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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 3, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 333-56239-01
LPA HOLDING CORP.
(exact name of registrant as specified in its charter)
SEE TABLE OF ADDITIONAL REGISTRANTS
Delaware 48-1144353
(State or other jurisdiction of (IRS employer identification number)
incorporation or organization)
8717 WEST 110TH STREET, SUITE 300
OVERLAND PARK, KANSAS 66210
(Address of principal executive office and zip code)
(913) 345-1250
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
$145,000,000 10% Senior Notes due May 15, 2008
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes [X] No [ ] (2) Yes [X] No [ ]
There are no shares of voting stock of La Petite Academy, Inc. held by
non-affiliates.
As of September 30, 1999, LPA Holding Corp. had outstanding 560,026 shares of
Class A Common Stock (par value, $.01 per share) and 20,000 shares of Class B
Common Stock (par value, $.01 per share). As of September 30, 1999, each of the
additional registrants had the number of outstanding shares, which is shown on
the following table.
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ADDITIONAL REGISTRANTS
Number of Shares
Jurisdiction of Commission IRS Employer of Common
Name Incorporation File Number Identification No. Stock Outstanding
- ---- ------------- ----------- ------------------ -----------------
La Petite Academy, Inc. Delaware 333-56239 43-1243221 100 shares of Common
Stock (par value, $.01
per share)
LPA Services, Inc. Delaware 333-56239-02 74-2849053 1,000 shares of common
stock (par value, $.01
per share)
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LPA HOLDING CORP.
INDEX
- --------------------------------------------------------------------------------
PART I.
PAGE
----
Item 1. Business 4
Item 2. Properties 6
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 17
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 34
PART III.
Item 10. Directors and Executive Officers of the Registrant 35
Item 11. Executive Compensation 38
Item 12. Security Ownership of Certain Beneficial Owners and Management 40
Item 13. Certain Relationships and Related Transactions 40
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 41
SIGNATURES 48
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PART I.
ITEM 1. BUSINESS
MERGER TRANSACTIONS
Vestar/LPA Investment Corp. (Investment), a privately-held Delaware corporation,
was formed in 1993 for the purpose of holding the capital stock of La Petite
Holdings Corp. (Holdings), a Delaware corporation. Holdings was formed in 1993
for the purpose of holding the capital stock of La Petite Acquisition Corp.
(Acquisition). On July 23, 1993, as a result of a series of transactions,
Holdings acquired all the outstanding shares of common stock, par value $.01
(the Common Stock), of La Petite Academy, Inc., a Delaware corporation (La
Petite). The transaction was accounted for as a purchase and the excess of
purchase price over the net assets acquired is being amortized over 30 years. On
May 31, 1997, Holdings was merged with and into La Petite with La Petite as the
surviving corporation. On August 28, 1997, LPA Services, Inc. (Services), a
wholly owned subsidiary of La Petite, was incorporated. Services provides third
party administrative services on insurance claims to La Petite.
On March 17, 1998, LPA Investment LLC (the Investor), a Delaware limited
liability company owned by an affiliate of Chase Capital Partners (CCP) and by
an entity controlled by Robert E. King, a director of La Petite, and Investment,
which was renamed LPA Holding Corp. (Parent), entered into an Agreement and Plan
of Merger pursuant to which a wholly owned subsidiary of the Investor was merged
into Parent (the Recapitalization). In the Recapitalization (i) all of the then
outstanding shares of preferred stock and common stock of Investment (other than
the shares of common stock retained by Vestar/LPT Limited Partnership and
management of La Petite) owned by the existing stockholders of Investment (the
Existing Stockholders) were converted into the right to receive cash and (ii)
the Existing Stockholders received the cash of La Petite as of the date of the
closing of the Recapitalization. As part of the Recapitalization, the Investor
purchased $72.5 million (less the value of options retained by management) of
common stock of the Parent (representing approximately 74.5% of the common stock
of Parent on a fully diluted basis) and $30 million of redeemable preferred
stock of Parent (collectively, the Equity Investment). In addition, in
connection with the purchase of preferred stock of Parent, the Investor received
warrants to purchase up to 6.0% of Parent's common stock on a fully diluted
basis (resulting in an aggregate fully diluted ownership of 80.5% of the common
stock of Parent). The Recapitalization was completed May 11, 1998.
Parent, consolidated with La Petite and Services, is referred to herein as the
Company.
BUSINESS DESCRIPTION
The following discussion refers to La Petite, and includes a discussion of La
Petite prior to the 1993 acquisition:
La Petite Academy, founded in 1968, is the second largest operator of for-profit
preschool educational facilities in the United States. The Company provides
center-based educational and child care services five days a week throughout the
year to children between the ages of six weeks and 12 years. Management believes
the Company differentiates itself through its superior educational programs,
which were developed and are regularly enhanced by its curriculum department.
The Company's focus on quality educational services allows it to capitalize on
the increased awareness of the benefits of premium educational instruction for
preschool and elementary school age children. At its residential and
employer-based Academies, the Company utilizes its proprietary Journey(R)
curriculum with the intent of maximizing a child's cognitive and social
development. The Company also operates Montessori schools which employ the
Montessori method of learning, a classical approach that features the
programming of tasks with materials presented in a sequence dictated by each
individual child's capabilities.
On July 21, 1999 the Company acquired Bright Start, Inc. (see note 13 to the
consolidated financial statements) which operates 43 child care/pre-school
facilities in the states of Minnesota, Wisconsin,
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Nevada, and New Mexico.
As of July 3, 1999, the Company operated 743 educational facilities, including
689 Journey Academies, 27 employer-based Academies and 27 Montessori schools,
located in 35 states and the District of Columbia. For the 44 weeks ended July
3, 1999, the Company had an average attendance of approximately 81,000 full and
part-time children. The Company's average operating capacity (as defined) was
approximately 91,000 full-time children and estimated full-time equivalent
student (FTE) utilization (as defined) was 65% during the 44 weeks ended July 3,
1999.
Tuition for the programs varies depending upon the location of an Academy and is
proportionally higher for children attending part-time. In addition, parents
currently pay an annual registration fee, which is reduced for families with
more than one child attending an Academy.
Historically, the Company's operating revenue has followed the seasonality of a
school year, declining during the summer months and the year-end holiday period.
The number of new children enrolling at the Academies is generally highest in
September-October and January-February and, therefore, the Company attempts to
concentrate its marketing efforts and new Academy openings immediately preceding
these high enrollment periods. Several Academies in certain geographic markets
have a backlog of children waiting to attend; however, this backlog is not
material to the overall attendance throughout the system.
EMPLOYEES
As of July 3, 1999, the Company employed approximately 12,000 persons. The
Company's employees are not represented by any organized labor unions or
employee organizations, and management believes relations with employees are
good.
COMPETITION
Each Academy competes with other child care alternatives in a very localized
market. The preschool education and child care industry is highly fragmented and
has historically been dominated by small, local nursery and day care centers.
The Company is the second largest provider of for-profit preschool education and
child care in the United States based on the number of centers operated and
competes principally with local nursery and day care centers, some of which are
church-affiliated or non-profit, and individuals caring for a few children in
their homes. In addition, in recent years certain public school districts have
begun to offer after school programs which compete with the Company's SuperStar
Program. The Company competes principally by offering trained and qualified
personnel, professionally planned educational and recreational programs,
well-equipped facilities and additional services such as transportation. In
addition, the Company offers a challenging and sophisticated program that
emphasizes the individual development of the child. Management believes that the
quality of the staff and facilities and the unique programs offered are the
principal factors in parents' choice of the Company, although price and location
of the facility are also important. For some of the Company's potential
customers, the non-profit status of certain of the Company's competitors may be
a significant factor in choosing a child care provider.
