)
subsequent to the Closing Date (other than an issuance or sale to (x) a
Subsidiary or (y) an employee stock ownership plan or other trust established by
La Petite or any of our Subsidiaries); (C) the amount by which our Indebtedness
or Indebtedness of our Restricted Subsidiaries is reduced on our balance sheet
upon the conversion or exchange (other than by a Subsidiary) subsequent to the
Closing Date of any of our Indebtedness or Indebtedness of our Restricted
Subsidiaries convertible or exchangeable for our Capital Stock (other than
Disqualified Stock) (less the amount of any cash or the fair market value of
other property distributed by us or any of our Restricted Subsidiaries upon such
conversion or exchange); (D) 100% of the aggregate amount of cash and marketable
securities contributed to our capital after the Closing Date; and (E) the amount
equal to the net reduction in Investments in Unrestricted Subsidiaries resulting
from (i) payments of dividends, repayments of the principal of loans or advances
or other transfers of assets to La Petite Academy or any of our Restricted
Subsidiaries from Unrestricted Subsidiaries or (ii) the redesignation of
Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as
provided in the definition of Investment) not to exceed, in the case of any
Unrestricted Subsidiary, the amount of Investments previously made by us or any
of our Restricted Subsidiaries in such Unrestricted Subsidiary, which amount was
included in the calculation of the amount of Restricted Payments.
(b) The provisions of the foregoing paragraph (a) will not prohibit: (i)
any Restricted Payment made by exchange for, or out of the proceeds of the
substantially concurrent sale of, our Capital Stock (other than
55
Disqualified Stock and other than Capital Stock issued or sold to our
Subsidiaries or an employee stock ownership plan or other trust established by
us or any of our Subsidiaries); provided, however, that (A) such Restricted
Payment will be excluded in the calculation of the amount of Restricted Payments
and (B) the Net Cash Proceeds from such sale applied in the manner set forth in
this clause (i) will be excluded from the calculation of amounts under clause
(3)(B) of paragraph (a) above; (ii) any purchase, repurchase redemption,
defeasance or other acquisition or retirement for value of our Subordinated
Obligations made by exchange for, or out of the proceeds of the substantially
concurrent sale of, our Indebtedness that is permitted to be Incurred pursuant
to paragraph (b) of the covenant described under "--Limitation on Indebtedness";
provided, however, that such purchase, repurchase, redemption, defeasance or
other acquisition or retirement for value will be excluded in the calculation of
the amount of Restricted Payments; (iii) any purchase or redemption of
Subordinated Obligations from Net Available Cash to the extent permitted by the
covenant described under "--Limitation on Sales of Assets and Subsidiary Stock";
provided, however, that such purchase or redemption will be excluded in the
calculation of the amount of Restricted Payments; (iv) dividends paid within 60
days after the date of declaration thereof if at such date of declaration such
dividend would have complied with this covenant; provided, however, that such
dividend will be included in the calculation of the amount of Restricted
Payments; (v) the repurchase or other acquisition of shares of, or options to
purchase shares of, our common stock or any of our Subsidiaries from La Petite's
employees, former employees, directors or former directors or any of our
Subsidiaries (or permitted transferees of such employees, former employees,
directors or former directors), pursuant to the terms of the agreements
(including employment agreements) or plans (or amendments thereto) approved by
the Board of Directors under which such individuals purchase or sell or are
granted the option to purchase or sell, shares of such common stock; provided,
however, that the aggregate amount of such repurchases shall not exceed $250,000
in any calendar year; provided further, however, that such repurchases and other
acquisitions shall be included in the calculation of the amount of Restricted
Payments; (vi) payment of dividends, other distributions or other amounts by us
for the purposes set forth in clauses (A) through (C) below; provided, however,
that such dividend, distribution or amount set forth in clause (C) shall be
included in the calculation of the amount of Restricted Payments for the
purposes of paragraph (a) above: (A) to our parent company in amounts equal to
the amounts required for our parent company to pay franchise taxes and other
fees required to maintain its corporate existence and provide for other
operating costs of up to $500,000 per fiscal year; (B) to our parent company in
amounts equal to amounts required for our parent company to pay Federal, state
and local income taxes to the extent such income taxes are attributable to the
income of La Petite and our Restricted Subsidiaries (and, to the extent of
amounts actually received from its Unrestricted Subsidiaries, in amounts
required to pay such taxes to the extent attributable to the income of such
Unrestricted Subsidiaries); (C) to our parent company in amounts equal to
amounts expended by parent company to repurchase Capital Stock of our parent
company owned by our former employees or former employees of our Subsidiaries or
their assigns, estates and heirs; provided, however, that the aggregate amount
paid, loaned or advanced to parent company pursuant to this clause (C) shall
not, in the aggregate, exceed $1.5 million per fiscal year plus any unused
amounts from any immediately preceding fiscal year, up to a maximum aggregate
amount of $5.0 million during the term of the indenture, plus any amounts
contributed by our parent company as a result of resales of such repurchased
shares of Capital Stock; or (vii) the payment of dividends on our Common Stock,
following the first public offering of our Common Stock after the Closing Date,
of up to 6% per annum of the net proceeds received by us in such public
offering, other than public offerings with respect to our Common Stock
registered on Form S-8, provided, however, that such dividends will be included
in the calculation of the amount of Restricted Payments for purposes of
paragraph (a) above.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES.
The indenture provides that La Petite Academy will not, and will not permit any
Restricted Subsidiary to, create or otherwise cause or permit to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary to (i) pay dividends or make any other distributions on
its Capital Stock or pay any Indebtedness or other obligations owed to us, (ii)
make any loans or advances to us or (iii) transfer any of its property or assets
to us, except: (1) any encumbrance or restriction pursuant to applicable law or
an agreement in effect at or entered into on the Closing Date; (2) any
encumbrance or restriction with respect to a Restricted Subsidiary pursuant to
an agreement relating to any Indebtedness Incurred by such Restricted Subsidiary
prior to the date on which such Restricted Subsidiary was acquired by us (other
than Indebtedness Incurred as consideration in, in contemplation of, or to
provide all or any portion of the funds or credit support utilized to consummate
the transaction or series of related transactions pursuant to which such
Restricted Subsidiary became a Restricted Subsidiary or was otherwise acquired
by us) and outstanding on such date; (3) in the case of clause (iii), any
encumbrance or restriction (A) that restricts in a customary manner the
subletting, assignment or transfer of any property or asset that is subject to a
lease, license or similar contract, (B) that is or was created by virtue of any
transfer of, agreement to transfer, option or right with respect to, or Lien on,
any of our property or assets or any Restricted Subsidiary not otherwise
prohibited by the indenture or (C) contained in security agreements securing
Indebtedness of a Restricted Subsidiary to the extent
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such encumbrance or restriction restricts the transfer of the property subject
to such security agreements; (4) with respect to a Restricted Subsidiary, any
restriction imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Capital Stock or assets of such
Restricted Subsidiary pending the closing of such sale or disposition; (5)
customary provisions in joint venture agreements and other similar agreements
entered into in the ordinary course of business; or (6) an agreement governing
Indebtedness incurred to Refinance the Indebtedness issued, assumed or incurred
pursuant to an agreement referred to in clauses (1) through (5) above; provided,
however, that the provisions relating to such encumbrance or restriction
contained in any agreement relating to such Indebtedness are no less favorable
to us in any material respect as determined by our Board of Directors in their
reasonable and good faith judgment than the provisions relating to such
encumbrance or restriction contained in agreements relating to the Indebtedness
being Refinanced.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK. (a) The indenture
provides that we will not, and will not permit any Restricted Subsidiary to,
make any Asset Disposition unless (i) we or such Restricted Subsidiary receives
consideration (including by way of relief from, or by any other Person assuming
sole responsibility for, any liabilities, contingent or otherwise) at the time
of such Asset Disposition at least equal to the fair market value of the shares
and assets subject to such Asset Disposition, (ii) at least 85% of the
consideration thereof received by us or such Restricted Subsidiary is in the
form of cash, provided that with respect to the sale or other disposition of an
operational Academy, we shall be deemed to be in compliance with this clause
(ii) if the Consolidated Coverage Ratio after giving effect to such sale or
disposition and the application of proceeds received therefrom is greater than
or equal to the Consolidated Coverage Ratio immediately prior to giving effect
to such sale or disposition and (iii) an amount equal to 100% of the Net
Available Cash from such Asset Disposition is applied by us (or such Restricted
Subsidiary, as the case may be) (A) first, to the extent we elect (or is
required by the terms of any Indebtedness) to prepay, repay, redeem or purchase
our Indebtedness outstanding under the Credit Agreement within 18 months after
the later of the date of such Asset Disposition or the receipt of such Net
Available Cash; (B) second, to the extent of the balance of Net Available Cash
after application in accordance with clause (A), to the extent we or such
Restricted Subsidiary elects, to reinvest in Additional Assets (including by
means of an Investment in Additional Assets by a Restricted Subsidiary with Net
Available Cash received by the Company or another Restricted Subsidiary) within
18 months from the later of such Asset Disposition or the receipt of such Net
Available Cash; (C) third, to the extent of the balance of such Net Available
Cash after application in accordance with clauses (A) and (B), to make an Offer
(as defined below) to purchase notes pursuant to and subject to the conditions
set forth in section (b) of this covenant; provided, however, that if we elect
(or is required by the terms of any other senior indebtedness), such Offer may
be made ratably to purchase the notes and other senior indebtedness, and (D)
fourth, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A), (B) and, to (x) acquire Additional
Assets (other than Indebtedness and Capital Stock) or (y) prepay, repay or
purchase Indebtedness of the Company (other than Indebtedness owed to our
Affiliate and other than Disqualified Stock of the Company) or Indebtedness of
any Restricted Subsidiary (other than Indebtedness owed to the Company or an
Affiliate of the Company), in each case described in this clause (D) within 18
months from the receipt of such Net Available Cash or, if we have made an Offer
pursuant to clause (C), six months from the date such Offer is consummated;
provided, however, that in connection with any prepayment, repayment or purchase
of Indebtedness pursuant to clause (A), (C) or (D) above, we or such Restricted
Subsidiary will retire such Indebtedness and will cause the related loan
commitment (if any) to be permanently reduced in an amount equal to the
principal amount so prepaid, repaid or purchased. Notwithstanding the foregoing
provisions of this covenant, we and the Restricted Subsidiaries will not be
required to apply any Net Available Cash in accordance with this covenant except
to the extent that the aggregate Net Available Cash from all Asset Dispositions
that is not applied in accordance with this covenant exceeds $10 million.
For the purposes of clause (ii) of the preceding paragraph, the following
are deemed to be cash: (x) the assumption of our Indebtedness (other than our
Disqualified Stock) or of any Restricted Subsidiary and our release or the
release of such Restricted Subsidiary from all liability on such Indebtedness in
connection with such Asset Disposition and (y) securities received by us or any
Restricted Subsidiary from the transferee that are promptly converted by us or
such Restricted Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of
notes (and other senior indebtedness) pursuant to clause (a)(iii)(C) of this
covenant, we will be required to purchase notes (and other senior indebtedness)
tendered pursuant to an offer by us for the notes (and other senior
indebtedness) (the Offer) at a purchase price of 100% of their principal amount
plus accrued and unpaid interest, if any, to the date of purchase in accordance
with the procedures (including prorationing in the event of oversubscription)
set forth in the indenture. If the aggregate purchase price of notes (and other
senior indebtedness) tendered pursuant to the Offer is less than the Net
Available Cash allotted to the purchase of the notes (and other senior
indebtedness), we will apply the remaining Net Available
57
Cash in accordance with clause (a)(iii)(D) of this covenant. La Petite will not
be required to make an Offer for notes (and other senior indebtedness) pursuant
to this covenant if the Net Available Cash available therefor (after application
of the proceeds as provided in clauses (A) and (B) of this covenant section
(a)(iii)) is less than $10 million for any particular Asset Disposition (which
lesser amount will be carried forward for purposes of determining whether an
Offer is required with respect to the Net Available Cash from any subsequent
Asset Disposition).
(c) We will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of this covenant, we will comply with the applicable securities laws
and regulations and will not be deemed to have breached its obligations under
this covenant by virtue thereof.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. (a) The indenture provides that
we will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, enter into or conduct any transaction (including the purchase, sale,
lease or exchange of any property or the rendering of any service) with any of
our Affiliates (an "Affiliate Transaction") (i) on terms that are less favorable
to us or such Restricted Subsidiary, as the case may be, than those that could
be obtained at the time of such transaction in arm's-length dealings with a
Person who is not such an Affiliate, (ii) if such Affiliate Transaction involves
an aggregate amount in excess of $1.0 million, such terms (1) are set forth in
writing and (2) have been approved by a majority of the members of the Board of
Directors having no personal stake in such Affiliate Transaction and (iii) if
such Affiliate Transaction involves an amount in excess of $5.0 million, such
terms have also been determined by a nationally recognized appraisal or
investment banking firm to be fair, from a financial standpoint, to us and our
Restricted Subsidiaries.
(b) The provisions of the foregoing paragraph (a) will not prohibit (i) any
Restricted Payment permitted to be paid pursuant to the covenant described under
"Limitation on Restricted Payments", (ii) any issuance of securities, or other
payments, awards or grants in cash, securities or otherwise pursuant to, or the
funding of, employment arrangements, stock options and stock ownership plans
approved by the Board of Directors, (iii) the grant of stock options or similar
rights to our employees and directors pursuant to plans approved by the Board of
Directors, (iv) loans or advances to employees in the ordinary course of
business in accordance with our past practices, but in any event not to exceed
$1.0 million in the aggregate outstanding at any one time, (v) any transaction
between us and a Wholly Owned Subsidiary or between Wholly Owned Subsidiaries,
(vi) reasonable fees and compensation paid to, and indemnity provided on behalf
of, our officers, directors, employees, consultants or agents or any of our
Restricted Subsidiaries as determined in good faith by our Board of Directors;
(vii) any transactions undertaken pursuant to any contractual obligations in
existence on the Closing Date (as in effect on the Closing Date); (viii) the
provision by Persons who may be deemed our Affiliates of investment banking,
commercial banking, trust lending or financing, investment, underwriting,
placement agent, financial advisory or similar services to us or our
Subsidiaries; (ix) transactions with customers, clients, suppliers or purchasers
or sellers of goods or services, in each case in the ordinary course of business
and otherwise in compliance with the terms of the indenture, which are fair to
us or our Restricted Subsidiaries in the reasonable determination of our Board
of Directors or the senior management thereof or are on terms no less favorable
to us or such Restricted Subsidiary, as the case may be, than those that could
be obtained at the time of such transaction in arm's-length dealings with a
Person who is not an Affiliate; and (x) any contribution to our capital by our
parent company or any purchase of our common stock by our parent company.
LIMITATION ON THE SALE OR ISSUANCE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES. The indenture provides that we will not sell or otherwise dispose
of any shares of Capital Stock of a Restricted Subsidiary, and will not permit
any Restricted Subsidiary, directly or indirectly, to issue or sell or otherwise
dispose of any shares of its Capital Stock except: (i) to us or a Wholly Owned
Subsidiary; (ii) if, immediately after giving effect to such issuance, sale or
other disposition, neither we nor any of our Subsidiaries own any Capital Stock
of such Restricted Subsidiary or (iii) if, immediately after giving effect to
such issuance or sale, such Restricted Subsidiary would no longer constitute a
Restricted Subsidiary and any Investment in such Person remaining after giving
effect thereto would have been permitted to be made under the covenant described
under "--Limitation on Restricted Payments" if made on the date of such
issuance, sale or other disposition. The proceeds of any sale of such Capital
Stock permitted hereby will be treated as Net Available Cash from an Asset
Disposition and must be applied in accordance with the terms of the covenant
described under "--Limitation on Sales of Assets and Subsidiary Stock."
LIMITATION ON LIENS. The indenture provides that we will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, Incur or permit to
exist any Lien of any nature whatsoever on any of our or its property or
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assets (including Capital Stock of a Restricted Subsidiary), whether owned at
the Closing Date or thereafter acquired, other than Permitted Liens, without
effectively providing that the notes shall be secured equally and ratably with
(or prior to) the obligations so secured for so long as such obligations are so
secured.
FUTURE GUARANTORS. The indenture provides that we will cause each Domestic
Subsidiary to become a guarantor, and, if applicable, execute and deliver to the
Trustee a supplemental indenture in the form set forth in the indenture pursuant
to which such Restricted Subsidiary will guarantee payment of the notes. Each
guarantee will be limited to an amount not to exceed the maximum amount that can
be guaranteed by that Restricted Subsidiary without rendering the guarantee, as
it relates to such Restricted Subsidiary, voidable under applicable law relating
to fraudulent conveyance or fraudulent transfer or similar laws affecting the
rights of creditors generally.
REPORTS. The indenture provides that, notwithstanding that we may not be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, we will file with the Commission and provide the Trustee and noteholders
and prospective noteholders (upon request) within 15 days after we file them
with the Commission copies of our annual report and the information, documents
and other reports that are specified in Sections 13 and 15(d) of the Exchange
Act. In addition, following a Public Equity Offering, we shall furnish to the
Trustee and the noteholders, promptly upon their becoming available, copies of
the annual report to shareholders and any other information provided by us or
our parent company to public shareholders generally. We also will comply with
the other provisions of Section 314(a) of the TIA.
MERGER AND CONSOLIDATION
The indenture provides that neither we nor our parent company will
consolidate with or merge with or into, or convey, transfer or lease all or
substantially all its assets to, any Person, unless: (i) the resulting,
surviving or transferee Person (the Successor Company) will be a corporation
organized and existing under the laws of the United States of America, any State
thereof or the District of Columbia and the Successor Company (if not us or our
parent company) will expressly assume, by a supplemental indenture executed and
delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of La Petite or our parent company, as the case maybe, under the
notes and the indenture; (ii) immediately after giving effect to such
transaction (and treating any Indebtedness which becomes an obligation of the
Successor Company or any Restricted Subsidiary as a result of such transaction
as having been Incurred by the Successor Company or such Restricted Subsidiary
at the time of such transaction), no Default will have occurred and be
continuing; and (iii) immediately after giving effect to such transaction, the
Successor Company would be able to Incur an additional $1.00 of Indebtedness
under paragraph (a) of the covenant described under "--Certain
Covenants--Limitation on Indebtedness," and (iv) the issuers deliver to the
Trustee an Officers' Certificate and an Opinion of Counsel, each stating that
such consolidation, merger or transfer and such amendment to the indenture, if
any, complies with the indenture.