INSURANCE AND CLAIMS ADMINISTRATION
Since July 1989, the Company has maintained excess liability insurance covering
general liability and automotive liability, in addition to primary general
liability, automotive liability, workers compensation, property and casualty,
crime and directors' and officers' insurance. Management believes that the
coverage provided by these policies is adequate to meet the Company's needs.
Third-party administration and claims payments services for general liability
and auto liability are provided by LPA Services, Inc., a wholly owned subsidiary
of La Petite.
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REGULATION AND GOVERNMENT INVOLVEMENT
Each Academy must be licensed under applicable state and local licensing laws
and is subject to a variety of state and local regulations. Although these state
and local regulations vary greatly from jurisdiction to jurisdiction,
governmental agencies generally review the safety, fitness and adequacy of the
buildings and equipment, the ratio of staff to children, the dietary program,
the daily curriculum and compliance with health standards. In a few
jurisdictions, new legislation or regulations have been enacted or are being
considered which establish requirements for employee background checks or other
clearance procedures for new employees of child care centers. For example, all
states in which the Company operates require criminal record checks for all
child care staff as part of licensing regulations and some require fingerprint
verification. Repeated failures by an Academy to comply with applicable
regulations can subject it to state sanctions, which might include being placed
on probation or, in more serious cases, suspension or revocation of the
Academy's license to operate. Management believes the Company is in substantial
compliance with all material regulations and licensing requirements applicable
to its businesses.
Although no federal license is required at this time, there are minimum
standards, which must be met to qualify for participation in certain federal
subsidy programs.
Government, at both the federal and state levels, is actively involved in
expanding the availability of child care services. Federal support is delivered
at the state level through government-operated educational and financial
assistance programs. Child care services offered directly by states include
training for child care providers and resource and referral systems for parents
seeking child care. In addition, the state of Georgia has an extensive
government-paid private sector preschool program in which the Company
participates.
In August and September of 1998, the National Highway Transportation Safety
Administration (NHTSA) issued interpretative letters that modified its
interpretation of regulations governing the sale by automobile dealers of
vehicles intended to be used for the transportation of children to and from
school. These letters indicate that dealers may no longer sell fifteen-passenger
vans for this use, and that any vehicle designed to transport eleven persons or
more must meet federal school bus standards if it is likely to be "used
significantly" to transport children to and from school or school-related
events. The Company, currently, maintains a fleet of approximately 1,500
fifteen-passenger vans for use in transportation of children which management
believes are safe and effective vehicles for that purpose. The Company's current
fleet meets all necessary federal, state, and local safety requirements. In
accordance, however, with the new NHTSA requirements all new fleet additions or
replacements will meet school bus standards. Accordingly, in August the Company
took delivery of 99 fourteen-passenger school buses. The new school buses cost
approximately 50% more than the fifteen-passenger vans previously purchased and
should have a longer economic useful life. The economic consequences of the
regulatory change will increase the cost to the Company of transporting
children.
COMPLIANCE WITH ENVIRONMENTAL PROTECTION PROVISIONS
Compliance with federal, state and local laws and regulations governing
pollution and protection of the environment is not expected to have any material
effect upon the financial condition or results of operations of the Company.
ITEM 2. PROPERTIES
Due to different licensing requirements and design features, Academies typically
contain 5,400, 6,700 or 7,800 square feet in a one-story, air-conditioned
building typically located on three-quarters of an acre to one acre of land.
Each Academy has an adjacent playground designed to accommodate the full age
range of children attending the Academy.
Licensed capacity for the same size building varies from state to state because
of different licensing requirements. In an open Academy design, a 5,400 square
foot Academy is typically licensed for 100 to 140 children, a 6,700 square foot
Academy is typically licensed for 130 to 170 children and a 7,800 square foot
Academy is typically licensed for 175 to 200 children.
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In 1998, the Company designed new prototypes for residential Academies and
Montessori schools, both of which are 9,500 square foot facilities built on one
acre or more of commercially zoned property. The new residential Academy
facilities have an operating capacity for approximately 175 children and are a
closed classroom designs, without infant rooms, that reflects a preschool
environment and supports the latest curriculum improvements. The Montessori
schools are divided into six equal-sized classrooms, which support 25 children,
resulting in an operating capacity for approximately 150 children. Management
believes the new facilities afford the Company more flexibility to better suit
varying site plans and future changes as residential neighborhoods evolve. The
new exterior design was developed to enhance the appearance and image of the
Academies.
The following table shows the locations of the Company's open Academies as of
July 3, 1999:
Alabama (18) Indiana (17) Nebraska (10) South Carolina (25)
Arizona (25) Iowa (8) Nevada (9) Tennessee (26)
Arkansas (8) Kansas (23) New Jersey (2) Texas (122)
California (58) Kentucky (4) New Mexico (4) Utah (4)
Colorado (25) Louisiana (1) North Carolina (30) Virginia (36)
Delaware (1) Maryland (15) Ohio (18) Washington, D. C. (1)
Florida (95) Minnesota (1) Oklahoma (24) Washington (15)
Georgia (53) Mississippi (3) Oregon (7) Wisconsin (2)
Illinois (16) Missouri (31) Pennsylvania (5) Wyoming (1)
As of July 3, 1999, the Company operated 743 Academies, 672 of which were leased
under operating leases, 55 of which were owned and 16 of which were operated in
employer-owned centers. Most of these Academy leases have 15-year terms, some
have 20-year terms, many have renewal options, and most require the Company to
pay utilities, maintenance, insurance and property taxes. In addition, some of
the leases provide for contingent rentals, if the Academy's operating revenue
exceeds certain base levels.
On July 21, 1999 the Company acquired Bright Start, Inc. (see note 13 to the
consolidated financial statements) which operates 43 child care/pre-school
facilities in the states of Minnesota, Wisconsin, Nevada, and New Mexico. These
facilities are leased under operating leases of various terms.
In opening a new Academy, the Company historically acquires the land, constructs
the facility and then seeks long-term financing through a sale (at cost) and
operating leaseback transaction. The Company currently leases 672 Academies from
approximately 400 investors.
The leases have initial terms expiring as follows:
YEARS INITIAL LEASE TERMS EXPIRE NUMBER OF ACADEMIES
2000 67
2001 92
2002-2007 451
2008 and later 62
---
672
---
The Company has generally been successful when it has sought to renew expiring
Academy leases.
In fiscal year 1999, the Company opened six Residential Academies and seven
Montessori schools. The Company expects to have an additional eight Residential
Academies and seven Montessori schools open for fall enrollment.
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ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company is not publicly traded. As of September 30,
1999, Investor owned 90.3% of the Company's common stock, management owned 6.1%
and Vestar/LPT Limited Partnership owned 3.6%.
No cash dividends were declared or paid on the common stock during fiscal year
1999 and 1998. The Company's Senior Notes and preferred stock (see Note 3 and
Note 7, respectively, to the Consolidated Financial Statements) contain certain
covenants that, among other things, do not permit La Petite to pay cash
dividends on its common or preferred stock now or in the immediate future.
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ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS OF DOLLARS)
44 WEEKS 52 WEEKS 52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
JULY 3, AUGUST 29, AUGUST 30, AUGUST 31, AUGUST 26,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
INCOME STATEMENT DATA
Operating revenue $ 281,072 $ 314,933 $ 302,766 $ 300,277 $ 279,806
Operating expenses:
Salaries, wages and benefits 150,052 166,501 159,236 155,046 142,757
Facility lease payments 34,717 39,641 39,332 39,587 39,901
Depreciation 10,911 13,892 13,825 13,680 13,501
Amortization of goodwill 925 1,884 2,236 2,774 3,712
and other intangibles
Restructuring charge (a) 11,700
Recapitalization costs (b) 8,724
Other 68,277 76,258 74,111 78,310 75,981
----------- ----------- ----------- ----------- -----------
Total operating expenses 264,882 306,900 288,740 289,397 287,552
----------- ----------- ----------- ----------- -----------
Operating income (loss) 16,190 8,033 14,026 10,880 (7,746)
Interest expense (c) 16,145 14,126 9,245 10,256 11,110
Minority interest in net
income of subsidiary 2,849 3,693 3,561 2,824
Interest income (153) (885) (959) (903) (1,063)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes
and extraordinary item 198 (8,057) 2,047 (2,034) (20,617)
Provision (benefit) for income
taxes 995 (254) 3,264 1,518 (6,155)
----------- ----------- ----------- ----------- -----------
Loss before extraordinary item (797) (7,803) (1,217) (3,552) (14,462)
Extraordinary item - loss on
early retirement of debt (d) (5,525) (819)
----------- ----------- ----------- ----------- -----------
Net loss $ (797) $ (13,328) $ (1,217) $ (4,371) $ (14,462)
=========== =========== =========== =========== ===========
BALANCE SHEET DATA (AT END OF
PERIOD)
Total assets $ 169,175 $ 160,791 $ 171,160 $ 177,133 $ 195,604
Subordinated debt 903 1,590 1,555
Total debt 183,999 185,727 85,903 86,590 99,186
Redeemable preferred stock 29,310 25,625 32,521 28,827 25,266
Stockholders' equity (deficit) (110,183) (105,701) 3,374 4,787 9,175
OTHER DATA
EBITDA (e) $ 28,026 $ 32,533 $ 30,087 $ 27,334 $ 21,167
Depreciation and amortization (f) 12,665 16,621 16,911 17,704 18,638
Capital expenditures 31,666 13,637 7,300 8,570 9,101
Proceeds from sale of assets 12,462 2,632 452 2,525 6,145
Academies at end of period 743 736 745 751 786
FTE utilization during the period (g) 65% 65% 66% 64% 59%
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a) During fiscal year 1995, the Company approved a plan to close 39
Academies located in areas where the demographic conditions no longer
support an economically viable operation and to restructure its
operating management to better serve the remaining Academies.
Accordingly, the Company recorded an $11.7 million restructuring charge
($7.0 million after tax) to provide for costs associated with the
Academy closures and restructuring. The charge included approximately
$10.0 million for the present value of rent and real estate taxes for
the remaining lease terms. The charge also included restructuring and
other costs related to the closures.
b) Recapitalization costs consist principally of transaction bonuses of
$1.5 million and payments for the cancellation of options of $7.2
million, both of which were inclusive of payroll taxes.
c) Interest expense includes $0.8 million, $0.8 million, $0.9 million,
$1.3 million, and $1.4 million of amortization of deferred financing
costs and accretion of the discount on the Convertible Debentures for
fiscal years 1999, 1998, 1997, 1996, and 1995, respectively.
d) On May 11, 1998, the Company incurred a $5.5 million extraordinary loss
related (i) to the retirement of all the outstanding $85.0 million
principal amount of 9 5/8% Senior Notes due on 2001, (ii) the exchange
of all outstanding shares of La Petite's Class A Preferred Stock for
$34.7 million in aggregate principal amount of La Petite's 12 1/8%
Subordinated Exchange Debentures due 2003 and (iii) the retirement of
all the then outstanding exchange debentures. The loss principally
reflects the write off of premiums and related deferred financing
costs, net of applicable income tax benefit.
e) EBITDA is defined herein as net income before non-cash restructuring
charges, extraordinary items, net interest cost, taxes, depreciation
and amortization and is presented because it is generally accepted as
providing useful information regarding a company's ability to service
and/or incur debt. EBITDA should not be considered in isolation or as a
substitute for net income, cash flows from operating activities and
other consolidated income or cash flow statement data prepared in
accordance with generally accepted accounting principles or as a
measure of the Company's profitability or liquidity.
f) Depreciation and amortization includes amortization of deferred
financing costs and the accretion of the discount on the Convertible
Debentures, which are presented in interest expense on the statements
of income.
g) FTE Utilization is the ratio of FTE students to the total operating
capacity for all of the Company's Academies. FTE attendance is not a
measure of the absolute number of students attending the Company's
Academies; rather, it is an approximation of the full-time equivalent
number of students based on Company estimates and weighted averages.
For example, a student attending full-time is equivalent to one FTE,
while a student attending one-half of each day is equivalent to 0.5
FTE.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and the related notes thereto included elsewhere in this
document.
On June 10, 1999, the Company changed its fiscal year to be the period starting
on the first Sunday in July and ending on the first Saturday in July in the
subsequent year (See Note 1 of the Notes to Consolidated Financial Statements).
For comparative purposes the table below presents the results of the 44 weeks
ended July 4, 1998 and the results of the 44 weeks ended July 3, 1999. The
subsequent discussion of results is based on the 44 week comparison.
The Company's operating results for the 44 weeks ended July 3, 1999 are
consistent and comparable with the 44 weeks ended July 4, 1998 except for
pre-opening costs and operating losses associated with new educational
facilities (the Academies). Pre-opening costs are included in other operating
costs, and cover all activities associated with preparing a new Academy for
opening other than capital development cost. Pre-opening costs for the 44 weeks
ended July 3, 1999 were $0.6 million. New Academies also typically generate
operating losses during the first few months of operation, until the Academies
achieve normalized occupancies. Included in operating income and EBIDTA were new
Academy operating losses of $0.6 million for the 44 weeks ended July 3, 1999.
There were no significant pre-opening costs or new Academy operating losses
during the same period last year as the new Academy construction program was not
fully underway until fiscal year 1999.
Full-time equivalent (FTE) attendance, as defined by the Company, is not a
measure of the absolute number of students attending the Company's Academies,
but rather is an approximation of the full-time equivalent number of students
based on Company estimates and weighted averages. For example, a student
attending full-time is equivalent to one FTE, while a student attending only
one-half of each day is equivalent to 0.5 FTE.
1999 COMPARED TO 1998 RESULTS (IN THOUSANDS OF DOLLARS)
44 WEEKS ENDED 44 WEEKS ENDED
------------------------- -------------------------
July 3, Percent of July 4, Percent of
1999 Revenue 1998 Revenue
----------- ----------- ----------- -----------
Operating revenue $ 281,072 100.0% $ 267,242 100.0%
Operating expenses:
Salaries, wages and benefits 150,052 53.4 140,991 52.8
Facility lease payments 34,717 12.4 33,581 12.6
Depreciation 10,911 3.9 11,769 4.4
Amortization of goodwill
and other intangibles 925 0.3 1,716 0.6
Recapitalization costs 8,724 3.3
Other 68,277 24.3 64,621 24.2
----------- ----------- ----------- -----------
Total operating expenses 264,882 94.3 261,402 97.9
----------- ----------- ----------- -----------
Operating income $ 16,190 5.7% $ 5,840 2.1%
=========== =========== =========== ===========
EBITDA $ 28,026 10.0% $ 28,049 10.5%
=========== =========== =========== ===========
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Fifteen Academies in operation on July 4, 1998 were closed and thirteen new
Academies were opened prior to July 3, 1999. As a result, the Company operated
743 Academies on July 3, 1999. The closures resulted principally from management
decisions not to renew the leases or contracts of certain Academies.