In the event of any transaction (other than a lease) described in, and
complying with, the immediately preceding paragraph in which we or our parent
company, as applicable, is not the surviving Person and the surviving Person
assumes all the obligations of La Petite or our parent company, as applicable,
under the notes and the indenture pursuant to a supplemental indenture, such
surviving Person shall succeed to, and be substituted for, and may exercise
every right and power of, us or our parent company, as applicable, and we or our
parent company, as applicable, will be discharged from our or its obligations
under the indenture and the notes.
Neither we nor our parent company will permit any guarantor to consolidate
with or merge with or into, or convey, transfer or lease, in one transaction or
series of transactions, all or substantially all of its assets to any Person
unless: (i) the resulting, surviving or transferee Person (if not such
guarantor) shall be a Person organized and existing under the laws of the
jurisdiction under which such guarantor was organized or under the laws of the
United States of America, or any State hereof or the District of Columbia, and
such Person shall expressly assume, by an amendment to the indenture, in a form
acceptable to the Trustee, all the obligations of such guarantor under its
guarantee; and (ii) immediately after giving effect to such transaction or
transactions on a pro forma basis (and treating any Indebtedness which becomes
an obligation of the resulting, surviving or transferee Person as a result of
such transaction as having been issued by such Person at the time of such
transaction), no Default shall have occurred and be continuing; and (iii) the
Issuers deliver to the Trustee an Officers' Certificate for each Issuer and an
Opinion of Counsel, each stating that such consolidation, merger, or transfer
and such amendment to this Indenture, if any, complies with this Indenture.
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Notwithstanding the foregoing, (a) any Restricted Subsidiary may
consolidate with, merge into or transfer all or part of our properties and
assets and (b) we may merge with an Affiliate incorporated solely for the
purpose of our reincorporating in another jurisdiction to realize tax or other
benefits.
DEFAULTS
An Event of Default is defined in the indenture as (i) a default in any
payment of interest on any note when due and payable, and the default continues
for 30 days, (ii) a default in the payment of principal of any note when due and
payable at its Stated Maturity, upon required redemption or repurchase, upon
acceleration or otherwise, (iii) the failure by our parent company or us to
comply with its obligations under the covenant described under "--Merger and
Consolidation," (iv) the failure by us or our parent company to comply for 30
days after notice with any of our or its obligations under the covenants
described under "--Change of Control" or "--Certain Covenants" (in each case,
other than a failure to purchase notes when required), (v) the failure by us or
our parent company to comply for 60 days after notice with our or its other
agreements contained in the notes or the indenture, (vi) the failure by us, our
parent company or any Significant Subsidiary to pay any Indebtedness within any
applicable grace period after final maturity or the acceleration of any such
Indebtedness by the holders thereof because of a default if the total amount of
such Indebtedness unpaid or accelerated exceeds $10.0 million (the "cross
acceleration provision") and such failure continues for 10 days after receipt of
the notice specified in the indenture, (vii) certain events of bankruptcy,
insolvency or reorganization of us, our parent company or one of our Significant
Subsidiaries (the "bankruptcy provisions"), (viii) the rendering of any judgment
or decree for the payment of money in excess of $10.0 million at the time it is
entered against us, our parent company or a Significant Subsidiary and is not
discharged, waived or stayed if (A) an enforcement proceeding thereon is
commenced by any creditor or (B) such judgment or decree remains outstanding for
a period of 60 days following such judgment and is not discharged, waived or
stayed (the "judgment default provision") or (ix) any guarantee ceases to be in
full force and effect (except as contemplated by the terms thereof) or any
guarantor or Person acting by or on behalf of such guarantor denies or
disaffirms such guarantor's obligations under the indenture or any guarantee and
such Default continues for 10 days after receipt of the notice specified in the
indenture.
The foregoing will constitute Events of Default whatever the reason for any
such Event of Default and whether it is voluntary or involuntary or is effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body.
However, a default under clause (iv), (v) or (viii) above will not
constitute an Event of Default until the Trustee or the holders of at least 25%
in principal amount of the outstanding notes notify the issuers of the default
and the issuers do not cure such default within the time specified in clause
(iv), (v) or (viii) above after receipt of such notice.
If an Event of Default (other than an Event of Default relating to certain
events of bankruptcy, insolvency or reorganization of the issuers) occurs and is
continuing, the Trustee or the holders of at least 25% in principal amount of
the outstanding notes by notice to the issuers may declare the principal of, and
accrued but unpaid interest on, all the notes to be due and payable. Upon such a
declaration, such principal and interest will be due and payable immediately. If
an Event of Default relating to certain events of bankruptcy, insolvency or
reorganization of the issuers occurs, the principal of, and interest on, all the
notes will become immediately due and payable without any declaration or other
act on the part of the Trustee or any holders. Under certain circumstances, the
holders of a majority in principal amount of the outstanding notes may rescind
any such acceleration with respect to the notes and its consequences.
Subject to the provisions of the indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
indenture at the request or direction of any of the holders unless such holders
have offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no holder may pursue any
remedy with respect to the indenture or the notes unless (i) such holder has
previously given the Trustee notice that an Event of Default is continuing, (ii)
holders of at least 25% in principal amount of the outstanding notes have
requested the Trustee in writing to pursue the remedy, (iii) such holders have
offered the Trustee reasonable security or indemnity against any loss, liability
or expense, (iv) the Trustee has not complied with such request within 60 days
after the receipt of the request and the offer of security or indemnity and (v)
the holders of a majority in principal amount of the outstanding notes have not
given the Trustee a direction inconsistent with such request within such 60-day
period. Subject to certain restrictions, the holders of a majority in principal
amount of the outstanding notes will be given the right to direct the time,
method
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and place of conducting any proceeding for any remedy available to the Trustee
or of exercising any trust or power conferred on the Trustee. The Trustee,
however, may refuse to follow any direction that conflicts with law or the
indenture or that the Trustee determines is unduly prejudicial to the rights of
any other holder or that would involve the Trustee in personal liability. Prior
to taking any action under the indenture, the Trustee will be entitled to
indemnification satisfactory to it in its sole discretion against all losses and
expenses caused by taking or not taking such action.
The indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder notice of the Default
within the earlier of 90 days after it occurs or 30 days after it is known to a
Trust Officer or written notice of it is received by the Trustee. Except in the
case of a Default in the payment of principal of, premium (if any) or interest
on any note (including payments pursuant to the redemption provisions of such
note), the Trustee may withhold notice if and so long as a committee of its
Trust Officers in good faith determines that withholding notice is in the
interests of the noteholders. In addition, the issuers will be required to
deliver to the Trustee, within 120 days after the end of each fiscal year, a
certificate indicating whether the signers thereof know of any Default that
occurred during the previous year. The issuers will also be required to deliver
to the Trustee, within 30 days after the occurrence thereof, written notice of
any event which would constitute certain Events of Default, the status of any
such event and the action the issuers is taking or proposes to take in respect
thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the indenture or the notes may be amended
with the written consent of the holders of a majority in principal amount of the
notes then outstanding, and any past default or compliance with any provisions
may be waived with the consent of the holders of a majority in principal amount
of the notes then outstanding. However, without the consent of each holder of an
outstanding note affected, no amendment may, among other things, (i) reduce the
amount of notes whose holders must consent to an amendment, (ii) reduce the rate
of or extend the time for payment of interest or any liquidated damages on any
note, (iii) reduce the principal of, or extend the Stated Maturity of, any note,
(iv) reduce the premium payable upon the redemption of any note or change the
time at which any note may be redeemed as described under "--Optional
Redemption," (v) make any note payable in money other than that stated in the
note, (vi) impair the right of any holder to receive payment of principal of,
and interest or any liquidated damages on, such holder's notes on or after the
due dates therefor or to institute suit for the enforcement of any payment on or
with respect to such holder's notes, (vii) make any change in the amendment
provisions which require each holder's consent or in the waiver provisions or
(viii) modify the guarantees in any manner adverse to the holders.
Without the consent of any holder, the issuers and Trustee may amend the
indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation of the obligations of the issuers
under the indenture, to provide for uncertificated notes in addition to, or in
place of, certificated notes (provided that the uncertificated notes are issued
in registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated notes are described in Section 163(f)(2)(B) of the
Code), to add additional guarantees with respect to the notes, to secure the
notes, to add to the covenants of the issuers for the benefit of the noteholders
or to surrender any right or power conferred upon the issuers, to make any
change that does not adversely affect the rights of any holder, subject to the
provisions of the indenture, to provide for the issuance of additional notes or
to comply with any requirement of the Commission in connection with the
qualification of the indenture under the TIA.
The consent of the noteholders will not be necessary under the indenture to
approve the particular form of any proposed amendment. It will be sufficient if
such consent approves the substance of the proposed amendment.
After an amendment under the indenture becomes effective, the issuers will
be required to mail to noteholders a notice briefly describing such amendment.
However, the failure to give such notice to all noteholders, or any defect
therein, will not impair or affect the validity of the amendment.
TRANSFER AND EXCHANGE
A noteholder may transfer or exchange notes in accordance with the
indenture. Upon any transfer or exchange, the registrar and the Trustee may
require a noteholder, among other things, to furnish appropriate endorsements
and transfer documents, and the issuers may require a noteholder to pay any
taxes required by law or permitted by the indenture. The issuers are not
required to transfer or exchange any note selected for redemption or to transfer
or
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exchange any note for a period of 15 days prior to a selection of notes to be
redeemed. The notes will be issued in registered form and the registered holder
of a note will be treated as the owner of such note for all purposes.
DEFEASANCE
The issuers at any time may terminate all their obligations under the notes
and the indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the notes, to replace mutilated, destroyed, lost or
stolen notes and to maintain a registrar and paying agent in respect of the
notes. The issuers at any time may terminate their obligations under "Change of
Control" and the covenants described under "--Certain Covenants," the operation
of the cross acceleration provision, the bankruptcy provisions with respect to
Significant Subsidiaries and the judgment default provision described under
"--Defaults" and the limitations contained in clause (iii) under the first
paragraph of "--Merger and Consolidation" ("covenant defeasance"). In the event
that the issuers exercise their legal defeasance option or its covenant
defeasance option, each guarantor will be released from all of its obligations
with respect to its guarantee.
The issuers may exercise their legal defeasance option notwithstanding
their prior exercise of their covenant defeasance option. If the issuers
exercise their legal defeasance option, payment of the notes may not be
accelerated because of an Event of Default with respect thereto. If the issuers
exercise their covenant defeasance option, payment of the notes may not be
accelerated because of an Event of Default specified in clause (iv), (vi), (vii)
(with respect only to Significant Subsidiaries), or (ix) under "--Defaults" or
because of the failure of the Company or parent company to comply with clause
(iii) under the first paragraph of "--Merger and Consolidation."
In order to exercise either defeasance option, the issuers must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium (if any) and
interest on the notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the Trustee of an
Opinion of Counsel to the effect that holders of the notes will not recognize
income, gain or loss for Federal income tax purposes as a result of such deposit
and defeasance and will be subject to Federal income tax on the same amounts and
in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable Federal income tax law).
CONCERNING THE TRUSTEE
PNC Bank, National Association is the Trustee under the indenture and has
been appointed by the issuers as Registrar and Paying Agent with regard to the
notes.
GOVERNING LAW
The indenture provides that it and the notes are governed by, and are to be
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) to be used by us or a Restricted Subsidiary in a
Related Business; (ii) the Capital Stock of a Person that becomes a Restricted
Subsidiary as a result of the acquisition of such Capital Stock by us or another
Restricted Subsidiary; or (iii) Capital Stock constituting a minority interest
in any Person that at such time is a Restricted Subsidiary; provided, however,
that any such Restricted Subsidiary described in clause (ii) or (iii) above is
primarily engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
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"Asset Disposition" means any sale, lease, sale-leaseback transaction,
transfer or other disposition (or series of related sales, leases, transfers or
dispositions) by La Petite or any of our Restricted Subsidiaries, including any
disposition by means of a merger, consolidation or similar transaction (each
referred to for the purposes of this definition as a "disposition"), of (i) any
shares of Capital Stock of a Restricted Subsidiary (other than directors'
qualifying shares or shares required by applicable law to be held by a Person
other than us or one of our Restricted Subsidiaries), (ii) all or substantially
all the assets of any division or line of business of La Petite or any of our
Restricted Subsidiaries or (iii) any other of our assets or any of our
Restricted Subsidiaries other than property or equipment that has become worn
out, obsolete, damaged or otherwise unsuitable for use in connection with our
business or any of our Restricted Subsidiaries, as the case may be (other than,
in the case of (i), (ii) and (iii) above, (w) a disposition by one of our
Restricted Subsidiaries or by us or a Restricted Subsidiary to a Wholly Owned
Subsidiary, (x) for purposes of the provisions described under "--Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock" only, a
disposition subject to the covenant described under "--Certain
Covenants--Limitation on Restricted Payments," (y) the sale, lease, transfer or
other disposition of all or substantially all of our assets as permitted by the
covenant described under "Merger and Consolidation" and (x) a disposition of
assets with a fair market value of less than $100,000).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Bank Indebtedness" means any and all amounts payable under or in respect
of the Credit Agreement and any Refinancing Indebtedness with respect thereto,
as amended from time to time, including principal, premium (if any), interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to us whether or not a claim for
post-filing interest is allowed in such proceedings), fees, charges, expenses,
reimbursement obligations, guarantees and all other amounts payable thereunder
or in respect thereof.
"Board of Directors" means our Board of Directors or our parent company, as
applicable, or any committee thereof duly authorized to act on behalf of such
Board of Directors.
"Business Day" means each day which is not a Legal Holiday.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of, or
interests in (however designated), equity of such Person, including any
Preferred Stock, but excluding any debt securities convertible into such equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be prepaid by the lessee without payment of a
penalty.
"JPMP" means J.P. Morgan Partners and its Affiliates.
"Closing Date" means the date of the indenture.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters for which financial statements are available to
(ii) Consolidated Interest Expense for such four fiscal quarters; provided,
however, that (A) if we or any of our Restricted Subsidiaries has Incurred any
Indebtedness since the beginning of such period that remains outstanding on such
date of determination or if the transaction giving rise to the need to calculate
the Consolidated Coverage Ratio is an Incurrence of Indebtedness, EBITDA and
Consolidated Interest Expense for such period shall be calculated after giving
effect on a pro forma basis to such Indebtedness as if such Indebtedness had
been Incurred on the first day of such period and the discharge of any other
Indebtedness repaid, repurchased, defeased or otherwise discharged with the
proceeds of such new Indebtedness as if such discharge had occurred on the first
day
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of such period, (B) if we or any of our Restricted Subsidiaries has repaid,
repurchased, defeased or otherwise discharged any Indebtedness since the
beginning of such period or if any Indebtedness is to be repaid, repurchased,
defeased or otherwise discharged (in each case other than Indebtedness Incurred
under any revolving credit facility unless such Indebtedness has been
permanently repaid and has not been replaced) on the date of the transaction
giving rise to the need to calculate the Consolidated Coverage Ratio, EBITDA and
Consolidated Interest Expense for such period shall be calculated on a pro forma
basis as if such discharge had occurred on the first day of such period and as
if we or such Restricted Subsidiary has not earned the interest income actually
earned during such period in respect of cash or Temporary Cash Investments used
to repay, repurchase, defease or otherwise discharge such Indebtedness, (c) if
since the beginning of such period we or any Restricted Subsidiary shall have
made any Asset Disposition, the EBITDA for such period shall be reduced by an
amount equal to the EBITDA (if positive) directly attributable to the assets
that are the subject of such Asset Disposition for such period or increased by
an amount equal to the EBITDA (if negative) directly attributable thereto for
such period and Consolidated Interest Expense for such period shall be reduced
by an amount equal to the Consolidated Interest Expense directly attributable to
any of our Indebtedness or any of our Restricted Subsidiaries repaid,
repurchased, defeased or otherwise discharged with respect to us and our
continuing Restricted Subsidiaries in connection with such Asset Disposition for
such period (or, if the Capital Stock of any Restricted Subsidiary is sold, the
Consolidated Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent we and our continuing
Restricted Subsidiaries are no longer liable for such Indebtedness after such
sale), (D) if since the beginning of such period we or any of our Restricted
Subsidiaries (by merger or otherwise) shall have made an Investment in any
Restricted Subsidiary (or any Person that becomes a Restricted Subsidiary) or an
acquisition of assets, including any acquisition of assets occurring in
connection with a transaction causing a calculation to be made hereunder, which
constitutes all or substantially all of an operating unit of a business, EBITDA
and Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto (including the Incurrence of any Indebtedness)
as if such Investment or acquisition occurred on the first day of such period
and (E) if since the beginning of such period any Person (that subsequently
became a Restricted Subsidiary or was merged with or into us or any of our
Restricted Subsidiaries since the beginning of such period) shall have made any
Asset Disposition or any Investment or acquisition of assets that would have
required an adjustment pursuant to clause (C) or (D) above if made by us or a
Restricted Subsidiary during such period, EBITDA and Consolidated Interest
Expense for such period shall be calculated after giving pro forma effect
thereto as if such Asset Disposition, Investment or acquisition of assets
occurred on the first day of such period. For purposes of this definition,
whenever pro forma effect is to be given to an acquisition of assets, the amount
of income or earnings relating thereto, including related cost savings measures,
and the amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting Officer of La Petite. If
any Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest expense on such Indebtedness shall be calculated as if the
rate in effect on the date of determination had been the applicable rate for the
entire period (taking into account any Interest Rate Agreement applicable to
such Indebtedness if such Interest Rate Agreement has a remaining term as at the
date of determination in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of La Petite and our Consolidated Restricted Subsidiaries, plus, to the
extent Incurred by us and our Subsidiaries in such period but not included in
such interest expense, (i) interest expense attributable to Capitalized Lease
Obligations, (ii) amortization of debt discount and debt issuance cost, (iii)
capitalized interest, (iv) non-cash interest expense, (v) commissions, discounts
and other fees and charges attributable to letters of credit and bankers'
acceptance financing, (vi) interest accruing on any Indebtedness of any other
Person to the extent such Indebtedness is guaranteed by us or any Restricted
Subsidiary, (vii) net costs associated with Hedging Obligations (including
amortization of fees), (viii) dividends in respect of (A) all of Preferred Stock
of La Petite and any of our Subsidiaries and (B) our Disqualified Stock, in each
of (A) and (B) to the extent held by Persons other than us or a Wholly Owned
Subsidiary, (ix) interest Incurred in connection with investments in
discontinued operations and (x) the cash contributions to any employee stock
ownership plan or similar trust to the extent such contributions are used by
such plan or trust to pay interest or fees to any Person (other than us) in
connection with Indebtedness Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income of La
Petite and our Consolidated Subsidiaries for such period; provided, however,
that there shall not be included in such Consolidated Net Income: (i) any net
income of any Person (other than us) if such Person is not a Restricted
Subsidiary, except that (A) subject to the limitations contained in clause (iv)
below, our equity in the net income of any such Person for such period shall be
included in such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Person during such period to us or a Restricted
Subsidiary as a dividend or other distribution (subject, in the case of a
dividend or other distribution made to a Restricted Subsidiary, to the
limitations contained in clause (iii) below)
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and (B) our equity in a net loss of any such Person for such period shall be
included in determining such Consolidated Net Income; (ii) any net income (or
loss) of any person acquired by us or a Subsidiary in a pooling of interests
transaction for any period prior to the date of such acquisition; (iii) any net
income (or loss) of any Restricted Subsidiary if such Restricted Subsidiary is
subject to restrictions, directly or indirectly, on the payment of dividends or
the making of distributions by such Restricted Subsidiary, directly or
indirectly, to us, except that (A) subject to the limitations contained in
clause (iv) below, our equity in the net income of any such Restricted
Subsidiary for such period shall be included in such Consolidated Net Income up
to the aggregate amount of cash actually distributed by such Restricted
Subsidiary during such period to us or another Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or other
distribution made to another Restricted Subsidiary, to the limitation contained
in this clause) and (B) our equity in a net loss of any such Restricted
Subsidiary for such period shall be included in determining such Consolidated
Net Income; (iv) any gain or loss realized upon the sale or other disposition of
any of our assets or the assets of our Consolidated Subsidiaries that is not
sold or otherwise disposed of in the ordinary course of business and any gain or
loss realized upon the sale or other disposition of any Capital Stock of any
Person; (v) any extraordinary gain or loss; (vi) the cumulative effect of a
change in accounting principles; (vii) any bonuses paid to members of the
Management Group in connection with the Transactions; and (viii) any expenses
relating to cash payments made in respect of the termination of outstanding
options in connection with the Transactions. Notwithstanding the foregoing, for
the purpose of the covenant described under "--Certain Covenants--Limitation on
Restricted Payments" only, there shall be excluded from Consolidated Net Income
any dividends, repayments of loans or advances or other transfers of assets from
Unrestricted Subsidiaries to us or a Restricted Subsidiary to the extent such
dividends, repayments or transfers increase the amount of Restricted Payments
permitted under such covenant pursuant to clause (a)(3)(D) thereof.