Operating revenue. Operating revenue increased 5.2% during the 44 weeks ended
July 3, 1999 as compared to the 44 weeks ended July 4, 1998. Excluding closed
and new Academies from both years, operating revenue increased 5.5%, full time
equivalent (FTE) attendance decreased 1.4%, and average weekly FTE tuition
increased 6.9% during the 44 weeks ended July 3, 1999 as compared to the 44
weeks ended July 4, 1998. The decline in FTE's occurred principally in the
infant, toddler and school age programs as the Company is concentrating its
focus on enhancing and expanding its pre-school program. Prior to the start of
fiscal year 1999, 238 Academies received modification to enhance the preschool
environment. The modifications included new room arrangements and added
preschool furniture and equipment which enhanced the pre-school appearance of
the Academies. The Company's Journey program continues to be an outstanding
curriculum for young children. As a result of this effort, attendance of
pre-school aged children increased 1,407 in the eight weeks ended June 5, 1999
(end of the school term) as compared to the same period in 1998. This gain,
however, was offset by declines in infants, toddlers, and school age children.
During fiscal year 1999 additional Academies received the pre-school
enhancements and by year-end, 550 Academies had been impacted.
The increase in average weekly tuition per FTE was principally due to: (i)
selective price increases which were put into place in February of fiscal years
1998 and 1999, based on geographic market conditions and class capacity
utilization and (ii) changes in various tuition rate discount policies which
took place in fiscal year 1999 and (iii) the change in enrollment mix resulting
in fewer children in the lower priced school age before and after program and
more children in the higher priced preschool program, offset somewhat by the
decline of children in the higher price infant and toddler programs.
Salaries, wages and benefits. Salaries, wages and benefits increased $9.1
million or 6.4% during the 44 weeks ended July 3, 1999 as compared to the 44
weeks ended July 4, 1998. The increase was principally due to a 7.0% increase in
average hourly wage rates, and higher health care costs resulting from benefit
plan enhancements. These increases were offset by a small decline in hours
worked. As a percentage of revenue, labor costs were 53.4% for the 44 weeks
ended July 3, 1999 as compared to 52.8% during the 44 weeks ended July 4, 1998.
Amortization of goodwill and other intangibles. Amortization of goodwill and
other intangibles decreased 46.1% during the 44 weeks ended July 3, 1999 as
compared to the 44 weeks ended July 4, 1998, as certain intangible assets became
fully amortized at the end of the third quarter of fiscal year 1998.
Recapitalization costs. Recapitalization costs consist principally of
transaction bonuses of $1.5 million and payments for the cancellation of stock
options of $7.2 million, both of which were inclusive of payroll taxes.
All other operating costs. Many of the Company's operating costs are relatively
fixed and do not decline or increase directly with small changes in attendance.
Facility lease expense, depreciation, amortization and other operating costs,
which includes repair and maintenance, utilities, insurance, marketing, real
estate taxes, food, supplies and transportation, excluding pre-opening costs all
declined or remained unchanged as a percentage of revenue during the 44 weeks
ended July 3, 1999, as compared to the 44 weeks ended July 4, 1998.
Operating income and EBITDA. As a result of the foregoing, operating income was
$16.2 million for the 44 weeks ended July 3, 1999, as compared to $5.8 million
during the 44 weeks ended July 4, 1998. Excluding Recapitalization Costs, this
reflects gains in operating income of 11.2% for the 44 weeks ended July 3, 1999,
as compared to the 44 weeks ended July 4, 1998. Earnings before recapitalization
costs, extraordinary items, interest, taxes, depreciation and amortization
(EBITDA) was $28.0 million for 44 weeks ended July 3, 1999 and for the 44 weeks
ended July 4, 1998. Excluding pre-opening costs and new
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Academy operating losses, EBIDTA would have been $29.2 million for 44 weeks
ended July 3, 1999 as compared to $28.1 million for the 44 weeks ended July 4,
1998.
Interest expense. Net interest expense for the 44 weeks ended July 3, 1999
increased $2.9 million from the 44 weeks ended July 4, 1998. The increase was
mainly due to increased interest payments related to the issuance of $145.0
million of 10% Senior Notes and a $40.0 million term loan facility under the
Credit Agreement which occurred as part of the Recapitalization (see notes to
the consolidated financial statements).
Loss on retirement of debt. On May 11, 1998, the Company incurred a $5.5 million
extraordinary loss related (i) to the retirement of all the outstanding $85.0
million principal amount of 9 5/8% Senior Notes due on 2001, (ii) the exchange
of all outstanding shares of La Petite's Class A Preferred Stock for $34.7
million in aggregate principal amount of La Petite's 12 1/8% Subordinated
Exchange Debentures due 2003 and (iii) the retirement of all the then
outstanding exchange debentures. The loss principally reflects the write off of
premiums and related deferred financing costs, net of applicable income tax
benefit.
Income tax rate. After adding back the permanent differences to pretax income,
the effective income tax rate for the 44 weeks ended July 3, 1999 was
approximately 47%, as compared to approximately 33% for the 44 weeks ended July
4, 1998. The 1999 fiscal year effective income tax rate was impacted by the
resolution of issues raised by the IRS regarding the Company's benefit plan.
(see note 8 to the consolidated financial statements).
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1998 COMPARED TO 1997 ACTUAL RESULTS (IN THOUSANDS OF DOLLARS)
52 WEEKS ENDED 52 WEEKS ENDED
------------------------- -------------------------
August 29, Percent of August 30, Percent of
1998 Revenue 1997 Revenue
Operating revenue $ 314,933 100.0% $ 302,766 100.0%
Operating expenses:
Salaries, wages and benefits 166,501 52.9 159,236 52.6
Facility lease payments 39,641 12.6 39,332 13.0
Depreciation 13,892 4.4 13,825 4.6
Amortization of goodwill
and other intangibles 1,884 0.6 2,236 0.7
Recapitalization costs 8,724 2.8
Other 76,258 24.2 74,111 24.5
----------- ----------- ----------- -----------
Total operating expenses 306,900 97.5 288,740 95.4
----------- ----------- ----------- -----------
Operating income $ 8,033 2.5% $ 14,026 4.6%
=========== =========== =========== ===========
EBITDA $ 32,533 10.3% $ 30,087 9.9%
=========== =========== =========== ===========
Adjusted EBITDA $ 34,332 10.9% $ 30,787 10.2%
=========== =========== =========== ===========
The results of operations for the Company for the 52 weeks ended August 29, 1998
are consistent and comparable with the 52 weeks ended August 30, 1997. Ten
Academies in operation at the end of the fiscal year 1997 were closed and one
new Academy was opened prior to the end of fiscal year 1998. As a result, the
Company operated 736 Academies at the end of fiscal year 1998, nine less than at
the end of fiscal year 1997. The closures resulted principally from management
decisions not to renew the leases or contracts of certain Academies.
Operating revenue. During the 52 weeks ended August 29, 1998 as compared to the
prior fiscal year, operating revenue increased 4.0%, FTE attendance declined
1.1% and Average Weekly FTE Tuition increased 5.2%. Excluding closed Academies
from both years, operating revenue increased 4.7%, FTE attendance declined 0.4%
and Average Weekly FTE Tuition increased 5.1%. The decline in FTE attendance
reflects, among other things, the Company's continuing focus on preschool-aged
children and a reduced emphasis on infant care. In addition, the strong economy
reportedly had the effect of increasing summer vacations, which in turn could
have negatively impacted Academy attendance. The increase in Average Weekly FTE
Tuition was principally due to selective price increases that were put into
place in the second quarter of fiscal 1998, based on geographic market
conditions and class capacity utilization.
Salaries, wages and benefits. Salaries, wages and benefits increased $7.3
million or 4.6% during the 52 weeks ended August 29, 1998 as compared to the 52
weeks ended August 30, 1997. The increase was principally due to increased
average hourly wage rates as staff hours worked in fiscal year 1998 declined
slightly from the prior year. As a percentage of revenue, labor costs were 52.9%
for the 52 weeks ended August 29, 1998 as compared to 52.6% during the 52 weeks
ended August 30, 1997.
Recapitalization costs. Recapitalization costs consist principally of
transaction bonuses of $1.5 million and payments for the cancellation of options
of $7.2 million, both of which were inclusive of payroll taxes.
All other operating costs. Many of the Company's operating costs are relatively
fixed and do not decline or increase directly with small changes in attendance.
Facility lease expense, depreciation, amortization and other operating costs all
declined or remained unchanged as a percentage of revenue during the 52 weeks
ended August 29, 1998, as compared to the 52 weeks ended August 30, 1997. In
September 1997, the Company held a special conference to which all Academy
Directors were invited at which the Company
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15
articulated its future business strategy for the growth of the Company. Total
operating expenses for the 52 weeks ended August 29, 1998 include $1.2 million
related to this conference.
Operating income and EBITDA. As a result of the foregoing, operating income was
$8.0 million for the 52 weeks ended August 29, 1998, as compared to $14.0
million during the 52 weeks ended August 30, 1997. Earnings before
recapitalization costs, extraordinary items, interest, taxes, depreciation and
amortization (EBITDA) was $32.5 million for the 52 weeks ended August 29, 1998
as compared to $30.1 million for the 52 weeks ended August 30, 1997, an increase
of 8.1%. Adjusted EBITDA, defined as EBITDA exclusive of the special conference
and of Vestar management and board fees which ceased with the recapitalization,
was $34.3 million for the 52 weeks ended August 29, 1998 as compared to $30.8
million for the 52 weeks ended August 30, 1997, an increase of 10.7%.
Interest expense. Net interest expense for the 52 weeks ended August 29, 1998
increased $4.1 million from the 52 weeks ended August 30, 1997. The increase was
mainly due to $1.6 million in fees for bridge loan commitments related to the
new debt offerings and increased interest payments related to the 10% Senior
Notes and term loan under the Credit Agreement (see notes to the consolidated
financial statements).
Loss on retirement of debt. On May 11, 1998, the Company incurred a $5.5 million
extraordinary loss related (i) to the retirement of all the outstanding $85.0
million principal amount of 9 5/8% Senior Notes due on 2001, (ii) the exchange
of all outstanding shares of La Petite's Class A Preferred Stock for $34.7
million in aggregate principal amount of La Petite's 12 1/8% Subordinated
Exchange Debentures due 2003 and (iii) the retirement of all the then
outstanding exchange debentures. The loss principally reflects the write off of
premiums and related deferred financing costs, net of applicable income tax
benefit.
Income tax rate. After adding back the permanent differences to pretax income,
the effective income tax rate for the 52 weeks ended August 29, 1998 was
approximately 34%, as compared to approximately 40% for the 52 weeks ended
August 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are from cash flow generated by
operations, borrowings under the revolving credit facility under the Credit
Agreement, and sale and leaseback financing for newly constructed Academies. The
Company's principal uses of liquidity are to meet its debt service requirements,
finance its capital expenditures and provide working capital.
Weekly tuition, the Company's primary source of revenue, is due from parents on
Mondays, in advance of service delivery. Accordingly, receivables from parents
are very low and accounts receivable generally reflects amounts due from third
party paying agencies. In addition, the nature of the Company's business does
not require a significant investment in inventories or other current assets.
Payroll, supplies and most other cost items, other than rent, are generally paid
in arrears, generating current liabilities in excess of working capital
requirements. As a result the Company has historically operated with negative
working capital, which funds can be used in the business or to reduce debt.
The Company incurred substantial indebtedness in connection with the
Recapitalization. See note 1 of the notes to consolidated financial statements.
In connection with the Recapitalization, Parent and La Petite entered into the
Credit Agreement, consisting of the $40 million Term Loan Facility and the $25
million Revolving Credit Facility. Parent and La Petite borrowed the entire $40
million available under the Term Loan Facility which, together with the proceeds
from the sale of the Senior Notes and the Equity Investment, were used to
consummate the Recapitalization and to pay the related fees and expenses.
The Term Loan Facility is subject to mandatory prepayment in the event of
certain equity or debt issuances or asset sales by the Company or any of its
subsidiaries and in amounts equal to specified percentages of the Company's
excess cash flow (as defined). The Term Loan Facility will terminate on May 11,
2005. The
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16
term loan amortizes in an amount equal to $1.0 million in each of the first five
years, $10.0 million in the sixth year and $25.0 million in the seventh year.
The Revolving Credit Facility will terminate on the same date.
The Company opened thirteen new Academies during fiscal 1999, and expects to
open 15 more between July and October. During fiscal 2000, new development will
be reduced as discussed below. The cost to open a new Academy ranges from $1.0
million to $1.5 million, of which approximately 85% is typically financed
through a sale and leaseback transaction. Alternatively, the Academy may be
constructed on a build to suit basis, which reduces the working capital
requirements during the construction process.
Purchasers of Academies in sale and leaseback transactions have included
insurance companies, bank trust departments, pension funds, real estate
investment trusts and individuals. The leases are operating leases and generally
have terms of 15 to 20 years with one or two five-year renewal options. Most of
these transactions are structured with an annual rental designed to provide the
owner/lessor with a fixed cash return on its capitalized cost over the term of
the lease. In addition, many of the Company's leases provide for either
contingent rentals if the Academy's operating revenue exceeds certain levels or
a fixed percentage increase every five years. Letters of commitment and
substantial funding have been obtained for all but two of the units being
developed during calendar 1999. Due diligence is currently in process and sale
closings are expected to generally occur over the next few months. Although the
Company expects sale and leaseback transactions to continue to finance its
expansion, no assurance can be given that such funding will always be available.
On July 21, 1999 the Company acquired all the outstanding shares of Bright
Start, Inc. ("Bright Start") for $9.3 million in cash and assumed approximately
$2.0 million in debt. Bright Start operates 43 preschools in the states of
Minnesota, Wisconsin, Nevada, and New Mexico. For the year ended August 31, 1998
Bright Start had operating revenue of $22.2 million and at August 31, 1998 total
assets were $5.1 million. See Note 13 to the consolidated financial statements.
Total capital expenditures for fiscal 1997, 1998 and 1999, were $7.3 million,
$13.6 million and $31.7 million, respectively. The Company views all capital
expenditures, other than those incurred in connection with the development of
new Academies, to be maintenance capital expenditures. Maintenance capital
expenditures for fiscal 1997, 1998, and 1999 were $7.0 million, $9.2 million and
$6.1 million, respectively.
During fiscal year 1999 the Company invested $25.5 million in new Academy
development and received $19.3 million as construction financing for sale and
leaseback transactions. Sale and leaseback transactions, completed or currently
in process, will fund most of this development. For fiscal year 1999, the
Company used $4.0 million of the Revolving Credit Facility to temporarily fund a
portion of this investment.
In addition to maintenance capital expenditures, the Company expends additional
funds to ensure that its facilities are in good working condition. Such funds
are expensed in the periods in which they are incurred. The amounts of such
expenses in fiscal 1997, 1998 and 1999 were $9.2 million, $9.9 million and $8.9
million, respectively.
The Company's ability to meet its debt and redeemable preferred stock
obligations is dependent on future earnings and cash flows. The Senior Notes and
preferred stock contain certain covenants that, among other things, limit the
ability of the Company to incur additional indebtedness or pay cash dividends or
certain other restricted payments. As of July 3, 1999, the Company, in
compliance with all of the covenants, is not permitted to pay cash dividends on
its common or preferred stock.