"Consolidation" means the consolidation of the accounts of each of the
Restricted Subsidiaries with those of us in accordance with GAAP consistently
applied; provided, however, that "Consolidation" will not include consolidation
of the accounts of any Unrestricted Subsidiary, but the interest of La Petite or
any Restricted Subsidiary in an Unrestricted Subsidiary will be accounted for as
an investment. The term "Consolidated" has a correlative meaning.
"Credit Agreement" means the Credit Agreement dated as of May 11, 1998, as
amended, waived or otherwise modified from time to time (except to the extent
that any such amendment, waiver or other modification thereto would be
prohibited by the terms of the indenture, unless otherwise agreed to by the
Holders of at least a majority in aggregate principal amount of notes at the
time outstanding), among us, our parent company, the financial institutions
signatory thereto, NationsBank, N.A., as Administrative Agent, and The Chase
Manhattan Bank, as Syndication Agent.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable or exercisable) or upon the happening of any
event (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in whole or in part, in each case on or prior to the first anniversary of the
Stated Maturity of the notes; provided, however, that any Capital Stock that
would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require such Person to repurchase or redeem such
Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the first anniversary of the Stated Maturity of the notes
shall not constitute Disqualified Stock if the "asset sale" or "change of
control" provisions applicable to such Capital Stock are not more favorable to
the holders of such Capital Stock than the provisions of the covenants described
under "--Change of Control" and "--Certain Covenants--Limitation on Sale of
Assets and Subsidiary Stock."
"Domestic Subsidiary" means any direct or indirect Subsidiary of us that is
organized and existing under the laws of the United States, any state thereof or
the District of Columbia.
"EBITDA" for any period means the Consolidated Net Income for such period,
plus the following to the extent deducted in calculating such Consolidated Net
Income: (i) the income tax expense of La Petite and our Consolidated Restricted
Subsidiaries, (ii) Consolidated Interest Expense, (iii) depreciation expense of
La Petite and our Consolidated Restricted Subsidiaries, (iv) amortization
expense of La Petite and our Consolidated Restricted Subsidiaries (excluding
amortization expense attributable to a prepaid cash item that was paid in a
prior period) and (v) all non-cash charges associated with the granting of New
Options during such period. Notwithstanding the
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foregoing, the provision for taxes based on the income or profits of, and the
depreciation and amortization and non-cash charges of, one of our Restricted
Subsidiaries shall be added to Consolidated Net Income to compute EBITDA only to
the extent (and in the same proportion) that the net income of such Restricted
Subsidiary was included in calculating Consolidated Net Income and only if a
corresponding amount would be permitted at the date of determination to be
dividended to us by such Restricted Subsidiary without prior approval (that has
not been obtained), pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to such Restricted Subsidiary or its stockholders.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Foreign Subsidiary" means any of our Subsidiary(s) that is not a Domestic
Subsidiary.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including those set forth in (i)
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) such other
statements by such other entity as approved by a significant segment of the
accounting profession and (iv) the rules and regulations of the Commission
governing the inclusion of financial statements (including pro forma financial
statements) in periodic reports required to be filed pursuant to Section 13 of
the Exchange Act, including opinions and pronouncements in staff accounting
bulletins and similar written statements from the accounting staff of the
Commission. All ratios and computations based on GAAP contained in the indenture
shall be computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness or other obligation of such other Person
(whether arising by virtue of partnership arrangements, or by agreement to
keep-well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise) or (ii) entered into
for purposes of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); provided, however, that the term
"guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "guarantee" used as a verb has a
corresponding meaning.
"Guarantee" means each guarantee of the obligations with respect to the
notes issued by one of our Subsidiaries pursuant to the terms of the indenture.
"Guarantor" means any Person that has issued a Guarantee.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement.
"Holder" or "Noteholder" means the Person in whose name a note is
registered on the registrar's books.
"Incur" means issue, assume, guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Person at the time it becomes a Subsidiary. The term "Incurrence" when used as a
noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall be deemed the Incurrence
of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of indebtedness of such Person for borrowed money; (ii) the principal
of and premium (if any) in respect of obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments; (iii) all obligations of
such Person in respect of letters of credit or other similar instruments
(including reimbursement obligations with respect thereto); (iv) all obligations
of such Person to pay the deferred and unpaid purchase price of property or
services (except Trade Payables), which purchase price is due more than six
months after the date of placing such property in service or taking delivery and
title thereto or the completion of such services; (v) all Capitalized Lease
Obligations of such Person; (vi) the amount of all obligations of such Person
with respect to the redemption, repayment or other repurchase of any
Disqualified Stock or, with respect to any Subsidiary of such Person, any
Preferred Stock (but excluding, in each case, any accrued dividends); (vii) all
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Indebtedness of other Persons secured by a Lien on any asset of such Person,
whether or not such Indebtedness is assumed by such Person; provided, however,
that the amount of Indebtedness of such Person shall be the lesser of (A) the
fair market value of such asset at such date of determination and (B) the amount
of such Indebtedness of such other Persons: or (viii) to the extent not
otherwise included in this definition, Hedging Obligations of such Person; all
obligations of the type referred to in clauses (i) through (ii) of other Persons
and all dividends of other Persons for the payment of which, in either case,
such Person is responsible or liable, directly or indirectly, as obligor,
guarantor or otherwise, including by means of any guarantee. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at such
date of all unconditional obligations as described above and the maximum
liability, upon the occurrence of the contingency giving rise to the obligation,
of any contingent obligations at such date.
"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the lender) or other
extension of credit (including by way of guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary" and the covenant described under "--Certain
Covenants--Limitation on Restricted Payments", (i) "Investment" shall include
the portion (proportionate to our equity interest in such Subsidiary) of the
fair market value of the net assets of any of our Subsidiaries at the time that
any such Subsidiary is designated an Unrestricted Subsidiary; provided, however,
that upon a redesignation of such Subsidiary as a Restricted Subsidiary, we
shall be deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary in an amount (if positive) equal to (x) our "Investment" in such
Subsidiary at the time of such redesignation less (y) the portion (proportionate
to our equity interest in such Subsidiary) of the fair market value of the net
assets of such Subsidiary at the time of such redesignation; and (ii) any
property transferred to or from an Unrestricted Subsidiary shall be valued at
its fair market value at the time of such transfer, in each case as determined
in good faith by our Board of Directors.
"King Investor" means an entity a majority of the economic interests of
which are owned by JPMP and a majority of the voting interests of which are
owned by (i) Robert E. King, his descendants or, in the event of the death or
incompetence of any of the foregoing individuals, such Person's estate,
executor, administrator, committee or other personal representative or (ii) any
other Person approved by JPMP.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Management Group" means the group consisting of La Petite Academy's
directors and executive officers of the Company.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise and proceeds from the
sale or other disposition of any securities received as consideration, but only
as and when received, but excluding any other consideration received in the form
of assumption by the acquiring Person of Indebtedness or other obligations
relating to the properties or assets that are the subject of such Asset
Disposition or received in any other non-cash form) therefrom, in each case net
of (i) all legal, title and recording tax expenses, commissions and other fees
and expenses incurred, and all federal, state, provincial, foreign and local
taxes required to be paid or accrued as a liability under GAAP, as a consequence
of such Asset Disposition, (ii) all payments made on any Indebtedness which is
secured by any assets subject to such Asset Disposition, in accordance with the
terms of any Lien upon or other security agreement of any kind with respect to
such assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law be repaid out of the
proceeds from such Asset Disposition, (iii) all distributions and other payments
required to be made to minority interest holders in Subsidiaries or joint
ventures as a result of such Asset Disposition and (iv) appropriate amounts to
be provided by the seller as a reserve, in accordance with GAAP, against any
liabilities associated with the property or other assets disposed of in such
Asset Disposition and retained by us or any of our Restricted Subsidiary after
such Asset Disposition.
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"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"New Options" means the options granted to certain members of management
pursuant to the New Option Plan.
"New Option Plan" means the New Option Plan adopted by our parent company
as part of the Recapitalization.
"Officer" means the Chairman of the Board, the Chief Executive Officer, the
Chief Financial Officer, the President, any Vice President, the Treasurer or the
Secretary of La Petite or our parent company, as the case maybe.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to La
Petite, our parent, or the Trustee.
"Parent " means LPA Holding Corp., a Delaware corporation or its
successors.
"Permitted Holders" means JPMP, the Management Group, the King Investor
Group and any Person acting in the capacity of an underwriter in connection with
a public or private offering of our or our parent company's Capital Stock.
"Permitted Investment" means an Investment by us or any of our Restricted
Subsidiaries in (i) us, a Restricted Subsidiary or a Person that will, upon the
making of such Investment, become a Restricted Subsidiary; provided, however,
that the primary business of such Restricted Subsidiary is a Related Business;
(ii) another Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, us or one of our Restricted Subsidiaries;
provided, however, that such Person's primary business is a Related Business;
(iii) Temporary Cash Investments; (iv) receivables owing to us or any Restricted
Subsidiary, if created or acquired in the ordinary course of business and
payable or dischargeable in accordance with customary trade terms; provided,
however, that such trade terms may include such concessionary trade terms as we
or any such Restricted Subsidiary deems reasonable under the circumstances; (v)
payroll, travel and similar advances to cover matters that are expected at the
time of such advances ultimately to be treated as expenses for accounting
purposes and that are made in the ordinary course of business; (vi) loans or
advances to employees made in the ordinary course of business consistent with
our past practices or those of such Restricted Subsidiary and not exceeding $1.0
million in the aggregate outstanding at any one time; (vii) stock, obligations
or securities received in settlement of debts created in the ordinary course of
business and owing to us or any Restricted Subsidiary or in satisfaction of
judgments, (viii) any Person to the extent such Investment represents the
non-cash portion of the consideration received for an Asset Disposition that was
made pursuant to and in compliance with the covenant described under "--Certain
Covenants--Limitation on Sale of Assets and Subsidiary Stock"; (ix) Interest
Rate Agreements entered into in the ordinary course of our or our Restricted
Subsidiaries' businesses and otherwise in compliance with the indenture; (x)
additional Investments (including joint ventures) in an amount that, when added
to all other Investments made pursuant to this clause (x), does not exceed 10%
of the Total Assets as of the end of the most recent fiscal quarter preceding
the date of such Investment for which financial statements are available; (xi)
Investments in securities of trade debtors of customers received pursuant to any
plan of reorganization or similar arrangement upon the bankruptcy or insolvency
of such trade debtors or customers; (xii) Investments made by us or our
Restricted Subsidiaries as a result of consideration received in connection with
an Asset Disposition made in compliance with the covenant described under
"Limitation on Sales of Assets and Subsidiary Stock"; and (xiii) Investments of
a Person or any of its Subsidiaries existing at the time such Person becomes one
of our Restricted Subsidiaries or at the time such Person merges or consolidates
with us or any of our Restricted Subsidiaries, in either case in compliance with
the indenture; provided that such Investments were not made by such Person in
connection with, or in anticipation or contemplation of, such Person becoming
one of our Restricted Subsidiaries or such merger or consolidation.
"Permitted Liens" means, with respect to any Person:
(a) Liens imposed by law for taxes or other governmental charges that are not
yet due or are being contested in good faith by appropriate proceedings;
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(b) carriers', warehousemen's, mechanics', materialmen's, repairmen's and other
like Liens imposed by law, arising in the ordinary course of business and
securing obligations that are not overdue by more than 60 days or are being
contested in good faith by appropriate proceedings;
(c) pledges and deposits made in the ordinary course of business in compliance
with workers' compensation, unemployment insurance and other social
security laws or regulations;
(d) deposits to secure the performance of bids, trade contracts, leases,
statutory obligations, surety and appeal bonds, performance bonds and other
obligations of a like nature (other than for the payment of Indebtedness),
in each case in the ordinary course of business;
(e) judgment liens in respect of judgments that do not constitute an Event of
Default under "--Events of Default";
(f) easements, zoning restrictions, rights-of-way and similar encumbrances on
real property imposed by law or arising in the ordinary course of business
that do not secure any monetary obligations and do not materially detract
from the value of the affected property or interfere with the ordinary
conduct of business of such Person;
(g) any interest of a landlord in or to property of the tenant imposed by law,
arising in the ordinary course of business and securing lease obligations
that are not overdue by more than 60 days or are being contested in good
faith by appropriate proceedings, or any possessory rights of a lessee to
the leased property under the provisions of any lease permitted by the
terms of the indenture;
(h) Liens of a collection bank arising in the ordinary course of business under
Section 4-208 of the Uniform Commercial Code in effect in the relevant
jurisdiction;
(i) Liens to secure Indebtedness permitted pursuant to clause (b)(i) of the
covenant described under "--Certain Covenants--Limitation on Indebtedness";
(j) Liens existing on the Closing Date provided, that (i) except as permitted
under subclause (D) of clause (l) of this definition such Lien shall not
apply to any other property or asset of such Person except assets financed
solely by the same financing source that provided the Indebtedness secured
by such Lien, and (ii) such Lien shall secure only those obligations that
it secures on the Closing Date and extensions, renewals and replacements
thereof that do not increase the outstanding principal amount thereof;
(k) any Lien existing on any property or asset prior to the acquisition thereof
by such Person or existing on any property or asset of another Person that
becomes a Subsidiary after the date hereof prior to the time such other
Person becomes a Subsidiary, provided that (A) such Lien is not created in
contemplation of or in connection with such acquisition or such other
Person becoming a Subsidiary, as the case may be, (B) such Lien shall not
apply to any other property or assets of such Person except assets financed
solely by the same financing source in existence on the date of such
acquisition that provided the Indebtedness secured by such Lien and (C)
except as permitted under subclause (D) of clause (l) of this definition
such Lien shall secure only those obligations that it secures on the date
of such acquisition or the date such other Person becomes a Subsidiary, as
the case may be, and extensions, renewals and replacements thereof that do
not increase the outstanding principal amount thereof;
(l) Liens on fixed or capital assets acquired, constructed or improved by such
Person and extensions, renewals and replacements thereof that do not
increase the outstanding principal amount of the Indebtedness secured
thereby, provided that (A) such security interests secure Indebtedness
permitted under "--Limitation on Indebtedness," (B) such security interests
and the Indebtedness secured thereby are incurred prior to or within 12
months after such acquisition or the completion of such construction or
improvement, (C) the Indebtedness secured thereby does not exceed 100% of
the cost of acquiring, constructing or improving such fixed or capital
assets and other fixed or capital assets financed solely by the same
financing source and (D) such security interests shall not apply to any
other property or assets of such Person except assets financed solely by
the same financing source;
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(m) licenses of intellectual property rights granted in the ordinary course of
business and not interfering in any material respect with the conduct of
the business;
(n) Liens securing Indebtedness or other obligations of a Restricted Subsidiary
owing to us or one of our Restricted Subsidiaries;
(o) Liens securing Hedging Obligations so long as the related Indebtedness is
secured by a Lien on the same property securing such Hedging Obligation;
(p) Liens securing the notes pursuant to the covenants described under
"--Certain Covenants--Limitation on Liens";
(q) Liens securing Refinancing Indebtedness of any Indebtedness secured by any
Lien referred to in clauses (j), (k) and (l); and
(r) Liens (other than those permitted by paragraphs (a) through (q) above)
securing liabilities permitted under the indenture in an aggregate amount
not exceeding $1.0 million at any time outstanding.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock," as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) that is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over shares
of Capital Stock of any other class of such Person.