INFLATION AND GENERAL ECONOMIC CONDITIONS
The Company has historically been able to increase tuition to offset increases
in its costs. During 1997 and 1998, a period of low to moderate inflation, the
Company implemented selective increases in tuition rates,
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17
based on geographic market conditions and class capacity utilization. The
Company did not experience a material decline in attendance as a result of these
increases.
On September 1, 1997, the Federal Minimum Wage increased from $4.75 to $5.15 per
hour. This increase did not materially impact the Company's operations.
During fiscal 1999, the Company experienced inflationary pressures on average
wage rates as hourly rates increased 7%. Management believes this is occurring
industry wide and there is no assurance that such wage rate increases can be
recovered through future increases in tuition.
A sustained recession with high unemployment may have a material adverse effect
on the Company's operations. The recession during 1990 and 1991 adversely
affected attendance.
MANAGEMENT INFORMATION SYSTEMS AND THE YEAR 2000
The arrival of the year 2000 is not expected to have an adverse impact on the
Company's computerized information systems and the cost of compliance is
expected to be immaterial. The most important new system for the Company has
been the installation of its ADMIN system nationwide. ADMIN was written using a
calendar dating system that is not sensitive to the year 2000 issue. For payroll
processing, human resources information, general ledger/financial reporting,
accounts payable disbursements, fixed assets record keeping and purchase order
accounting, the Company utilizes software under licensing arrangements for
systems that have already been upgraded and are currently year 2000 compliant.
The costs of the upgrades were included as part of the annual licensing fees.
Also, during 1999, the Company is testing and, if necessary, modifying its
smaller applications to insure that any year 2000 issues are corrected on a
timely basis.
The Company has not assessed the year 2000 readiness of its major suppliers or
third-party funding agencies. Due to the general uncertainty inherent in
addressing year 2000 readiness, the most likely worst case year 2000 scenario
and the impact it may have on the Company is uncertain. In the event that major
suppliers of curriculum material are unable to fulfill purchase orders for
supplies, Academy Directors will need to buy necessary supplies from local
retailers. This could have adverse cost consequences to the Company, but on the
assumption that the banking system continues to function, should not have a
material impact on operations. The Company also provides preschool and
child-care services for children that are funded by various state and local
government agencies. In the event that any such agency were unable to timely
reimburse the Company for such services, it would have an adverse impact on the
Company's cash flow. Such impact is not expected to be material and the Company
generally has the option to discontinue providing such services for nonpayment.
OTHER INFORMATION
None.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On May 11, 1998, the Company recapitalized, providing for (a) Series B Senior
Notes in the aggregate principal amount of $145 million, (b) a Term Loan
Facility in the aggregate principal amount of $40 million and (c) a Revolving
Credit Facility providing for revolving loans to the Company in an aggregate
principal amount (including swingline loans and the aggregate stated amount of
letters of credit) of $25 million. Borrowings under the Senior notes bear
interest at 10% per annum. Borrowings under the Credit Agreement will bear
interest at a rate per annum equal (at the Company's option) to: (a) an adjusted
London inter-bank offered rate ("LIBOR") plus a percentage based on the
Company's financial performance; or (b) a rate equal to the highest of The Chase
Manhattan Bank's published prime rate, a certificate of deposit rate plus 1% or
the federal funds effective rate plus 1/2 of 1%, known as the average banking
rate ("ABR") plus, in each case a percentage based on the Company's financial
performance. The borrowing margins applicable to the Credit Agreement are
initially 3.25% for LIBOR loans and 2.25% for ABR loans. The Senior Notes will
mature in May 2008 and the Credit Agreement will mature in May
17
18
2005. The term loan amortizes in an amount equal to $1.0 million in each of the
first five years, $10.0 million in the sixth year and $25.0 million in the
seventh year.
To reduce the impact of interest rate changes on the Term Loan Facility, the
company entered into interest rate collar agreements during the second quarter.
The collar agreements cover the LIBOR portion of the Term Loan Facility interest
rate percentage, effectively setting maximum and minimum interest rates.
To reduce interest expense on the $145 million Series B Senior Notes, the
Company entered into an interest rate swap transaction with an imbedded collar
during the third quarter. The fixed rate debt was exchanged for a variable rate
arrangement based on LIBOR plus a fixed percentage. The imbedded collar covers
the LIBOR portion of variable rate swap, effectively setting maximum and minimum
interest rates.
There were no initial costs associated with either the swap or the interest rate
collar agreements as the floor and ceiling cap rates were priced to offset each
other. Any differential paid or received based on the swap/collar agreements is
recognized as an adjustment to interest expense. As of July 3, 1999, the
notional value of such derivatives was $184.3 million with an unrealized loss of
$1.2 million. A 1% change in an applicable index rate, after giving effect to
the interest rate collars and swap agreement, would result in an interest
expense increase of $1.8 million per year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets as of July 3, 1999 and August 29, 1998
Consolidated Statements of Income for the 44 weeks ended July 3, 1999,
52 weeks ended August 29, 1998, and 52 weeks ended August 30, 1997
Consolidated Statements of Stockholders' Equity for the 44 weeks ended
July 3, 1999, 52 weeks ended August 29, 1998, and 52 weeks ended August
30, 1997
Consolidated Statements of Cash Flows for the 44 weeks ended July 3,
1999, 52 weeks ended August 29, 1998, and 52 weeks ended August 30,
1997
Notes to Consolidated Financial Statements
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INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
of LPA Holding Corp.
We have audited the accompanying consolidated balance sheets of LPA Holding
Corp. and its subsidiary (the "Company") as of July 3, 1999 and August 29, 1998,
and the related consolidated statements of operations, stockholders' deficit and
cash flows for the 44 weeks ended July 3, 1999, the 52 weeks ended August 29,
1998, and the 52 weeks ended August 30, 1997. Our audits also included the
financial statement schedules listed in the Index at Item 14. These financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of LPA Holding Corp. and its
subsidiary as of July 3, 1999 and August 29, 1998, and the results of their
operations and their cash flows for the 44 weeks ended July 3, 1999, the 52
weeks ended August 29, 1998, and the 52 weeks ended August 30, 1997 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
Kansas City, Missouri
September 3, 1999
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20
LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
JULY 3, AUGUST 29,
ASSETS 1999 1998
----------- -----------
Current assets:
Cash and cash equivalents $ 4,572 $ 6,868
Restricted cash investments (Note 1) 1,218 1,756
Accounts and notes receivable, net 8,077 7,002
Prepaid food and supplies 7,884 5,987
Other prepaid expenses 5,850 2,259
Refundable income taxes (Note 5) 192 1,776
Current deferred income taxes (Note 5) 1,124
----------- -----------
Total current assets 27,793 26,772
Property and equipment, at cost:
Land 6,120 6,120
Buildings and leasehold improvements 77,197 71,754
Equipment 20,451 18,695
Facilities under construction 15,261 2,264
----------- -----------
119,029 98,833
Less accumulated depreciation 48,310 37,839
----------- -----------
Net property and equipment 70,719 60,994
Other assets (Note 2) 61,780 64,919
Deferred income taxes (Note 5) 8,883 8,106
----------- -----------
$ 169,175 $ 160,791
=========== ===========
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21
LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED)
JULY 3, AUGUST 29,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
----------- -----------
Current liabilities:
Overdrafts due banks $ 7,450 $ 2,890
Accounts payable 7,972 7,447
Current reserve for closed academies 1,366 1,595
Current maturities of long-term debt and capital lease obligations 6,187 2,121
Accrued salaries, wages and other payroll costs 11,903 10,937
Accrued insurance liabilities 2,389 4,043
Accrued property and sales taxes 3,749 4,103
Accrued interest payable 2,388 4,771
Other current liabilities 11,199 5,572
Current deferred income taxes (Note 5) 361
----------- -----------
Total current liabilities 54,964 43,479
Long-term debt and capital lease obligations (Note 3) 183,999 185,727
Other long-term liabilities (Note 4) 11,085 11,661
Series A 12% redeemable preferred stock ($.01 par value per share); 29,310 25,625
30,000 shares authorized, issued and outstanding at aggregate
liquidation preference of $1,036.558 as of August 29, 1998 and of
$1,143.444 as of July 3, 1999 (Note 7)
Stockholders' deficit:
Class A common stock ($.01 par value per share); 950,000 shares 6 6
authorized and 560,026 shares issued and outstanding as of August
29, 1998 and July 3, 1999
Class B common stock ($.01 par value per share); 20,000 shares
authorized, issued and outstanding as of August 29, 1998 and July
3, 1999
Common stock warrants 5,645 5,645
Accumulated deficit (115,834) (111,352)
----------- -----------
Total stockholders' deficit (110,183) (105,701)
----------- -----------
$ 169,175 $ 160,791
=========== ===========
See notes to consolidated financial statements.