"principal" of a note means the principal of the note plus the premium, if
any, payable on the note which is due or overdue or is to become due at the
relevant time.
"Public Equity Offering" means an underwritten primary public offering of
our common stock or common stock of our parent company pursuant to an effective
registration statement under the Securities Act.
"Public Market" means any time after (i) a Public Equity Offering has been
consummated and (ii) at least 15% of the total issued and outstanding common
stock of La Petite or our parent company (as applicable) has been distributed by
means of an effective registration statement under the Securities Act.
"Purchase Money Indebtedness" means Indebtedness of La Petite or any of our
Subsidiaries incurred to finance the acquisition, construction or improvement of
any fixed or capital assets, including Capital Lease Obligations and any
Indebtedness assumed in connection with the acquisition of any such assets or
secured by a Lien on any such assets prior to the acquisition thereof, and
extensions, renewals and replacements of any such Indebtedness that do not
increase the outstanding principal amount thereof or result in an earlier
maturity date or decreased weighted average life thereof, provided that such
Indebtedness is incurred prior to or within 12 months after such acquisition or
the completion of such construction or improvement.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness in whole or in
part. "Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend (including pursuant to any defeasance
or discharge mechanism) any Indebtedness of La Petite or any of our Restricted
Subsidiaries existing on the Closing Date or Incurred in compliance with the
indenture (including our Indebtedness that Refinances Refinancing Indebtedness);
provided, however, that (i) the Refinancing Indebtedness has a Stated Maturity
no earlier than the Stated Maturity of the Indebtedness being Refinanced, (ii)
the Refinancing Indebtedness has an Average Life at the time such Refinancing
Indebtedness is Incurred that is equal to or greater than the Average Life of
the Indebtedness being Refinanced, (iii) such Refinancing Indebtedness is
Incurred in an aggregate principal amount (or if issued with original issue
discount, an aggregate issue price) that is equal to or less than the aggregate
principal amount (or if issued with original issue discount, the aggregate
accreted value) then outstanding of the Indebtedness being Refinanced (plus the
amount of any premium required to be paid under the
70
terms of the instrument governing such Indebtedness and plus the amount of
reasonable expenses incurred by us in connection with such Refinancing) and (iv)
if the Indebtedness being Refinanced is subordinated in right of payment to the
notes, such Refinancing Indebtedness is subordinated in right of payment to the
notes at least to the same extent as the Indebtedness being Refinanced; provided
further, however, that Refinancing Indebtedness shall not include (x)
Indebtedness of a Restricted Subsidiary that Refinances our Indebtedness or (y)
Indebtedness of La Petite or one of our Restricted Subsidiaries that Refinances
Indebtedness of an Unrestricted Subsidiary.
"Related Business" means any business related, ancillary or complementary
(as determined in good faith by our Board of Directors) to the businesses of La
Petite and the Restricted Subsidiaries on the Closing Date.
"Restricted Subsidiary" means any of our Subsidiaries other than an
Unrestricted Subsidiary.
"Secured Indebtedness" means any of our Indebtedness secured by a Lien.
"Secured Indebtedness" of our parent or a Guarantor has a correlative meaning.
"Senior Indebtedness" of the La Petite Academy means the principal of,
premium (if any) and accrued and unpaid interest (including interest accruing on
or after the filing of any petition in bankruptcy or for our reorganization,
regardless of whether or not a claim for post-filing interest is allowed in such
proceedings) on, and fees and other amounts owing in respect of, Bank
Indebtedness and all of our other Indebtedness, whether outstanding on the
Closing Date or thereafter incurred, unless in the instrument creating or
evidencing the same or pursuant to which the same is outstanding it is provided
that such obligations are subordinated in right of payment to the notes. "Senior
indebtedness" of our parent company or any Guarantor has a correlative meaning.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" within the meaning of Rule 1-02 under Regulation S-X
promulgated by the Commission.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Subordinated Obligation" means any of our Indebtedness (whether
outstanding on the Closing Date or thereafter Incurred) that is subordinate or
junior in right of payment to the notes pursuant to a written agreement.
"Subordinated obligation" of our parent company or a Guarantor has a correlative
meaning.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and one
or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such
Person.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within one year of the date of acquisition thereof
issued by a bank or trust company that is organized under the laws of the United
States of America, any state thereof or any foreign country recognized by the
United States of America having capital, surplus and undivided profits
aggregating in excess of $250,000,000 (or the foreign currency equivalent
thereof) and whose long-term debt is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act), (iii) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clause (i) above entered into with a bank meeting the
qualifications described in clause (ii) above, (iv) investments in commercial
paper, maturing not more than one year after the date of acquisition, issued by
a corporation (other than our Affiliates) organized and in existence under the
laws of the United States of America or any foreign country recognized by the
United States of America with a rating at the time as of which any investment
therein is made of "P-1" (or higher) according to Moody's Investors Service,
Inc. or "A-1" (or higher) according to Standard and Poor's Ratings Service, a
division of The McGraw-Hill Companies, Inc. ("S&P"), (v) investments in
securities with maturities of six months or less from the date of acquisition
issued or fully guaranteed by any state, commonwealth or territory of the United
States of America, or by any political subdivision or taxing authority thereof,
and rated at
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least "A" by S&P or "A" by Moody's Investors Service, Inc. and (vi) investments
in money market funds that invest substantially all their assets in securities
of the types described in clauses (i) through (v) above.
"TIA" means the Trust Indenture Act of 1939 as in effect on the date of the
indenture.
"Total Assets" means the total consolidated assets of La Petite and our
Restricted Subsidiaries as shown on our most recent balance sheet.
"Trade Payables" means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
"Trustee" means the party named as such in the indenture until a successor
replaces it and, thereafter, means the successor.
"Trust Officer" means the Chairman of the Board, the President or any other
officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"Unrestricted Subsidiary" means (i) any of our Subsidiaries that at the
time of determination shall be designated an Unrestricted Subsidiary by our
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any of our
Subsidiaries (including any of our newly acquired or newly formed Subsidiaries)
to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of La Petite , or any of our other Subsidiaries that is not
a Subsidiary of the Subsidiary to be so designated; provided, however, that
either (A) the Subsidiary to be so designated has total Consolidated assets of
$1,000 or less or (B) if such Subsidiary has Consolidated assets greater than
$1,000, then such designation would be permitted under the covenant entitled
"Limitation on Restricted Payments". The Board of Directors may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that
immediately after giving effect to such designation (x) we could Incur $1.00 of
additional Indebtedness under paragraph (a) of the covenant entitled "Limitation
on Indebtedness" and (y) no Default shall have occurred and be continuing. Any
such designation of a Subsidiary as a Restricted Subsidiary or Unrestricted
Subsidiary by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the resolution of the Board of
Directors giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) we or another Wholly
Owned Subsidiary own.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain United States federal income tax
considerations to U.S. holders and non-U.S. holders that hold notes as capital
assets relating to the purchase, ownership and disposition of the notes pursuant
to the offer described in this prospectus, but does not purport to be a complete
analysis of all the potential tax considerations relating thereto. U.S. Holder
means a holder which is a citizen or resident of the United States, a
corporation or other entity taxable as a corporation created in, or organized
under the laws of, the United States or any political subdivision thereof, an
estate the income of which is subject to U.S. federal income taxation regardless
of its source or a trust, the administration over which a United States court
can exercise primary supervision and all of the substantial decisions of which
one or more United States persons have the authority to control. Notwithstanding
the preceding sentence, to the extent provided in Treasury Regulations, certain
trusts in existence on August 20, 1996, and treated as United States persons
prior to such date, that elect to continue to be treated as United States
persons will also be U.S. holders. A Non-U.S. holder is any holder of notes that
is not a U.S. holder. This summary does not address tax considerations
applicable to investors that may be subject to special tax rules, such as banks,
tax-exempt organizations, insurance companies, dealers in securities or
currencies, or persons that will hold notes as a position in a hedging
transaction, "straddle" or "conversion transaction" for tax purposes. This
summary does not consider the effect of any applicable foreign, state, local or
other tax laws. This summary is based on the Code, existing, temporary, and
proposed Treasury Regulations, laws, rulings and decisions now in effect, all of
which are subject to change. Any such changes may be applied retroactively in a
manner that could adversely affect a holder of the notes.
THE FOLLOWING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, INVESTORS
CONSIDERING THE PURCHASE OF NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME AND ESTATE TAX
LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING
UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION OR UNDER ANY
APPLICABLE TAX TREATY.
TAXATION OF U.S. HOLDERS
PAYMENT OF INTEREST. Interest on a note generally will be includable in the
income of a holder as ordinary interest income at the time such interest is
received or accrued, in accordance with such holder's method of accounting for
United States federal income tax purposes. The notes were not issued with
original issue discount for U.S. federal income tax purposes.
MARKET DISCOUNT ON RESALE OF NOTES. A holder of a note should be aware that
the purchase or resale of a note may be affected by the "market discount"
provisions of the Code. The market discount rules generally provide that if a
holder of a note purchases the note at a market discount (i.e., a discount other
than at original issue), any gain recognized upon the disposition of the note by
the holder will be taxable as ordinary income, rather than as capital gain, to
the extent such gain does not exceed the accrued market discount on such note at
the time of such disposition. Market discount generally means the excess, if
any, of a note's stated redemption price at maturity over the price paid by the
holder therefor, unless a de minimis exception applies. A holder who acquires a
note at a market discount also may be required to defer the deduction of a
portion of the amount of interest that the holder paid or accrued during the
taxable year on indebtedness incurred or maintained to purchase or carry such
note, if any.
Any principal payment on a note acquired by a holder at a market discount
will be included in gross income as ordinary income to the extent that it does
not exceed the accrued market discount at the time of such payment. The amount
of the accrued market discount for purposes of determining the tax treatment of
subsequent payments on, or dispositions of, a note is to be reduced by the
amounts so treated as ordinary income.
A holder of a note acquired at a market discount may elect to include
market discount in gross income as such market discount accrues, either on a
straight-line basis or on a constant interest rate basis. This current inclusion
election, once made, applies to all market discount obligations acquired on or
after the first day of the first taxable year to which the election applies, and
may not be revoked without the consent of the Internal Revenue Service ("IRS").
If a holder of a note makes such an election, the foregoing rules regarding the
recognition of ordinary income on sales and other dispositions and the receipt
of principal payments with respect to such note, and regarding
73
the deferral of interest deductions on indebtedness incurred or maintained to
purchase or carry such note, will not apply.
NOTES PURCHASED AT A PREMIUM. In general, if a holder purchases a note for
an amount in excess of its stated redemption price at maturity, the holder may
elect to treat such excess as "amortizable bond premium," in which case the
amount required to be included in the holder's income each year with respect to
interest on the note will be reduced by the amount of amortizable bond premium
allocable (based on the note's yield to maturity) to such year. Any such
election would apply to all bonds (other than bonds the interest on which is
excludable from gross income) held by the holder at the beginning of the first
taxable year to which the election applies or which thereafter are acquired by
the holder, and such election is irrevocable without the consent of the IRS.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES. Upon the sale, exchange or
retirement of a note, a holder generally will (except as discussed under "Market
Discount on Resale of Notes") recognize capital gain or loss equal to the
difference between (i) the amount of cash proceeds and the fair market value of
any property received on the sale, exchange or redemption (except to the extent
such amount is attributable to accrued interest income not previously included
in income which is taxable as ordinary income) and (ii) such holder's adjusted
tax basis in the note. A holder's adjusted tax basis in a note generally will
equal the purchase price of the note to such holder. Such capital gain or loss
will be long-term if the holder held the note for more than one year at the time
of sale, exchange or redemption.
TAXATION OF NON-U.S. HOLDERS
PAYMENTS OF INTEREST. A Non-U.S. holder will not be subject to United
States federal income tax by withholding or otherwise on payments of interest on
a note (provided that the beneficial owner of the note fulfills the statement
requirements set forth in applicable Treasury regulations) unless (A) such
Non-U.S. holder (i) actually or constructively owns 10% or more of the total
combined voting power of all classes of stock of us entitled to vote, (ii) is a
controlled foreign corporation related, directly or indirectly, to us through
stock ownership, or (iii) is a bank receiving interest described in Section
881(c)(3)(A) of the Code or (B) such interest is effectively connected with the
conduct of a trade or business by the Non-U.S. holder in the United States.
GAIN ON DISPOSITION OF THE NOTES. A Non-U.S. holder will not be subject to
United States federal income tax by withholding or otherwise on any gain
realized upon the disposition of a note unless (i) in the case of a Non-U.S.
Holder who is an individual, such Non-U.S. holder is present in the United
States for a period or periods aggregating 183 days or more during the taxable
year of the disposition and certain other requirements are met or (ii) the gain
is effectively connected with the conduct of a trade or business by the Non-U.S.
holder in the United States.
EFFECTIVELY CONNECTED INCOME. To the extent that interest income or gain on
the disposition of a note is effectively connected with the conduct of a trade
or business of the Non-U.S. holder in the United States, such income will be
subject to United States federal income tax on a net income basis in the same
manner as if such holder were a United States person. Additionally, in the case
of a Non-U.S. holder which is a corporation, such effectively connected income
may be subject to the United States branch profits tax at the rate of 30%.
TREATIES. A tax treaty between the United States and a country in which a
Non-U.S. holder is a resident may alter the tax consequences described above.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to payments of
principal, premium, if any, and interest on a note and payments of the proceeds
of the sale of a note, and a 31% backup withholding tax may apply to such
payments if the holder (i) fails to furnish or certify its correct taxpayer
identification number to the payor in the manner required, (ii) is notified by
the IRS that it has failed to report payments of interest and dividends properly
or (iii) under certain circumstances, fails to certify that it has not been
notified by the IRS that it is subject to backup withholding for failure to
report interest and dividend payments. Any amounts withheld under the backup
withholding rules from a payment to a holder will be allowed as a credit against
such holder's United States federal income tax and may entitle the holder to a
refund, provided that the required minimum information is furnished to the IRS.
Generally, such information reporting and backup withholding may apply to
payments of principal, interest and premium (if any) to Non-U.S. holders which
are not "Exempt Recipients" and which fail to provide certain
74
information as may be required by United States law and applicable regulations.
The payment of the proceeds of the disposition of notes to or through the United
States office of a broker will be subject to information reporting and backup
withholding at a rate of 31% unless the owner certifies its status as a Non-U.S.
holder under penalties of perjury or otherwise establishes an exemption.
Holders should consult their tax advisors regarding the application of
information reporting and backup withholding in their particular situation and
the availability of an exemption therefrom, and the procedures for obtaining any
such exemption.
The United States Department of the Treasury has promulgated regulations
regarding the information reporting and backup reporting rules discussed above.
In general, the regulations do not significantly alter the substantive
information reporting and backup withholding requirements but rather unify
current certification procedures and forms and clarify reliance standards. In
addition, the regulations permit the shifting of primary responsibility for
withholding to certain financial intermediaries acting on behalf of beneficial
owners. The regulations are generally effective for payments made on or after
January 1, 2001, subject to certain transition rules. Prospective purchasers of
the notes should consult their own tax advisors concerning the effect of such
regulations on their particular situations.
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BOOK-ENTRY; DELIVERY AND FORM
The notes are represented by one or more permanent global certificates in
definitive, fully registered form (or "Global Notes"). The Global Notes are
deposited with, or on behalf of, The Depository Trust Company, or DTC, and
registered in the name of a nominee of DTC.
THE GLOBAL NOTES
Pursuant to procedures established by DTC upon the issuance of the Global
Notes, DTC or its custodian credited, on its internal system, the principal
amount of notes of the individual beneficial interests represented by the Global
Notes to the respective accounts of persons who have accounts with DTC and
ownership of beneficial interests in the Global Notes will be shown on, and the
transfer of such ownership will be effected only through, records maintained by
DTC or its nominee (with respect to interests of Participants (as defined
below)) and the records of Participants (with respect to interests of persons
other than Participants). Ownership of beneficial interests in the Global Notes
is limited to persons who have accounts with DTC ("Participants") or persons who
hold interests through Participants. Interests in the Global Notes may be held
directly through DTC, by Participants, or indirectly through organizations which
are Participants.
So long as DTC, or its nominee, is the registered owner or holder of the
Global Notes, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the notes represented by such Global Notes for all
purposes under the indenture. No beneficial owner of an interest in the Global
Notes will be able to transfer that interest except in accordance with DTC's
procedures, in addition to those provided for under the indenture.
Payments of the principal of, premium, if any, and interest on the Global
Notes will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. None of the issuers, the Trustee or any paying agent will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interest.
The issuers expect that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect of the Global Notes, will
credit Participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Notes as
shown on the records of DTC or its nominee. The issuers also expect that
payments by Participants to owners of beneficial interests in the Global Notes
held through such Participants will be governed by standing instructions and
customary practice, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such payments
will be the responsibility of such Participants.
Transfers between Participants will be effected in the ordinary way in
accordance with DTC rules and will be settled in same day funds. If a holder
requires physical delivery of a Certificated Note (as defined below) for any
reason, including to sell notes to persons in states which require physical
delivery of the notes, or to pledge such securities, such Holder must transfer
its interest in a Global Note in accordance with the normal procedures of DTC
and with the procedures set fourth in the indenture.
DTC has advised the issuers that it will take any action permitted to be
taken by a Holder of notes only at the direction of one or more Participants to
whose account the DTC interests in the Global Notes are credited and only in
respect of such portion of the aggregate principal amount of Notes as to which
such Participant or Participants has or have given such direction. However, if
there is an Event of Default under the indenture, DTC will exchange the Global
Notes in whole for Certificated Notes, which it will distribute to the
Participants.
DTC has advised the issuers as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for Participants and facilitate the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes in accounts of its Participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC System is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
("Indirect Participants").
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Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Notes among Participants, it is under no
obligation to perform such procedures, and such procedures may be discontinued
at any time. Neither the issuers nor the Trustee will have any responsibility
for the performance by DTC or the Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations.
CERTIFICATED NOTES
If:
- the issuers notify the Trustee in writing that DTC is no longer
willing or able to act as a depositary or DTC ceases to be registered
as a clearing agency under the Exchange Act and a successor
depositary is not appointed within 90 days of such notice or
cessation;
- the issuers, at their option, notify the Trustee in writing that they
elect to cause the issuance of notes in definitive form under the
indenture; or
- upon the occurrence of certain other events as provided in the
indenture;
then, upon surrender by DTC of the Global Notes, Certificated Notes will be
issued to each person that DTC identifies as the beneficial owner of the notes
represented by the Global Notes. Upon any such issuance, the Trustee is required
to register such Certificated Notes in the name of such person or persons (or
the nominee of any thereof) and cause the same to be delivered thereto.
None of the issuers or the Trustee shall be liable for any delay by DTC or
any Participant or Indirect Participant in identifying the beneficial owners of
the related notes and each such person may conclusively rely on, and shall be
protected in relying on, instructions from DTC for all purposes (including with
respect to the registration and delivery, and the respective principal amounts,
of the notes to be issued).
77
PLAN OF DISTRIBUTION
This prospectus may be used by JPMSI in connection with offers and sales
related to market-making transactions in the notes. JPMSI may act as principal
or agent in such transactions. Such sales will be made at prices related to
prevailing market prices at the time of sale. We will not receive any of the
proceeds of such sales. JPMSI has no obligation to make a market in the notes
and may discontinue its market-making activities at any time without notice, at
its sole discretion. We have agreed to indemnify JPMSI against certain
liabilities, including liabilities under the Securities Act of 1933, and to
contribute to payments which JPMSI might be required to make in respect thereof.
For a description of certain relationships between the issuers and JPMSI
and its affiliates, see "Certain Relationships and Related Transactions" and
"Ownership of Securities."
LEGAL MATTERS
The validity of the notes offered hereby was passed upon by O'Sullivan LLP,
New York, New York.
EXPERTS
The consolidated financial statements as of June 30, 2001, July 1, 2000 and
for each of the three years in the period ended June 30, 2001,of LPA Holding
Corp. included in this prospectus, the related financial statement schedules
included elsewhere in the registration statement, and the financial statements
from which the Selected Consolidated Financial and Other Data included in this
prospectus have been derived, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein (which report
expresses an unqualified opinion and includes an explanatory paragraph referring
to compliance with covenants and the subsequent amendment to the Credit
Agreement). Such consolidated financial statements, financial statement
schedules, and Selected Consolidated Financial and Other Data have been included
herein and elsewhere in the Registration Statement in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
We filed with the Commission a Registration Statement on Form S-4 (together
with all amendments, exhibits, schedules and supplements thereto, the
"Registration Statement") under the Securities Act with respect to the notes.
This prospectus does not contain all of the information set forth in the
Registration Statement, certain portions of which have been omitted pursuant to
the rules and regulations promulgated by the Commission. Statements made in this
prospectus as to the contents of any contract, agreement or other document are
not necessarily complete. With respect to each such contract, agreement or other
document filed or incorporated by reference as an exhibit to the Registration
Statement, reference is made to such exhibit for a more complete description of
the matter involved, and each such statement is qualified in its entirety by
such reference.
The Registration Statement may be inspected by anyone without charge at the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and The Woolworth Building, 233 Broadway, New York, New York 10048. Copies of
such material may also be obtained at the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, upon payment of prescribed fees. Such materials can also be
inspected on the Internet at http://www.sec.gov.
We are subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). In accordance
therewith, we file reports and other information with the Commission. Such
materials filed by us with the Commission may be inspected, and copies thereof
obtained, at the places, and in the manner, set forth above.
In the event that we cease to be subject to the informational reporting
requirements of the Exchange Act, we have agreed that, so long as the notes
remain outstanding, we will file with the Commission and distribute to holders
of the notes copies of the financial information that would have been contained
in annual reports and quarterly reports, including a management's discussion and
analysis of financial condition and results of operations, that we would have
been required to file with the Commission pursuant to the Exchange Act. Such
financial information
78
will include annual reports containing consolidated financial statements and
notes, together with an opinion expressed by an independent public accounting
firm, as well as quarterly reports containing unaudited condensed consolidated
financial statements for the first three quarters of each fiscal year. We will
also make such reports available to prospective purchasers of the notes,
securities analysts and broker-dealers upon their request.
79
INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS OF LPA HOLDING CORP.
Page
----
AS OF JUNE 30, 2001 AND JULY 1, 2000 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 2001:
Independent Auditors' Report............................................................................ F-2
Consolidated Balance Sheets as of June 30, 2001 and July 1, 2000........................................ F-3
Consolidated Statements of Operations and Comprehensive Operations for the 52 weeks ended June 30,
2001, 52 weeks ended July 1, 2000, and 44 weeks ended July 3, 1999...................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the 52 weeks ended June 30, 2001, 52
weeks ended July 1, 2000, and 44 weeks ended July 3, 1999............................................... F-5
Consolidated Statements of Cash Flows for the 52 weeks ended June 30, 2001, 52 weeks ended July 1,
2000, and 44 weeks ended July 3, 1999................................................................... F-6
Notes to Consolidated Financial Statements.............................................................. F-7
AS OF OCTOBER 20, 2001 AND JUNE 30, 2001 AND FOR THE 16 WEEKS ENDED OCTOBER 20, 2001 AND OCTOBER 21, 2000
(UNAUDITED):
Consolidated Balance Sheets as of October 20, 2001 and June 30, 2000.................................... F-20
Consolidated Statements of Operations and Comprehensive Operations for the 16 weeks ended October 20,
2001 and October 21, 2000............................................................................... F-21
Consolidated Statements of Cash Flows for the 16 weeks ended October 20, 2001 and October 21, 2000...... F-22
Notes to Consolidated Financial Statements.............................................................. F-23
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
LPA Holding Corp.
Overland Park, Kansas
We have audited the accompanying consolidated balance sheets of LPA Holding
Corp. and subsidiaries (the "Company") as of June 30, 2001 and July 1, 2000, and
the related consolidated statements of operations and comprehensive operations,
stockholders' deficit and cash flows for the 52 weeks ended June 30, 2001, the
52 weeks ended July 1, 2000, and the 44 weeks ended July 3, 1999. 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 auditing standards generally accepted
in the United States of America. 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 subsidiaries
as of June 30, 2001 and July 1, 2000, and the results of their operations and
their cash flows for the 52 weeks ended June 30, 2001, the 52 weeks ended July
1, 2000, and the 44 weeks ended July 3, 1999, in conformity with accounting
principles generally accepted in the United States of America. 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.
As discussed in Notes 3 and 13, the Company was not in compliance as of June 30,
2001 with certain financial covenants contained in its Credit Agreement. On
November 14, 2001, the Company entered into Amendment No. 3 to Credit Agreement
and Waiver (the "Amendment") with its senior secured lenders. The Amendment
waives the events of default and establishes future modified covenants. In
addition, the Amendment provides for specific waivers necessary to permit the
issuance of $15.0 million of a new class of convertible preferred stock of the
Company.
Deloitte & Touche LLP
Kansas City, Missouri
September 14, 2001 (November 15, 2001 as to Note 13)
F-2
LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
JUNE 30, JULY 1,
2001 2000
--------- ---------
(IN THOUSANDS OF DOLLARS, EXCEPT
SHARE AND PER SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents $ 5,078 $ 4,008
Restricted cash investments (Note 1) 91 837
Accounts and notes receivable, (net of allowance for
doubtful accounts of $537 and $406) 9,920 7,462
Prepaid food and supplies 6,346 7,127
Other prepaid expenses 3,475 5,324
Refundable income taxes (Note 5) 55 109
Deferred income taxes (Note 5) 950
--------- ---------
Total current assets 24,965 25,817
Property and equipment, at cost:
Land 5,778 5,886
Buildings and leasehold improvements 85,753 79,568
Equipment 11,491 23,780
Facilities under construction 2,280 2,041
--------- ---------
105,302 111,275
Less accumulated depreciation 46,278 54,842
--------- ---------
Net property and equipment 59,024 56,433
Other assets (Note 2) 65,108 69,159
Deferred income taxes (Note 5) 16,276 14,238
--------- ---------
$ 165,373 $ 165,647
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Overdrafts due banks $ 5,925 $ 4,756
Accounts payable 5,707 8,273
Current reserve for closed academies 3,100 3,268
Current maturities of long-term debt and capital lease obligations 1,255 1,897
Accrued salaries, wages and other payroll costs 15,495 14,212
Accrued insurance liabilities 2,359 2,586
Accrued property and sales taxes 3,368 3,490
Accrued interest payable 2,487 2,568
Other current liabilities 4,692 5,556
Deferred income taxes (Note 5) 1,629
--------- ---------
Total current liabilities 46,017 46,606
Long-term debt and capital lease obligations (Note 3) 194,648 182,319
Other long-term liabilities (Note 4) 7,060 13,061
Series A 12% redeemable preferred stock ($.01 par value per share);
45,000 shares authorized, issued and outstanding at June 30, 2001
and July 1, 2000 at aggregate liquidation preference of $1,360.563
as of June 30, 2001 and $1,211.291 as of July 1, 2000 (Note 7) 54,941 47,314
Stockholders' deficit:
Class A common stock ($.01 par value per share); 950,000 shares
authorized and 564,985 shares issued and outstanding as of June
30, 2001 and July 1, 2000 (Note 7) 6 6
Class B common stock ($.01 par value per share); 20,000 shares authorized,
issued and outstanding as of June 30, 2001 and July 1, 2000 (Note 7)
Common stock warrants (Note 7) 8,596 8,596
Accumulated other comprehensive income 331
Accumulated deficit (146,226) (132,255)
--------- ---------
Total stockholders' deficit (137,293) (123,653)
--------- ---------
$ 165,373 $ 165,647
========= =========
See notes to consolidated financial statements.
F-3
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
52 WEEKS 52 WEEKS 44 WEEKS
ENDED ENDED ENDED
JUNE 30, JULY 1, JULY 3,
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS OF DOLLARS)
Operating revenue $ 384,837 $ 371,037 $ 281,072
Operating expenses:
Salaries, wages and benefits 216,018 205,665 150,052
Facility lease expense 44,751 46,573 33,670
Depreciation and amortization 15,252 16,335 12,883
Restructuring costs (Note 12) 7,500
Provision for doubtful accounts 4,531 2,931 1,382
Other 87,393 86,948 66,895
--------- --------- ---------
Total operating expenses 367,945 365,952 264,882
--------- --------- ---------
Operating income 16,892 5,085 16,190
Interest expense 23,577 20,880 16,145
Interest income (85) (163) (153)
--------- --------- ---------
Net interest costs 23,492 20,717 15,992
--------- --------- ---------
Income (loss) before income taxes (6,600) (15,632) 198
Provision (benefit) for income taxes (288) (5,085) 995
--------- --------- ---------
Net loss (6,312) (10,547) (797)
--------- --------- ---------
Other comprehensive income
Other comprehensive loss, net (1,565)
Reclassification into operations 1,896
--------- --------- ---------
Total other comprehensive income 331
--------- --------- ---------
Comprehensive loss $ (5,981) $ (10,547) $ (797)
========= ========= =========
See notes to consolidated financial statements.
F-4
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
------------ ACCUMULATED TOTAL
NUMBER ACCUMULATED OTHER COMPRE- STOCKHOLDERS'
OF SHARES AMOUNT WARRANTS DEFICIT HENSIVE INCOME EQUITY (DEFICIT)
--------- --------- --------- ----------- -------------- ----------------
(IN THOUSANDS OF DOLLARS)
Balance, August 30, 1998 580,026 $ 6 $ 5,645 $(111,352) $(105,701)
Preferred stock dividend (Note 7) (3,685) (3,685)
Net loss (797) (797)
--------- --------- --------- --------- --------- ---------
Balance, July 3, 1999 580,026 6 5,645 (115,834) (110,183)
Exercise of stock options 4,959 89 89
Issuance of warrants 2,951 2,951
Preferred stock dividend (5,963) (5,963)
Net loss (10,547) (10,547)
--------- --------- --------- --------- --------- ---------
Balance, July 1, 2000 584,985 6 8,596 (132,255) (123,653)
Other comprehensive loss, net (1,565) (1,565)
Reclassification of other comprehensive
income into operations 1,896 1,896
Buyback of stock options (32) (32)
Preferred stock dividend (7,627) (7,627)
Net loss (6,312) (6,312)
--------- --------- --------- --------- --------- ---------
Balance, June 30, 2001 584,985 $ 6 $ 8,596 $(146,226) $ 331 $(137,293)
========= ========= ========= ========= ========= =========
See notes to consolidated financial statements.
F-5
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
52 WEEKS 52 WEEKS 44 WEEKS
ENDED ENDED ENDED
JUNE 30, 2001 JULY 1, 2000 JULY 3, 1999
------------- ------------ ------------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,312) $(10,547) $ (797)
Adjustments to reconcile net loss to net cash from operating activities
Restructuring costs 7,500
Amortization of transition adjustment into operations 3,192
Depreciation and amortization 16,364 17,387 13,712
Deferred income taxes 315 (4,831) 708
Changes in assets and liabilities:
Accounts and notes receivable (2,292) 1,199 (1,014)
Prepaid expenses and supplies 2,630 2,187 (5,488)
Accrued property and sales taxes (122) (302) (354)
Accrued interest payable (81) 180 (2,383)
Accounts payable and other accrued liabilities (2,289) (5,511) 9,409
Other changes in assets and liabilities, net (8,613) (1,665) (3,473)
-------- -------- --------
Net cash provided by operating activities 2,792 5,597 10,320
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Bright Start, net of cash acquired (10,361)
Capital expenditures (14,894) (23,412) (31,666)
Proceeds from sale of assets 189 23,432 12,462
-------- -------- --------
Net cash used for investing activities (14,705) (10,341) (19,204)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt and capital lease obligations (1,900) (8,242) (1,692)
Net borrowings under the Revolving Credit Agreement 13,000 4,000
Exercise of stock options 89
Deferred financing costs (346) (818)
Proceeds from issuance (buyback) of redeemable preferred stock
and warrants, net of expenses (32) 14,992
Increase (reduction) in bank overdrafts 1,169 (2,694) 4,560
Decrease in restricted cash investments 746 381 538
-------- -------- --------
Net cash provided by financing activities 12,983 4,180 6,588
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,070 (564) (2,296)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,008 4,572 6,868
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,078 $ 4,008 $ 4,572
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 21,403 $ 19,694 $ 17,699
Income taxes 160 86 275
Cash received during the period for:
Interest $ 92 $ 156 $ 152
Income taxes 43 88 2,122
Non-cash investing and financing activities:
Capital lease obligations of $588, $34 and $29 were incurred during
the 52 weeks ended June 30, 2001, the 52 weeks ended July 1, 2000
and 44 weeks ended July 3, 1999 respectively, when the Company
entered into leases for new computer equipment
See notes to consolidated financial statements.
F-6
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Vestar/LPA Investment Corp. (Parent), 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, which has no independent assets or operations, 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 (LPA), a Delaware limited liability
company owned by an affiliate of J.P. Morgan Partners, LLC (JPMP) and by an
entity controlled by Robert E. King, a director of La Petite, and Parent,
which was renamed LPA Holding Corp., entered into an Agreement and Plan of
Merger pursuant to which a wholly owned subsidiary of LPA was merged into
Parent (the Recapitalization). In the Recapitalization, all of the then
outstanding shares of preferred stock and common stock of Parent (other
than the shares of common stock retained by Vestar/LPT Limited Partnership
and management of La Petite) owned by the existing stockholders of Parent
(the Existing Stockholders) were converted into cash. As part of the
Recapitalization, LPA purchased $72.5 million (less the value of options
retained by management) of common stock of the Parent 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,
LPA received warrants to purchase up to 6.0% of Parent's common stock on a
fully diluted basis. 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.
On July 21, 1999, La Petite acquired all the outstanding shares of Bright
Start, Inc. ("Bright Start"). See Note 11 to the consolidated financial
statements.
On December 15, 1999, LPA acquired an additional $15.0 million of Parent's
redeemable preferred stock and received warrants to purchase an additional
3% of Parent's common stock on a fully-diluted basis. The $15.0 million
proceeds received by Parent was contributed to La Petite as common equity.
As a result of the recapitalization and additional purchase of preferred
stock and warrants, LPA beneficially owns 81.3% of the common stock of
Parent on a fully diluted basis and $45 million of redeemable preferred
stock of Parent (See Notes 7 and 13). An affiliate of JPMP owns a majority
of the economic interests of LPA and an entity controlled by Robert E. King
owns a majority of the voting interests of LPA.
Parent, consolidated with La Petite, Bright Start and Services, is referred
to herein as the Company.
The Company offers educational, developmental and child care programs that
are available on a full-time or part-time basis, for children between six
weeks and twelve years old. The Company's 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 Parent and its wholly-owned subsidiary, La Petite and its
wholly-owned subsidiaries, Bright Start and Services, after elimination of
all significant inter-company accounts and transactions.
F-7
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
FISCAL YEAR END - On April 18, 2001, the Company changed its fiscal year
end from the 52 or 53-week period ending on the first Saturday in July to
the 52 or 53-week period ending on the Saturday closest to June 30. This
change was made to align the Company's business fiscal year with its tax
fiscal year. 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 accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
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, leasehold improvements,
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 that have been sold and leased back, which are
recognized over the terms of the related lease agreements.
EXCESS OF PURCHASE PRICE OVER THE NET ASSETS ACQUIRED - The excess of the
purchase price over the fair value of assets and liabilities acquired
related to the acquisition of La Petite and Bright Start is being amortized
over a period of 30 years and 20 years, respectively, on the straight-line
method.
OTHER ASSETS - Other assets include real estate property held for sale, the
deferred loss on real estate sale-leaseback transactions, deposits for rent
and utilities, and the fair value of identifiable intangible assets
acquired in connection with the acquisition of La Petite. The loss on
sale-leaseback transactions is being amortized over the lease life, and the
intangible assets are being amortized over periods ranging from 2 to 10
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.
CASH EQUIVALENTS - The Company's cash equivalents consist of commercial
paper and money market funds with original maturities of three months or
less.
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.
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.
F-8
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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
due to their short-term nature. The estimated fair values of Senior Notes
and preferred stock at June 30, 2001 were $98.6 million and $61.2 million,
respectively. The estimated fair values of Senior Notes and preferred stock
at July 1, 2000 were $85.6 million and $54.5 million, respectively. The
combined estimated fair value of the Company's interest rate contracts at
June 30, 2001 was a liability of $10,391. Estimates of fair value are
obtained from independent broker quotes.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews long-lived assets and
certain identifiable intangibles for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable.