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22
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
44 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JULY 3, AUGUST 29, AUGUST 30,
1999 1998 1997
------------ ------------ ------------
Operating revenue $ 281,072 $ 314,933 $ 302,766
Operating expenses:
Salaries, wages and benefits 150,052 166,501 159,236
Facility lease expense 34,717 39,641 39,332
Depreciation 10,911 13,892 13,825
Amortization of goodwill and other
intangibles 925 1,884 2,236
Recapitalization costs (Note 1) 8,724
Other 68,277 76,258 74,111
------------ ------------ ------------
264,882 306,900 288,740
------------ ------------ ------------
Operating income 16,190 8,033 14,026
------------ ------------ ------------
Interest expense 16,145 14,126 9,245
Minority interest in net income of subsidiary 2,849 3,693
Interest income (153) (885) (959)
------------ ------------ ------------
Net interest costs 15,992 16,090 11,979
------------ ------------ ------------
Income (loss) before income taxes
and extraordinary item 198 (8,057) 2,047
Provision (benefit) for income taxes 995 (254) 3,264
------------ ------------ ------------
Loss before extraordinary item (797) (7,803) (1,217)
------------ ------------ ------------
Extraordinary loss on retirement of
debt, net of applicable income taxes
of $3,776 (Note 11) (5,525)
------------ ------------ ------------
Net loss $ (797) $ (13,328) $ (1,217)
============ ============ ============
See notes to consolidated financial statements.
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23
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS OF DOLLARS)
COMMON STOCK TOTAL
------------
NUMBER PREFERRED PAID-IN ACCUMULATED TREASURY STOCKHOLDERS'
OF SHARES AMOUNT STOCK WARRANTS CAPITAL DEFICIT STOCK EQUITY(DEFICIT)
------------ --------- --------- --------- --------- ----------- --------- ---------------
Balance, August 31, 1996 852,160 $ 9 $ 3 $ 33,105 (28,227) $ (103) $ 4,787
10% Cumulative Non 1,129 (1,129)
Convertible Preferred
Dividend
Repurchase of common stock (196) (196)
Net loss (1,217) (1,217)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, August 30, 1997 852,160 9 3 34,234 (30,573) (299) 3,374
10% Cumulative Non 848 (848)
Convertible Preferred
Dividend
Issuance of common stock 523,985 5 70,120 70,125
Repurchase of common stock (41) (41)
Redemption of preferred stock (3) (59,271) (59,274)
Redemption of common (769,859) (8) (45,931) (57,092) (103,031)
stock
Issuance of warrants 5,645 5,645
Equity issuance costs (7,901) (7,901)
Cancellation of treasury (26,260) (340) 340
stock
Preferred stock (1,270) (1,270)
dividend (Note 7)
Net loss (13,328) (13,328)
--------- --------- --------- --------- --------- --------- --------- ----------
Balance, August 29, 1998 580,026 6 5,645 (111,352) (105,701)
Preferred stock dividend (3,685) (3,685)
Net loss (797) (797)
--------- --------- --------- --------- --------- --------- --------- ----------
Balance, July 3, 1999 580,026 $ 6 $ 0 $ 5,645 $ $(115,834) $ $(110,183)
========= ========= ========= ========= ========= ========= ========= =========
See notes to consolidated financial statements.
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LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
44 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JULY 3, 1999 AUGUST 29, 1998 AUGUST 30,1997
-------------- --------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (797) $ (13,328) $ (1,217)
Adjustments to reconcile net loss to net cash from
operating activities
Noncash portion of extraordinary loss on retirement
of debt 3,209
Depreciation and amortization 12,665 16,621 16,911
Deferred income taxes 708 (4,799) 223
Minority interest in net income of La Petite Academy,
Inc 2,849 3,693
Changes in assets and liabilities:
Accounts and notes receivable (1,014) (1,924) (1,402)
Prepaid expenses and supplies (5,488) 1,353 (980)
Accrued property and sales taxes (354) (26) (125)
Accrued interest payable (2,383) 4,052 (20)
Other changes in assets and liabilities, net 6,983 (783) (2,197)
------------- ------------- -------------
Net cash from operating activities 10,320 7,224 14,886
------------- ------------- -------------
CASH FLOWS USED FOR INVESTING ACTIVITIES
Capital expenditures (31,666) (13,637) (7,300)
Proceeds from sale of assets 12,462 2,632 452
------------- ------------- -------------
Net cash used for investing activities (19,204) (11,005) (6,848)
------------- ------------- -------------
CASH FLOWS USED FOR FINANCING ACTIVITIES
Repayment of debt and capital lease obligations (8,692) (121,726) (900)
Borrowings under the Revolving Credit Agreement 11,000
Additions to long-term debt 185,000
Deferred financing costs (818) (7,605)
Retirement of old equity (162,304)
Proceeds from issuance of common stock, net of expenses 62,224
Proceeds from issuance of preferred stock and warrants 30,000
Increase (reduction) in bank overdrafts 4,560 533 (2,873)
Decrease (increase) in restricted cash investments 538 556 6,915
------------- ------------- -------------
Net cash from (used for) financing activities 6,588 (13,322) 3,142
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (2,296) (17,103) 11,180
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,868 23,971 12,791
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,572 $ 6,868 $ 23,971
============ ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 17,699 $ 9,229 $ 8,415
Income taxes 275 2,084 5,470
Cash received during the period for:
Interest $ 152 $ 1,000 $ 848
Income taxes 2,122 207 1,154
Non-cash investing and financing activities:
Capital lease obligations of $29, $3,170 and $391
were incurred during the 44 weeks ended July 3, 1999 and the 52 weeks
ended August 29, 1998, and August 30, 1997 respectively, when the
Company entered into leases for new computer equipment
See notes to consolidated financial statements.
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LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Vestar/LPA Investment Corp. (Investment), a privately-held Delaware
corporation, was formed in 1993 for the purpose of holding the capital
stock of La Petite Holdings Corp. (Holdings), a Delaware corporation.
Holdings was formed in 1993 for the purpose of holding the capital
stock of La Petite Acquisition Corp. (Acquisition). On July 23, 1993,
as a result of a series of transactions, Holdings acquired all the
outstanding shares of common stock, par value $.01 (the Common Stock),
of La Petite Academy, Inc., a Delaware corporation (La Petite). The
transaction was accounted for as a purchase and the excess of purchase
price over the net assets acquired is being amortized over 30 years. On
May 31, 1997, Holdings was merged with and into La Petite with La
Petite as the surviving corporation. On August 28, 1997, LPA Services,
Inc. (Services), a wholly owned subsidiary of La Petite, was
incorporated. Services provides third party administrative services on
insurance claims to La Petite.