ADVERTISING COSTS - The Company expenses the production costs of
advertising the first time the advertising takes place, except for
direct-response advertising, which is capitalized and amortized over its
expected period of future benefits. At June 30, 2001, no advertising was
reported as an asset. Advertising expense was $5.4 million for the year
ended June 30, 2001.
STOCK-BASED COMPENSATION - The Company accounts for stock compensation
awards under Accounting Principles Board ("APB") Opinion No. 25 that
requires compensation cost to be recognized based on the excess, if any,
between the market price of the stock at the date of grant and the amount
an employee must pay to acquire the stock. The Company has disclosed the
pro forma net income (loss) determined on the fair value method in
accordance with SFAS No. 123 (See Note 10).
DERIVATIVE FINANCIAL INSTRUMENTS - The Company utilizes swap and collar
agreements to manage interest rate risks. The Company has established a
control environment that 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 -The Company has determined that it currently operates
entirely in one segment.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - Effective July 2, 2000, the
Company adopted Statement of Financial Accounting Standards No. 133, as
amended by SFAS Nos. 137 and 138 ("SFAS No. 133"), Accounting for
Derivative Instruments and Hedging Activities, which establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities. All derivatives, whether designated in hedging relationships or
not, are required to be recorded on the balance sheet at fair value. If the
derivative is designated as a fair value hedge, the changes in the fair
value of the derivative and of the hedged item attributable to the hedged
risk are recognized in earnings. If the derivative is designated as a cash
flow hedge, the effective portions of changes in the fair value of the
derivative are recorded in other comprehensive income and are recognized in
the income statement when the hedged item affects earnings. Ineffective
portions of changes in the fair value of cash flow hedges are recognized in
earnings. Changes in fair value of derivative instruments that do not meet
hedge accounting criteria are recorded as a component of current
operations. The Company is exposed to credit risk on derivative
instruments, limited to the net interest receivable and the fair market
value of the derivative instrument should the counter-party fail. The
contract or notional value is not at risk in derivative contracts. Credit
risk is managed through the selection of only credit worthy counter-parties
and continuing review and monitoring of counter-parties. The Company is
also exposed to market risk from derivative instruments when adverse
changes in interest rates occur. Market risk is monitored and
F-9
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
controlled through adherence to financial risk policies and periodic review
of positions. The adoption of SFAS 133 on July 2, 2000, resulted in a net
cumulative transition loss of $2.6 million ($1.6 million net of taxes),
which was recorded in other comprehensive income and represented the market
value of derivatives as of the implementation date. This transition
adjustment is amortized from other comprehensive income into operations
over the life of the derivative contracts. During the year ended June 30,
2001, $3.2 million of derivative losses ($1.9 million net of taxes) were
amortized into operations. The Company has one interest rate swap contract
as of June 30, 2001, which expires on May 15, 2005.
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring
after June 30, 2001. This Statement replaces SFAS No. 125 and carries over
most of the provisions without reconsideration. However, SFAS No. 140 does
revise the accounting for securitizations and other transfers of financial
assets and collateral, and requires certain disclosures. This Statement is
effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after June 30, 2001 and for
recognition and reclassification of collateral and for disclosures relating
to securitization transactions and collateral for the fiscal year ended
June 30, 2001. The Company has adopted the Statement as of June 30, 2001,
which had no impact on the Company's financial statements as of June 30,
2001.
In June 2001, the Financial Accounting Standards Board ("FASB") approved
SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 will require business combinations entered
into after June 30, 2001 to be accounted for using the purchase method of
accounting. Specifically identifiable intangible assets acquired, other
than goodwill, will be amortized over their estimated useful economic life.
SFAS No. 142 will require that goodwill will not be amortized, but should
be tested for impairment at least annually. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized in an entity's statement of financial position
at that date, regardless of when those assets were initially recognized.
Once adopted, annual goodwill amortization of approximately $2.6 million
will cease. The Company has not yet determined if any impairment will
result from adoption of these Statements.
Also, in June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. This Statement addresses financial accounting and
reporting for obligations associated with retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and (or) the normal
operation of a long-lived assets, except for certain obligations of
lessees. The Company has not yet determined the impact of the
implementation of this Statement.
In August 2001, The FASB issued SFAS No. 144 Accounting for Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 modified the financial
accounting and reporting for long-lived assets to be disposed of by sale,
and it broadens the presentation of discontinued operations to include more
disposal transactions. The Company has not yet determined the impact of the
implementation of this Statement, which is effective for the Company's 2003
fiscal year.
RECLASSIFICATIONS - Certain reclassifications to prior year amounts have
been made in order to conform to the current year presentation.
F-10
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. OTHER ASSETS
(in thousands of dollars)
JUNE 30, JULY 1,
2001 2000
--------- ---------
Intangible assets:
Excess purchase price over net assets acquired $ 74,220 $ 74,220
Curriculum 1,497 1,497
Accumulated amortization (19,356) (16,533)
--------- ---------
56,361 59,184
Deferred financing costs 8,769 8,769
Accumulated amortization (3,252) (2,141)
Other assets 3,230 3,347
--------- ---------
$ 65,108 $ 69,159
========= =========
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
(in thousands of dollars)
JUNE 30, JULY 1,
2001 2000
--------- ---------
Senior Notes, 10.0% due May 15, 2008 (a) $ 145,000 $ 145,000
Borrowings under credit agreement (b) 50,250 38,250
Capital lease obligations 653 966
--------- ---------
195,903 184,216
Less current maturities of long-term debt
and capital lease obligations (1,255) (1,897)
--------- ---------
$ 194,648 $ 182,319
========= =========
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 are joint and
several obligations of Parent and its 100% owned subsidiary, La
Petite, as co-issuers, and are fully and unconditionally guaranteed on
a joint and several basis by all of La Petite's other subsidiaries,
namely, Bright Start and Services. Bright Start and Services are 100%
owned subsidiaries of La Petite. Parent has no independent assets or
operations. There does not exist any restrictions on the ability of
Parent or La Petite to obtain funds from its subsidiaries by dividend
or loan. 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 of the same
notional amount with an imbedded collar during the third quarter of
fiscal year 1999. The effect of this transaction was that 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 of 10.9% and 9.2%. On January 11, 2001, the
Company entered into an agreement with the counter party to terminate
the interest rate swap on the Senior Notes. The
F-11
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
termination agreement required the Company to pay the counter party
$575,000 on February 28, 2001, which was recorded in interest expense.
b) On May 11, 1998 the Company 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 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 bear an interest rate per annum equal to (at the
Company's option): (i) an adjusted London inter-bank offered rate
(LIBOR) not to be less than an amount equal to 2.5% per annum, plus a
percentage based on the Company'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 the Company's financial performance. The
Company is 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 fiscal year 2001 through 2003, $7.8 million in fiscal
year 2004, and $27.5 million in fiscal year 2005. The term loan is
also 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 percentage of excess
cash flow (as defined). At June 30, 2001 there was $13.0 million
outstanding on the revolver.
To reduce the impact of interest rate changes on the term loan, the
Company entered into interest rate collar agreements during the second
quarter of fiscal year 1999. The collar agreements cover the LIBOR
interest rate portion of the term loan, effectively setting maximum
and minimum interest rates of 9.5% and 7.9%. As of June 30, 2001, the
notional value of the interest rate collar agreement was $18.6
million.
At June 30, 2001, the Company was not in compliance with certain of
the financial covenants contained in the Credit Agreement. On November
14, 2001, the Company entered into Amendment No. 3 to Credit Agreement
and Waiver (the "Amendment"), which effectively waived the events of
default and established future modified financial covenants (see Note
13). The Company expects to comply with the amended financial
covenants contained in the Credit Agreement, as amended by the
Amendment, throughout fiscal year 2002. However, there can be no
assurance that the Company will be able to do so. Additionally, the
Amendment established revised rates of interest based on the Company's
leverage ratio, as defined.
Scheduled maturities and mandatory prepayments of long-term debt and
capital lease obligations during the five years subsequent to June 30, 2001
are as follows (in thousands of dollars):
2002 $ 1,255
2003 14,220
2004 7,928
2005 27,500
2006 0
2007 and thereafter 145,000
---------
$ 195,903
=========
F-12
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. OTHER LONG-TERM LIABILITIES
(in thousands of dollars)
JUNE 30, JULY 1,
2001 2000
-------- -------
Unfavorable lease, net of accumulated amortization $ 2,542 $ 3,973
Reserve for closed academies 1,858 5,295
Interest rate swap agreement 10 -
Long-term insurance liabilities 2,650 3,793
------- -------
$ 7,060 $13,061
======= =======
In connection with the acquisition of La Petite and Bright Start, an
intangible liability for unfavorable operating leases was recorded and is
being amortized over the average remaining life of the leases.
The reserve for closed academies includes the long-term liability related
primarily to leases for Academies that 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):
52 WEEKS 52 WEEKS 44 WEEKS
ENDED ENDED ENDED
JUNE 30, JULY 1, JULY 3,
2001 2000 1999
-------- -------- --------
Refundable (Payable) Currently:
Federal $ 23 $(8,304) $ 1,426
State 4 (1,612) 277
------- ------- -------
Total 27 (9,916) 1,703
------- ------- -------
Deferred:
Federal (264) 4,046 (593)
State (51) 785 (115)
------- ------- -------
Total (315) 4,831 (708)
------- ------- -------
$ (288) $(5,085) $ 995
======= ======= =======
The difference between the provision for income taxes, as reported in the
Consolidated Statements of Operations, 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 $2.6 million, $2.6 million, and $1.8 million in the 52
weeks ended June 30, 2001, July 1, 2000, and the 44 weeks ended July 3,
1999, 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).
F-13
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 June 30,
2001 and July 1, 2000 are estimated as follows (in thousands of dollars):
JUNE 30, JULY 1,
2001 2000
-------- --------
Current deferred taxes:
Accruals not currently deductible $ 2,519 $ 3,788
Supplies (2,633) (2,985)
Prepaids and other (1,515) 147
-------- --------
Net current deferred tax assets (liabilities) $ (1,629) $ 950
======== ========
Noncurrent deferred taxes:
Unfavorable leases $ 1,032 $ 1,613
Insurance reserves 1,076 1,540
Reserve for closed academies 754 2,150
Carryforward of net operating loss 8,120 3,847
Property and equipment 4,651 4,448
Intangible assets 324 349
Other 319 291
-------- --------
Net noncurrent deferred tax assets $ 16,276 $ 14,238
======== ========
The Company has federal net operating loss carry-forwards of $17.1 million
to offset future taxable income through the tax year 2012 and 2018.
Management believes that the deferred tax assets recorded on the balance
sheet are recoverable and no reserve is required.
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
$47.4 million, $52.3 million, and $39.1 million, for the 52 weeks ended
June 30, 2001, July 1, 2000, and 44 weeks ended July 3, 1999, respectively.
Contingent rental expense of $2.3 million, $1.9 million and $1.4 million
were included in rental expense for the 52 weeks ended June 30, 2001, July
1, 2000, and the 44 weeks ended July 3, 1999.
Aggregate minimum future rentals payable under facility leases as of June
30, 2001 were as follows (in thousands of dollars):
Fiscal year ending:
2002 $ 41,880
2003 37,104
2004 30,525
2005 24,083
2006 20,485
2007 and thereafter 58,988
---------
$ 213,065
---------
F-14
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
The authorized stock of Parent as of June 30, 2001 consists of:
(i) 45,000 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 $45.0 million on May 11, 2008.
The preferred stock is non-voting and mandatorily redeemable on May
11, 2008. Dividends at the rate of 12.0% per annum 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 $1,360.563 as of June 30, 2001 and
$1,211.291 as of July 1, 2000. 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 564,985 shares were issued and outstanding as
of June 30, 2001.
(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 June 30, 2001. 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 64,231 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 discounts on the
preferred stock by allocating $8,596,000 to the Warrants
representing the fair value of the Warrants when issued.
8. BENEFIT PLAN
The Company sponsored 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 and plan administration cost expense
attributable to this Plan was $15,679, $0.3 million and $0.3 million for
the 52 weeks ended June 30, 2001, July 1, 2000, and the 44 weeks ended July
3, 1999, respectively.
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 on financial
position and results of operations of the Company was not material.
However, recognizing some inherent deficiencies in the Plan's design, the
Company petitioned the IRS for the right to terminate the plan effective
May 31, 1999, and on January 13, 2000 the Company received a favorable
determination from the IRS and terminated the plan effective May 31, 1999.
The Company sponsored a new defined contribution plan (the "2001 Plan") for
substantially all employees. Eligible participants may make contributions
to the 2001 Plan from 0% to 15% of their compensation (as defined). The
Company may make contributions at the discretion of the Board of Directors.
The Company made no contributions for fiscal year 2001.
F-15
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. 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 position, results of
operations and cash flows.
10. STOCK-BASED COMPENSATION
On August 27, 1995, the Board of Directors of Parent adopted the
"Non-Qualified Stock Option Agreement" (1995 Plan). Under the terms of the
1995 Plan, the Board of Directors in their sole discretion granted
non-qualified stock options, with respect to the common stock of Parent, 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 Parent, 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 Parent adopted the "1998
Stock Option Plan" (1998 Plan). The 1998 Plan provides for the granting of
Tranche A and Tranche B options to purchase up to 60,074 shares of the
Parent's common stock. During the 2001 year, the Board of Directors of
parent amended the 1998 Plan, increasing to 230,000 the number of shares of
the Parent's common stock that may be purchased. Tranche A options were
granted at prices, which approximated the fair value of a share of common
stock of the Parent 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).
On August 19, 1999, the board of directors of the Parent adopted the 1999
Stock Option Plan for Non-Employee Directors (1999 Plan). Under the terms
of the 1999 Plan, 10,000 shares of Parent's common stock are reserved for
issuance to non-employee directors at prices that approximate the fair
value of a share of Parent's common stock at the date of issuance. Options
vest ratably on the last day of each month over four years following the
date of grant, if the person is a director on that day.
F-16
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Stock option transactions during the past three years have been as follows:
1998 PLAN 1998 PLAN
1995 PLAN TRANCHE A TRANCHE B 1999 PLAN
--------------------- --------------------- --------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
OPTIONS AVG. PRICE OPTIONS AVG. PRICE OPTIONS AVG. PRICE OPTIONS AVG. PRICE
------- ---------- ------- ---------- ------- ---------- ------- ----------
Options outstanding
at August 29, 1998 20,717 $ 19.19 38,850 $ 66.92 13,205 $ 133.83
------- ---------- ------- ---------- ------- ---------- ------- ----------
Granted 4,500 $ 66.92 1,200 $ 133.83
------- ---------- ------- ---------- ------- ---------- ------- ----------
Options outstanding
at July 3, 1999 20,717 $ 19.19 43,350 $ 66.92 14,405 $ 133.83
------- ---------- ------- ---------- ------- ---------- ------- ----------
Granted 4,400 $ 66.92
Exercised 4,959 $ 18.00
Canceled 11,795 $ 19.01 33,450 $ 66.92 9,605 $ 133.83
------- ---------- ------- ---------- ------- ---------- ------- ----------
Options outstanding
at July 1, 2000 3,963 $ 21.22 9,900 $ 66.92 4,800 $ 133.83 4,400 $ 66.92
------- ---------- ------- ---------- ------- ---------- ------- ----------
Granted 182,285 $ 66.92
Canceled 750 $ 18.00 2,575 $ 66.92 4,200 $ 133.83 500 $ 66.92
------- ---------- ------- ---------- ------- ---------- ------- ----------
Options outstanding
at June 30, 2001 3,213 $ 21.97 189,610 $ 66.92 600 $ 133.83 3,900 $ 66.92
======= ========== ======= ========== ======= ========== ======= ==========
Options exercisable
at June 30, 2001 3,213 55,308 1,787
======= ======= ======= =======
Options available for
grant at June 30, 2001 25,374 14,416 6,100
======= ======= ======= =======
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------------------------------------------------------------------------------
1995 Plan:
$ 18.00 2,463 4.2 years $ 18.00 2,463 $ 18.00
$ 35.00 750 5.5 years $ 35.00 750 $ 35.00
-------------------------------------------------------------------------------------
$ 18.00 to $ 35.00 3,213 4.5 years $ 21.97 3,213 $ 21.97
=====================================================================================
1998 Tranche A:
$ 66.92 189,610 8.8 years $ 66.92 55,308 $ 66.92
=====================================================================================
1998 Tranche B
$133.83 600 6.9 years $133.83
=====================================================================================
1999 Plan
$ 66.92 3,900 8.1 years $ 66.92 1,787 $ 66.92
=====================================================================================
F-17
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, "Accounting for Stock-Based Compensation," the Company's net
loss would have been increased by (in thousands) $11 in 2001, $14 in 2000
and $37 in 1999. 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.
11. ACQUISITION
On July 21, 1999, the Company acquired all the outstanding shares of Bright
Start for $9.3 million in cash and assumed approximately $2.0 million in
debt. At the time of the acquisition, Bright Start operated 43 preschools
in the states of Minnesota, Wisconsin, Nevada, and New Mexico with one new
school under construction. 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 was accounted for as a purchase and,
accordingly, the purchase price has been allocated to the fair value of net
assets acquired and resulted in an allocation to goodwill of $10.1 million
which is being amortized on a straight-line basis over 20 years. The
Company's financial statements reflect the results of operations of Bright
Start during the period subsequent to July 21, 1999. On an unaudited pro
forma basis, assuming the acquisition had occurred on July 4, 1998, the
Company's operating revenue and net loss for the 52 weeks ended July 3,
1999 would have been $352.0 million and $1.2 million, respectively.
12. RESTRUCTURING CHARGE
In the third quarter of 2000, management committed to a plan to close
certain 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 a $7.5 million restructuring charge ($4.5 million
after tax) to provide for costs associated with the closures of 49
Academies. The charge consisted principally of $5.9 million for the present
value of rent, real estate taxes, common area maintenance charges, and
utilities, net of anticipated sublease income, and $1.1 million for the
write-down of fixed assets to fair market value.
As of June 30, 2001, the following costs related to the closings and
restructurings were charged against the 2000 year restructuring reserve:
FACILITIES
& RELATED OTHER
ASSETS COSTS TOTAL
---------- ------- -------
Reserves recorded in fiscal year 2000 $ 6,989 $ 511 $ 7,500
Amount utilized in fiscal year 2000 (1,234) (149) (1,383)
------- ------- -------
Balance at July 1, 2000 5,755 362 6,117
Amount utilized in fiscal year 2001 (2,222) (139) (2,361)
------- ------- -------
Balance at June 30, 2001 $ 3,533 $ 223 $ 3,756
======= ======= =======
F-18
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. SUBSEQUENT EVENTS
On November 14, 2001, the Company and certain of its senior secured lenders
entered into Amendment No. 3 to Credit Agreement and Waiver (the
"Amendment"). The Amendment waived existing defaults in connection with the
failure to satisfy certain financial covenants for the quarterly periods
ended June 30, 2001 and September 30, 2001, and the failure to deliver
timely financial information to the senior secured lenders. Additionally,
the Amendment revised certain future financial covenants. The Company
expects to comply with the financial covenants contained in the Credit
Agreement, as amended, throughout fiscal year 2002. However, there can be
no assurance that the Company will be able to do so. The Amendment also
provided for specific waivers necessary to permit the issuance of a new
class of convertible preferred stock of the Company. In consideration for
the waiver and amendments, the Company is required to issue additional
equity of $15.0 million prior to May 14, 2002, with $3.4 million to be
issued prior to the effectiveness of the Amendment and an additional $0.825
million to be issued prior to December 31, 2001. As part of the Amendment,
JPMP agreed to guarantee a portion of the bank debt if LPA fails to satisfy
its commitment to purchase the new equity prior to May 14, 2002 or earlier
if the bank debt has been accelerated. The amount of such guaranty equals
the amount of LPA's unfunded commitment to purchase the new equity, as
adjusted from time to time.
The Company offered all of its stockholders the right to purchase up to
their respective pro rata amount of a newly created class of convertible
preferred stock and warrants to purchase common stock. The convertible
preferred stock is junior to the redeemable preferred stock of Parent in
terms of dividends, distributions, and rights upon liquidation. Up to $4.25
million of convertible preferred stock of Parent and warrants to purchase
562,500 shares of common stock were offered. At any time, or from time to
time, prior to May 14, 2002, as requested by Parent, the stockholders of
Parent participating in the offer are required to purchase the balance of
the convertible preferred stock being offered. All of the proceeds received
by Parent will be contributed to La Petite as common equity and will be
used by La Petite for general working capital and liquidity purposes.
Pursuant to the offer, on November 15, 2001 LPA acquired $3.4 million of
Parent's convertible preferred stock and received warrants to purchase
452,343 shares of common stock. The proceeds were contributed to La Petite
as common equity. In connection with such purchase, the banks waived their
right under the Credit Agreement to require that the proceeds be used to
repay amounts outstanding under the Credit Agreement. LPA also committed to
purchase the balance of the $11.6 million of convertible preferred stock
being offered and not otherwise purchased by the other stockholders of the
Company. After giving effect to the investment on November 15, 2001, LPA
beneficially owns approximately 90.0% of Parent's outstanding common stock
on a fully diluted basis.
In connection with the Amendment to the Credit Agreement and the $15.0
million of committed capital, management is continuing to review plans and
actions that will enable the Company to improve future operations. However,
there can be no assurance that the Company will be able to do so.
******
F-19
LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
OCTOBER 20, 2001 JUNE 30, 2001
---------------- -------------
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE
AND PER SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents $ 5,427 $ 5,078
Restricted cash investments 949 91
Receivables (net of allowance for doubtful accounts of $917 and
$537, respectively) 9,487 9,920
Prepaid supplies and expenses 13,108 9,821
Other current assets 980 55
--------- ---------
Total current assets 29,951 24,965
Property and equipment (net of accumulated depreciation of $49,034
and $46,278, respectively) 57,670 59,024
Intangible assets (net of accumulated amortization of $20,225 and
$19,356, respectively) 55,493 56,361
Other assets 8,347 8,747
Deferred income taxes 17,603 16,276
--------- ---------
$ 169,064 $ 165,373
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Overdrafts due banks $ 5,136 $ 5,925
Accounts payable 5,976 5,707
Other current liabilities (Note 3) 40,045 34,385
--------- ---------
Total current liabilities 51,157 46,017
Long-term debt and capital lease obligations (Note 4) 197,770 194,648
Other long-term liabilities 5,530 7,060
Series A 12% redeemable preferred stock ($.01 par value per share);
45,000 shares authorized, issued and outstanding as of
October 20, 2001 and June 30, 2001 at aggregate liquidation
preference of $1,410.254 and $1,360.563 per share, respectively 57,457 54,941
Stockholders' deficit:
Class A Common Stock ($.01 par value per share); 950,000 shares
authorized and 564,985 issued and outstanding as of October 20, 2001
and June 30, 2001 6 6
Class B Common stock ($.01 par value per share); 20,000 shares authorized,
issued and outstanding as of October 20, 2001 and June 30, 2001
Common stock warrants 8,596 8,596
Other comprehensive income 310 331
Accumulated deficit (151,762) (146,226)
--------- ---------
Total stockholders' deficit (142,850) (137,293)
--------- ---------
$ 169,064 $ 165,373
========= =========
See notes to consolidated financial statements.
F-20
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS (UNAUDITED)
16 WEEKS ENDED
-----------------------------
OCTOBER 20, OCTOBER 21,
2001 2000
----------- -----------
(IN THOUSANDS OF DOLLARS)
Revenues, net $ 117,307 $ 114,274
Operating expenses:
Salaries, wages and benefits 65,039 65,011
Facility lease expense 13,985 13,689
Depreciation and amortization 4,588 4,798
Provision for doubtful accounts 882 888
Other 30,785 28,118
--------- ---------
Total operating expenses 115,279 112,504
--------- ---------
Operating income 2,028 1,770
Interest income (85) (28)
Interest expense 6,638 7,441
--------- ---------
Loss before income taxes (4,525) (5,643)
Benefit for income taxes (1,505) (1,976)
--------- ---------
Net Loss (3,020) (3,667)
========= =========
Other comprehensive income (loss):
Other comprehensive loss (1,565)
Reclassification into operations 21 (157)
--------- ---------
Total other comprehensive loss 21 (1,722)
--------- ---------
Comprehensive loss $ (2,999) $ (5,389)
========= =========
See notes to consolidated financial statements.
F-21
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
16 WEEKS ENDED
------------------------
OCTOBER 20, OCTOBER 21,
2001 2000
----------- -----------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,020) $(3,667)
Adjustments to reconcile net loss to net cash from operating activities:
Amortization of transition adjustment into operations (35) 264
Depreciation and amortization 4,881 5,140
Deferred income taxes (3,868) (2,910)
Changes in assets and liabilities:
Receivables 433 (1,361)
Prepaid supplies and expenses (3,287) 2,326
Accrued property and sales taxes 967 875
Accrued interest payable 4,540 5,503
Accounts payable and other current liabilities (26) (5,639)
Other changes in assets and liabilities, net 1,148 (196)
------- -------
Net cash from operating activities 1,733 335
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (2,568) (1,920)
Proceeds from sale of assets 2 183
------- -------
Net cash used for investing activities (2,566) (1,737)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt and capital lease obligations (371) (645)
Borrowings under the Revolving Credit Agreement 3,200 6,000
Increase (reduction) in overdrafts due banks (789) (797)
Decrease (increase) in restricted cash investments (858) (3,990)
------- -------
Net cash provided by financing activities 1,182 568
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 349 (834)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,078 4,008
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,427 $ 3,174
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 3,255 $ 1,332
Income taxes 83 94
Cash received during the period for:
Interest $ 85 $ 33
Income taxes 19
See notes to consolidated financial statements.
F-22
LPA HOLDING CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
La Petite Academy, Inc. (La Petite), founded in 1968, is the largest
privately held and one of the leading for-profit preschool educational
providers in the United States. La Petite Academy, Inc. provides
center-based educational services and childcare to children between the
ages of six weeks and 12 years.
La Petite is owned by LPA Holding Corp. (Parent). On March 17, 1998, LPA
Investment LLC (LPA), a Delaware limited liability company owned by an
affiliate of J.P. Morgan Partners (JPMP), formerly Chase Capital Partners,
and by an entity controlled by Robert E. King, a director of La Petite and
Parent, entered into an Agreement and Plan of Merger pursuant to which a
wholly owned subsidiary of LPA was merged into Parent (the
Recapitalization). The Recapitalization was completed May 11, 1998.
On December 15, 1999, LPA acquired an additional $15.0 million of Parent's
redeemable preferred stock and received warrants to purchase an additional
3% of Parent's common stock on a fully-diluted basis. The $15.0 million
proceeds received by Parent was contributed to La Petite as common equity.
As a result of the recapitalization and additional purchase of preferred
stock and warrants, LPA beneficially owns 81.3% of the common stock of
Parent on a fully diluted basis and $45 million of redeemable preferred
stock of Parent (See Note 7). An affiliate of JPMP owns a majority of the
economic interests of LPA and an entity controlled by Robert E. King owns a
majority of the voting interests of LPA.
La Petite has two wholly owned subsidiaries, LPA Services, Inc. (Services),
a third party administrator for La Petite insurance claims, and Bright
Start, Inc. (Bright Start), an operator of preschools in various states.
Parent, consolidated with La Petite, Bright Start and Services, is referred
to herein as the Company.
As of October 20, 2001, the Company operated 725 Academies including 661
residential Academies, 32 employer-based Academies and 32 Montessori
schools located in 36 states and the District of Columbia. For the 16 weeks
ended October 20, 2001, the Company had an average attendance of
approximately 72,000 full and part-time children.
2. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments necessary for their fair
presentation in conformity with accounting principles generally accepted in
the United States of America (GAAP). The results for the interim period are
not necessarily indicative of the results to be expected for the entire
fiscal year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or omitted.
These financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Form 10-K for the fiscal year ended June 30, 2001.
The preparation of financial statements in conformity with GAAP 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.
The Company utilizes a 52 or 53-week fiscal year ending on the Saturday
closest to June 30 and is composed of 13 four-week periods. The first
quarter contains four such periods or 16 weeks and each remaining quarter
contains 3 periods or 12 weeks.
Certain reclassifications to prior year amounts have been made in order to
conform to the current year presentation.
F-23
3. OTHER CURRENT LIABILITIES (in thousands of dollars)
<Table>
<Caption>
OCTOBER 20, 2001 JUNE 30, 2001
--------------------- ---------------------
Current reserve for closed academies $ 3,024 $ 3,100
Current maturities of long-term debt and capital lease
obligations 974 1,255
Accrued salaries, wages and other payroll costs 14,734 15,495
Accrued insurance liabilities 3,276 2,359
Accrued property and sales taxes 4,335 3,368
Accrued interest payable 7,027 2,487
Other current liabilities 6,675 4,692
Current deferred income taxes 1,629
--------------------- ---------------------
$ 40,045 $ 34,385
--------------------- ---------------------
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (IN THOUSANDS OF DOLLARS)
OCTOBER 20, 2001 JUNE 30, 2001
---------------------- ---------------------
Senior Notes, 10.0% due May 15, 2008 $ 145,000 $ 145,000
Borrowings under credit agreement 53,200 50,250
Capital lease obligations 544 653
---------------------- ---------------------
198,744 195,903
Less current maturities of long-term debt and capital lease
Obligations (974) (1,255)
---------------------- ---------------------
$ 197,770 $ 194,648
---------------------- ---------------------
</Table>
5. COMMITMENTS AND 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 position or results of
operation.
6. NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards ("SFAS") No. 141, Business Combinations, No.
142, Goodwill and other Intangible Assets, No. 143, Accounting for Asset
Retirement Obligations, and No. 144, Accounting for the Impairment or
Disposal of Long Lived Assets. These Statements are effective on various
dates through the Company's 2002 and 2003 fiscal years. The Company has not
yet determined the impact of implementation of these Statements.
7. SUBSEQUENT EVENTS
On November 14, 2001, the Company and certain of its senior secured lenders
entered into Amendment No. 3 to Credit Agreement and Waiver (the
"Amendment"). The Amendment waived existing defaults in connection with the
failure to satisfy certain financial covenants for the quarterly periods
ended June 30, 2001 and September 30, 2001, and the failure to deliver
timely financial information to the senior secured lenders. Additionally,
the Amendment revised certain future financial covenants. The Company
expects to comply with the financial covenants contained in the Credit
Agreement, as amended, throughout fiscal year 2002. However,
F-24
LPA HOLDING CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
there can be no assurance that the Company will be able to do so. The
Amendment also provided for specific waivers necessary to permit the
issuance of a new class of convertible preferred stock of the Company. In
consideration for the waiver and amendments, the Company is required to
issue additional equity of $15.0 million prior to May 14, 2002, with $3.4
million to be issued prior to the effectiveness of the Amendment and an
additional $0.825 million to be issued prior to December 31, 2001. As part
of the Amendment, JPMP agreed to guarantee a portion of the bank debt if
LPA fails to satisfy its commitment to purchase the new equity prior to May
14, 2002 or earlier if the bank debt has been accelerated. The amount of
such guaranty equals the amount of LPA's unfunded commitment to purchase
the new equity, as adjusted from time to time.
The Company offered all of its stockholders the right to purchase up to
their respective pro rata amount of a newly created class of convertible
preferred stock and warrants to purchase common stock. The convertible
preferred stock is junior to the redeemable preferred stock of Parent in
terms of dividends, distributions, and rights upon liquidation. Up to $4.25
million of convertible preferred stock of Parent and warrants to purchase
562,500 shares of common stock were offered. At any time, or from time to
time, prior to May 14, 2002, as requested by Parent, the stockholders of
Parent participating in the offer are required to purchase the balance of
the convertible preferred stock being offered. All of the proceeds received
by Parent will be contributed to La Petite as common equity and will be
used by La Petite for general working capital and liquidity purposes.
Pursuant to the offer, on November 15, 2001 LPA acquired $3.4 million of
Parent's convertible preferred stock and received warrants to purchase
452,343 shares of common stock. The proceeds were contributed to La Petite
as common equity. In connection with such purchase, the banks waived their
right under the Credit Agreement to require that the proceeds be used to
repay amounts outstanding under the Credit Agreement. LPA also committed to
purchase the balance of the $11.6 million of convertible preferred stock
being offered and not otherwise purchased by the other stockholders of the
Company. After giving effect to the investment on November 15, 2001, LPA
beneficially owns approximately 90.0% of Parent's outstanding common stock
on a fully diluted basis.
In connection with the Amendment to the Credit Agreement and the $15.0
million of committed capital, management is continuing to review plans and
actions that will enable the Company to improve future operations. However,
there can be no assurance that the Company will be able to do so.
F-25
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
provides for the indemnification of officers and directors under
certain circumstances against expenses incurred in successfully
defending against a claim and authorizes Delaware corporations to
indemnify their officers and directors under certain circumstances
against expenses and liabilities incurred in legal proceedings
involving such persons because of their being or having been an officer
or director. Pursuant to Section 102(b)(7) of the General Corporation
Law of the State of Delaware, the Certificate of Incorporation of La
Petite and parent company provide that the directors of La Petite and
parent company, individually or collectively, shall not be held
personally liable to La Petite or parent company (as the case may be)
or their respective stockholders for monetary damages for breaches of
fiduciary duty as directors, except that any director shall remain
liable (1) for any breach of the director's fiduciary duty of loyalty
to La Petite or parent company (as the case may be) or their respective
stockholders, (2) for acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of law, (3) for liability
under Section 174 of the General Corporation Law of the State of
Delaware or (4) for any transaction from which the director derived an
improper personal benefit. The by-laws of La Petite and parent company
provide for indemnification of their respective officers and directors
to the full extent authorized by law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
3.1(i) Amended and Restated Certificate of Incorporation of LPA
Holding Corp.
3.2(i) Certificate of Designations, Preferences and Rights of
Series A Redeemable Preferred Stock of LPA Holding
Corp.
3.3(i) Bylaws of LPA Holding Corp.
3.4(i) Amended and Restated Certificate of Incorporation of La
Petite Academy, Inc.
3.5(i) Bylaws of La Petite Academy, Inc.
3.6(vi) Certificate of Incorporation of LPA Services.
3.7(vi) By-Laws of LPA Services.
3.8(vi) Amended and Restated Articles of Incorporation of Bright
Start, Inc.
3.9(vi) By-Laws of Bright Start, Inc.
3.10(v) Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of LPA Holding Corp., filed
on December 13, 1999.
3.11(v) Certificate of Amendment of the Certificate of
Designations, Preferences and Rights of Series A
Redeemable Preferred Stock of LPA Holdings Corp., filed
on December 13, 1999.
3.12(ix) Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of LPA Holding Corp.,
filed on November 14, 2001.
3.13(ix) Certificate of Designations, Preferences and Rights of
Series B Convertible Redeemable Participating Preferred
Stock of LPA Holding Corp., filed on November 14, 2001.
4.1(i) Indenture among LPA Holding Corp., La Petite Academy,
Inc., LPA Services, Inc. and PNC Bank, National
Association dated as of May 11, 1998.
4.2(iv) First Supplemental Indenture dated as of July 23, 1999,
among Bright Start, Inc., LPA Holding Corp., La Petite
Academy, Inc. and The Chase Manhattan Bank.
5.1(i) Opinion of O'Sullivan LLP (formerly known as O'Sullivan
Graev & Karabell, LLP).
10.1(i) Purchase Agreement among Vestar/LPA Investment
Corp., La Petite Academy, Inc., LPA Services,
Inc., J.P. Morgan Securities Inc. and NationsBanc
Montgomery Securities LLC dated May 6, 1998.
II-1
EXHIBIT
NUMBER DESCRIPTION
10.2(i) 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(i) Merger Agreement by and between LPA Investment LLC and
Vestar/LPA Investment Corp. dated as of March 17, 1998.
10.5(i) Stockholders Agreement among LPA Holding Corp.,
Vestar/LPT Limited Partnership, LPA Investment LLC and
the management stockholders dated as of May 11, 1998.
10.5a(v) Amendment #1 and Consent of the Stockholders Agreement
among LPA Holding Corp., Vestar/LPT Limited Partnership,
LPA Investment LLC and the management stockholders dated
April 8, 1999 .
10.6(i) 1998 Stock Option Plan and Stock Option Agreement for
LPA Holding Corp. dated as of May 18, 1998.
10.7(i) Preferred Stock Registration Rights Agreement between
LPA Holding Corp. and LPA Investment LLC dated May 11,
1998.
10.8(i) 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(i) Credit Agreement dated as of May 11, 1998 among La
Petite Academy, Inc., LPA Holding Corp., Nationsbank,
N.A., and The Chase Manhattan Bank.
10.10(i) Pledge Agreement among La Petite Academy, Inc., LPA
Holding Corp., Subsidiary Pledgors and Nationsbank,
N.A. dated as of May 11, 1998.
10.11(i) Security Agreement among La Petite Academy, Inc., LPA
Holding Corp., Subsidiary Guarantors and Nationsbank,
N.A. dated as of May 11, 1998.
10.12(i) Parent Company Guarantee Agreement among LPA Holding
Corp. and Nationsbank, N.A. dated as of May 11, 1998.
10.13(i) Subsidiary Guarantee Agreement among Subsidiary
Guarantor of La Petite Academy, Inc., LPA Services, Inc.
and Nationsbank, N.A. dated as of May 11, 1998.
10.14(i) 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.
10.15(v) 1999 Stock Option Plan for Non-Employee Directors.
10.16(iii) Agreement and Plan of Merger By and Between La Petite
Academy, Inc., LPA Acquisition Co. Inc., and Bright
Start, Inc.
10.17(v) Amendment No. 1, Consent and Waiver dated as of December
13, 1999, to the Credit Agreement dated as of May 11,
1998 among LPA Holding Corp., La Petite Academy, Inc.,
Bank of America, N.A. (formerly known as NationsBank,
N.A.) as Administrative Agent, Documentation Agent and
Collateral Agent for the Lenders and The Chase Manhattan
Bank as Syndication Agent.
10.18(v) Warrant No. 2 dated as of December 15, 1999, issued by
LPA Holding Corp. to LPA Investment LLC.
10.19(v) Amendment No. 1 and Consent dated as of April 8, 1999,
among LPA Holding Corp., Vestar/LPT Limited Partnership,
LPA Investment LLC and the management stockholders named
therein, to the Stockholders Agreement dated as of May
11, 1999, among LPA Holding Corp., Vestar/LPT Limited
Partnership, LPA Investment LLC and the management
stockholders named therein.
10.20(v) Amendment No. 1 to the LPA Holding Corp. 1999 Stock
Option Plan for Non-Employee Directors.
10.21(vii) Employment Agreement among LPA Holding Corp., La Petite
Academy, Inc., and Judith A. Rogala.
10.22(viii) Amendment No. 2, Consent and Waiver dated as of June 29,
2000, to the Credit Agreement dated as of May 11, 1998,
as amended, among LPA Holding Corp., La Petite Academy,
Inc., Bank of America, N.A. (formerly known as
NationsBank, N.A.) as Administrative Agent,
Documentation Agent and Collateral Agent for the Lenders
and The Chase Manhattan Bank as Syndication Agent.
II-2
EXHIBIT
NUMBER DESCRIPTION
10.23(ix) Amendment No. 3, Consent and Waiver dated as of November
14, 2001, to the Credit Agreement dated as of May 11,
1998, as amended, among LPA Holding Corp., La Petite
Academy, Inc., Bank of America, N.A. (formerly known as
NationsBank, N.A.) as Administrative Agent,
Documentation Agent and Collateral Agent for the Lenders
and Chase Bank of Texas, National Association (formerly
known as The Chase Manhattan Bank) as Syndication Agent.
10.24(ix) Guarantee, dated as of November 15, 2001, by J.P. Morgan
Partners (23A SBIC), LLC for the benefit of the Lenders
(as defined in the Credit Agreement, dated as of May 11,
1998, as amended, among LPA Holding Corp., La Petite
Academy, Inc., the Lenders party thereto, Bank of
America, N.A. (formerly known as NationsBank, N.A.) as
Administrative Agent, Documentation Agent and Collateral
Agent for the Lenders and Chase Bank of Texas (formerly
known as The Chase Manhattan Bank) as Syndication Agent.
10.25(ix) Securities Purchase Agreement, dated as of November 14,
2001, among LPA Holding Corp., LPA Investment, LLC and
the other parties thereto.
10.26(ix) Warrant No. 3, dated as of November 14, 2001, issued by
LPA Holding Corp. to LPA Investment, LLC.
12.1(*) Statement regarding computation of ratios.
21.1(vi) Subsidiaries of Registrant.
23.1(i) Consent of O'Sullivan LLP (formerly known as O'Sullivan
Graev & Karabell, LLP) (included in Exhibit 5.1).
23.2(*) Consent of Deloitte & Touche LLP.
24.1 Powers of Attorney (included on the signature page of
Post Effective Amendment No. 3 to this Registration
Statement).
25.1(i) Statement of Eligibility and Qualifications under the
Trust Indenture Act of 1939 of PNC Bank, National
Association as Trustee.
(i) 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.
(ii) Incorporated by reference to the Exhibits to LPA Holding
Corp.'s Form 10-K for the Fiscal Year ended August 29,
1998, filed with the Securities and Exchange Commission
on November 24, 1998.
(iii) Incorporated by reference to the Exhibits to LPA Holding
Corp.'s Form 8-K, filed with the Securities and Exchange
Commission on December 7, 1999.
(iv) Incorporated by reference to the Exhibits to LPA Holding
Corp.'s Form 10-Q/A for the 16 weeks ended October 23,
1999, filed with the Securities and Exchange Commission
on December 16, 1999.
(v) Incorporated by reference to the Exhibits to LPA Holding
Corp.'s Form 8-K, filed with the Securities and Exchange
Commission on December 21, 1999.
(vi) Incorporated by reference to the Exhibits to LPA Holding
Corp.'s Form S-4 Post Effective Amendment #1, filed with
the Securities and Exchange Commission on December 23,
1999.
(vii) Incorporated by reference to the Exhibits to LPA Holding
Corp.'s Form 8-K, filed with the Securities and Exchange
Commission on February 16, 2000.
II-3
EXHIBIT
NUMBER DESCRIPTION
(viii) Incorporated by reference to the Exhibits to La Petite
Academy, Inc.'s Post Effective Amendment No. 3 to
Registration Statement on Form S-4, Registration No.
333-56239, filed with the Securities and Exchange
Commission on November 2, 2000.
(ix) Incorporated by reference to the Exhibits to LPA Holding
Corp.'s Form 8-K, filed with the Securities and Exchange
Commission on November 16, 2001.
(*) Filed herewith.
(b) Financial Statement Schedules:
Schedule I--Condensed Financial Information of Registration
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are not required under the
related instructions, are inapplicable or not material, or the
information called for thereby is otherwise included in the financial
statements and therefore have been omitted.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrants hereby undertake:
1. To file, during any period in which offers or sales
are being made, a post-effective amendment to this
registration statement;
(i) To include any prospectus required by
Section 10(a) (3) of the Securities Act of
1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of
the registration statement (or the most
recent post-effective amendment thereof)
which, individually or in the aggregate,
represent a fundamental change in the
information set forth in the registration
statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement.
2. That, for the purpose of determining any liability
under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities
offered therein, and the offering
II-4
of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
3. To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted
to directors, officers and controlling persons of the
registrants pursuant to the DGCL, the Act, the Certificate of
Incorporation and Bylaws of La Petite or parent company, or
otherwise, the registrants have been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities
(other than the payment by the registrants of expenses
incurred or paid by a director, officer or controlling person
of any registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or
controlling, person in connection with the securities being
registered, the registrants will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the
final adjudication of such issue.
(c) The undersigned registrants hereby undertake to respond to
requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11 or 13 of
this form, within one business day of receipt of such request,
and to send the incorporated documents by first class mail or
other equally prompt means. This includes information
contained in documents filed subsequent to the effective date
of the registration statement through the date of responding
to the request.
(d) The undersigned registrants hereby undertake to supply by
means of a post-effective amendment all information concerning
a transaction, and the company being acquired involved
therein, that was not the subject of and included in the
registration statement when it became effective.
II-5
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS
DULY CAUSED THIS POST EFFECTIVE AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF NEW YORK, STATE OF NEW YORK ON THIS 18TH DAY OF DECEMBER, 2001.
LA PETITE ACADEMY, INC.
By: /s/ Jeffrey J. Fletcher
-------------------------------------
Name: Jeffrey J. Fletcher
Title: Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS POST EFFECTIVE
AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED ON THIS 18TH DAY
OF DECEMBER, 2001 BY THE FOLLOWING PERSONS IN THE CAPACITY INDICATED.
<Table>
<Caption>
SIGNATURE TITLE
/s/ Judith A. Rogala Chief Executive Officer, President and Director
- --------------------------------------------
Judith A. Rogala
/s/ Jeffrey J. Fletcher Chief Financial Officer (principal financial
- -------------------------------------------- officer and principal accounting officer)
Jeffrey J. Fletcher
* Chairman of the Board and Director
- --------------------------------------------
Stephen P. Murray
* Director
- --------------------------------------------
Mitchell J. Blutt, M.D.
* Director
- --------------------------------------------
Brian J. Richmand
* Director
- --------------------------------------------
Robert E. King
* Director
- --------------------------------------------
Terry D. Byers
* Director
- --------------------------------------------
Ronald L. Taylor
*By: /s/ Jeffrey J. Fletcher
----------------------------------------
Jeffrey J. Fletcher
Attorney-in-fact
</Table>
II-6
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS
DULY CAUSED THIS POST EFFECTIVE AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF NEW YORK, STATE OF NEW YORK ON THIS 18TH DAY OF DECEMBER, 2001.
LPA HOLDING CORP.
By: /s/ Jeffrey J. Fletcher
--------------------------------
Name: Jeffrey J. Fletcher
Title: Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS POST EFFECTIVE
AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED ON THIS 18TH DAY
OF DECEMBER, 2001 BY THE FOLLOWING PERSONS IN THE CAPACITY INDICATED.
<Table>
<Caption>
SIGNATURE TITLE
/s/ Judith A. Rogala Chief Executive Officer, President and Director
- --------------------------------------------
Judith A. Rogala
/s/ Jeffrey J. Fletcher Chief Financial Officer (principal financial
- -------------------------------------------- officer and principal accounting officer)
Jeffrey J. Fletcher
* Chairman of the Board and Director
- --------------------------------------------
Stephen P. Murray
* Director
- --------------------------------------------
Mitchell J. Blutt, M.D.
* Director
- --------------------------------------------
Brian J. Richmand
* Director
- --------------------------------------------
Robert E. King
* Director
- --------------------------------------------
Terry D. Byers
* Director
- --------------------------------------------
Ronald L. Taylor
*By: /s/ Jeffrey J. Fletcher
----------------------------------------
Jeffrey J. Fletcher
Attorney-in-fact
</Table>
II-7
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS
DULY CAUSED THIS POST EFFECTIVE AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF NEW YORK, STATE OF NEW YORK ON THIS 18TH DAY OF DECEMBER, 2001.
LPA SERVICES, INC.
By: /s/ Jeffrey J. Fletcher
-----------------------------------------
Name: Jeffrey J. Fletcher
Title: Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS POST EFFECTIVE
AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED ON THIS 18TH DAY
OF DECEMBER, 2001 BY THE FOLLOWING PERSONS IN THE CAPACITY INDICATED.
<Table>
<Caption>
SIGNATURE TITLE
/s/ Judith A. Rogala Chief Executive Officer, President and Director
- --------------------------------------------
Judith A. Rogala
/s/ Jeffrey J. Fletcher Chief Financial Officer (principal financial
- -------------------------------------------- officer and principal accounting officer)
Jeffrey J. Fletcher
* Chairman of the Board and Director
- --------------------------------------------
Stephen P. Murray
* Director
- --------------------------------------------
Mitchell J. Blutt, M.D.
* Director
- --------------------------------------------
Brian J. Richmand
* Director
- --------------------------------------------
Robert E. King
* Director
- --------------------------------------------
Terry D. Byers
* Director
- --------------------------------------------
Ronald L. Taylor
*By: /s/ Jeffrey J. Fletcher
----------------------------------------
Jeffrey J. Fletcher
Attorney-in-fact
</Table>
II-8
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS
DULY CAUSED THIS POST EFFECTIVE AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF NEW YORK, STATE OF NEW YORK ON THIS 18TH DAY OF DECEMBER, 2001.
BRIGHT START, INC.
By: /s/ Jeffrey J. Fletcher
-----------------------------------------
Name: Jeffrey J. Fletcher
Title: Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS POST EFFECTIVE
AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED ON THIS 18TH DAY
OF DECEMBER, 2001 BY THE FOLLOWING PERSONS IN THE CAPACITY INDICATED.
<Table>
<Caption>
SIGNATURE TITLE
/s/ Judith A. Rogala Chief Executive Officer, President and Director
- --------------------------------------------
Judith A. Rogala
/s/ Jeffrey J. Fletcher Chief Financial Officer (principal financial
- -------------------------------------------- officer and principal accounting officer)
Jeffrey J. Fletcher
* Chairman of the Board and Director
- --------------------------------------------
Stephen P. Murray
* Director
- --------------------------------------------
Mitchell J. Blutt, M.D.
* Director
- --------------------------------------------
Brian J. Richmand
* Director
- --------------------------------------------
Robert E. King
* Director
- --------------------------------------------
Terry D. Byers
* Director
- --------------------------------------------
Ronald L. Taylor
*By: /s/ Jeffrey J. Fletcher
----------------------------------------
Jeffrey J. Fletcher
Attorney-in-fact
</Table>
II-9
LPA HOLDING CORP.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS OF DOLLARS)
<Table>
<Caption>
JUNE 30, JULY 1,
BALANCE SHEETS 2001 2000
------------- ---------------
ASSETS:
Investment in La Petite Academy, Inc. $ (27,188) $ (21,207)
------------- ---------------
$ (27,188) $ (21,207)
============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Payable to La Petite Academy, Inc. 55,164 55,132
------------- ---------------
Total current liabilities 55,164 55,132
Series A 12% redeemable preferred stock ($.01 par value per share);
45,000 shares authorized, issued and outstanding at June 30, 2001
at aggregate liquidation preference of $1,360.563 and $1,211.291
as of July 1, 2000 (Note 7) 54,941 47,314
Stockholders' deficit:
Class A common stock ($.01 par value per share); 950,000 shares
authorized and 564,985 shares issued and outstanding as of June 30,
2001 and July 1, 2000 6 6
Class B common stock ($.01 par value per share); 20,000 shares
authorized, issued and outstanding as of June 30, 2001 and July 1,
2000
Common stock warrants 8,596 8,596
Accumulated other comprehensive income 331 -
Accumulated deficit (146,226) (132,255)
------------- ---------------
Total stockholders' deficit (137,293) (123,653)
------------- ---------------
$ (27,188) $ (21,207)
============= ===============
</Table>
See notes to consolidated financial statements.
S-1
LPA HOLDING CORP.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS OF DOLLARS)
<Table>
<Caption>
52 WEEKS 52 WEEKS 44 WEEKS
ENDED ENDED ENDED
JUNE 30, JULY 1, JULY 3,
STATEMENTS OF OPERATIONS 2001 2000 1999
------------- -------------- -------------
Equity in net loss of La Petite Academy, Inc. (5,981) (10,547) (797)
------------- -------------- -------------
Net loss $ (5,981) $ (10,547) $ (797)
============= ============== =============
</Table>
See notes to consolidated financial statements.
S-2
LPA HOLDING CORP.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS OF DOLLARS)
<Table>
<Caption>
52 WEEKS 52 WEEKS 44 WEEKS
ENDED ENDED ENDED
JUNE 30, JULY 1, JULY 3,
STATEMENTS OF CASH FLOWS 2001 2000 1999
----------- ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,981) $ (10,547) $ (797)
Adjustments to reconcile net loss to net cash from operating
activities:
Equity in net loss of La Petite Academy, Inc. 5,981 10,547 797
----------- ------------ -----------
Net cash from operating activities $ - $ - $ -
=========== ============ ===========
</Table>
See notes to consolidated financial statements.
S-3
LPA HOLDING CORP.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<Table>
<Caption>
BALANCE AT CHARGED TO BALANCE AT
JULY 1, COSTS AND JUNE 30,
DESCRIPTION 2000 EXPENSES WRITE-OFFS 2001
-------------- -------------- ------------ --------------
Allowance for doubtful accounts $ 406 $ 4,531 $ 4,400 $ 537
-------------- -------------- ------------ --------------
</Table>
<Table>
<Caption>
BALANCE AT CHARGED TO BALANCE AT
JULY 3, COSTS AND JULY 1,
DESCRIPTION 1999 EXPENSES WRITE-OFFS 2000
-------------- -------------- ------------ --------------
Allowance for doubtful accounts $ 306 $ 2,931 $ 2,831 $ 406
-------------- -------------- ------------ --------------
</Table>
<Table>
<Caption>
BALANCE AT CHARGED TO BALANCE AT
AUGUST 29, COSTS AND JULY 3,
DESCRIPTION 1998 EXPENSES WRITE-OFFS 1999
-------------- -------------- ------------ --------------
Allowance for doubtful accounts $ 196 $ 1,382 $ 1,272 $ 306
-------------- -------------- ------------ --------------
</Table>
S-4
LPA HOLDING CORP.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
RESERVE FOR CLOSED ACADEMIES
<Table>
<Caption>
BALANCE AT CHARGED TO BALANCE AT
JULY 1, COSTS AND CHARGED TO JUNE 30,
DESCRIPTION 2000 EXPENSES RESERVE 2001
------------- ------------- ------------- -------------
Reserve for Closed Academies $ 8,563 $ 426 $ 4,031 $ 4,958
------------- ------------- ------------- -------------
</Table>
<Table>
<Caption>
BALANCE AT CHARGED TO BALANCE AT
JULY 3, COSTS AND CHARGED TO JULY 1,
DESCRIPTION 1999 EXPENSES RESERVE 2000
------------- ------------- ------------- -------------
Reserve for Closed Academies $ 4,048 $ 7,500 $ 2,985 $ 8,563
------------- ------------- ------------- -------------
</Table>
<Table>
<Caption>
BALANCE AT CHARGED TO BALANCE AT
AUGUST 30, COSTS AND CHARGED TO JULY 3,
DESCRIPTION 1998 EXPENSES RESERVE 1999
------------- ------------- ------------- -------------
Reserve for Closed Academies $ 5,417 $ $ 1,369 $ 4,048
------------- ------------- ------------- -------------
</Table>
S-5