On March 17, 1998, LPA Investment LLC (the Investor), a Delaware
limited liability company owned by an affiliate of Chase Capital
Partners (CCP) and by an entity controlled by Robert E. King, a
director of La Petite, and Investment, which was renamed LPA Holding
Corp. (Parent), entered into an Agreement and Plan of Merger pursuant
to which a wholly owned subsidiary of the Investor was merged into
Parent (the Recapitalization). In the Recapitalization (i) all of the
then outstanding shares of preferred stock and common stock of
Investment (other than the shares of common stock retained by
Vestar/LPT Limited Partnership and management of La Petite) owned by
the existing stockholders of Investment (the Existing Stockholders)
were converted into the right to receive cash and (ii) the Existing
Stockholders received the cash of La Petite as of the date of the
closing of the Recapitalization. As part of the Recapitalization, the
Investor purchased $72.5 million (less the value of options retained by
management) of common stock of the Parent (representing approximately
74.5% of the common stock of Parent on a fully diluted basis) and $30
million of redeemable preferred stock of Parent (collectively, the
Equity Investment). In addition, in connection with the purchase of
preferred stock of Parent, the Investor received warrants to purchase
up to 6.0% of Parent's common stock on a fully diluted basis (resulting
in an aggregate fully diluted ownership of 80.5% of the common stock of
Parent). Transaction expenses included in operating expenses under the
caption "Recapitalization Costs" for this period include approximately
$1.5 million in transaction bonuses and $7.2 million for the
cancellation of stock options and related taxes. The Recapitalization
was completed May 11, 1998.
Parent, consolidated with La Petite and Services, is referred to herein
as the Company.
The Company offers educational, developmental and child care programs,
which are available on a full-time or part-time basis, for children
between six weeks and twelve years old. The La Petite Academy schools
are located in 35 states and the District of Columbia, primarily in the
southern, Atlantic coastal, mid-western and western regions of the
United States.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Investment and its wholly-owned subsidiary, La
Petite and its wholly-owned subsidiary, Services, after elimination of
all significant inter-company accounts and transactions.
FISCAL YEAR END - On June 10, 1999, the Company changed its fiscal year
to be the 52 or 53 week period ending on the first Saturday in July.
Prior to this change the Company utilized a fiscal year consisting of
the 52 or 53 week period ending on the last Saturday in August. The
report covering the transition period is presented herein.
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USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECOGNITION OF REVENUES AND PRE-OPENING EXPENSES - The Company operates
preschool education and child care Academies. Revenue is recognized as
the services are performed. Expenses associated with opening new
Academies are charged to expense as incurred.
DEPRECIATION AND AMORTIZATION - Buildings, furniture and equipment are
depreciated over the estimated useful lives of the assets using the
straight-line method. For financial reporting purposes, buildings are
generally depreciated over 29 to 40 years, furniture and equipment over
three to 10 years and leasehold improvements over five to 15 years.
Maintenance and repairs are charged to expense as incurred. The cost of
additions and improvements is capitalized and depreciated over the
remaining useful lives of the assets. The cost and accumulated
depreciation of assets sold or retired are removed from the accounts,
and any gain or loss is recognized in the year of disposal, except
gains and losses on property and equipment which have been sold and
leased back which are recognized over the terms of the related lease
agreements.
RESTRICTED CASH INVESTMENTS - The restricted cash investment balance
represents cash deposited in an escrow account as security for the
self-insured portion of the Company's workers compensation and
automobile insurance coverage.
EXCESS OF PURCHASE PRICE OVER THE NET ASSETS ACQUIRED - The excess of
the purchase price over the fair value of tangible and identifiable
intangible assets and liabilities acquired related to the acquisition
of La Petite is being amortized over a period of 30 years on the
straight-line method.
DEFERRED FINANCING COSTS - The costs of obtaining financing are
included in other assets and are being amortized over the life of the
related debt.
OTHER ASSETS - Other assets include the fair value of identifiable
intangible assets acquired in connection with the acquisition of La
Petite and are being amortized over periods ranging from two to 10
years on the straight-line method.
CASH EQUIVALENTS - The Company's cash equivalents consist of commercial
paper and money market funds with original maturities of three months
or less.
INCOME TAXES -The Company establishes deferred tax assets and
liabilities, as appropriate, for all temporary differences, and adjusts
deferred tax balances to reflect changes in tax rates expected to be in
effect during the periods the temporary differences reverse. Management
has evaluated the recoverability of the deferred income tax asset
balances and has determined that the deferred balances will be realized
based on future taxable income.
DISCLOSURES REGARDING FINANCIAL INSTRUMENTS - The carrying values of
the Company's financial instruments, with the exception of the
Company's Senior Notes, preferred stock, and financial derivatives,
approximate fair value. The estimated fair values of Senior Notes and
preferred stock at July 3, 1999 were $137.7 million and $34.3 million,
respectively. The estimated fair values of Senior Notes and preferred
stock at August 29, 1998 were $140.1 million and $31.1 million,
respectively. The combined estimated fair value of the Company's
interest rate contracts at July 3, 1999 was a liability of $1.2
million.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," as of the
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beginning of its 1997 fiscal year. The Statement requires that
long-lived assets and certain identifiable intangibles to be held and
used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Statement also requires that long-lived assets and
certain identifiable intangibles to be disposed of be reported at the
lower of carrying amount or fair value less cost to sell. There was no
impact on the Company's results of operations or financial condition
upon adoption of Statement No. 121.
STOCK-BASED COMPENSATION - The Company has adopted the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
The Statement encourages rather than requires companies to adopt a new
method that accounts for stock compensation awards based on their
estimated fair value at the date they are granted. Companies are
permitted, however, to continue accounting for stock compensation
awards under Accounting Principles Board ("APB") Opinion No. 25, which
requires compensation cost to be recognized based on the excess, if
any, between the quoted market price of the stock at the date of grant
and the amount an employee must pay to acquire the stock. The Company
has elected to continue to apply APB Opinion No. 25 and has disclosed
the pro forma net income (loss), determined as if the method under SFAS
No. 123 had been applied, in Note 12.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company utilizes swap and collar
agreements to manage interest rate risks. The Company has established a
control environment, which includes policies and procedures for risk
assessment and the approval, reporting, and monitoring of derivative
financial instrument activities. Company policy prohibits holding or
issuing derivative financial instruments for trading purposes. Any
differential paid or received based on the swap/collar agreements is
recognized as an adjustment to interest expense. Amounts receivable or
payable under derivative financial instrument contracts, when
recognized are reported on the Consolidated Balance Sheet as both
current and long term receivables or liabilities. Gains and losses on
terminations of hedge contracts are recognized as other operating
expense when terminated in conjunction with the termination of the
hedged position, or to the extent that such position remains
outstanding, deferred as prepaid expenses or other liabilities and
amortized to interest expense over the remaining life of the position.
SEGMENT REPORTING - In June 1997, the FASB issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information".
This pronouncement establishes standards for the way that public
business enterprises report information about operating segments in
annual and interim financial statements. The Company adopted SFAS No.
131 during fiscal year 1999. The Company has determined that it
currently operates entirely in one segment.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
and for hedging activities. This Statement requires that an entity
recognize all derivatives as either assets or liabilities and measure
those instruments at fair value. The new standard becomes effective for
the Company's fiscal year 2001. Management has not yet assessed the
impact that the adoption of SFAS No. 133 will have on the Company's
financial position or results of operations.
RECLASSIFICATIONS - Certain reclassifications to prior year amounts
have been made in order to conform to the current year presentation.
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2. OTHER ASSETS
JULY 3, AUGUST 29,
1999 1998
----------- -----------
Intangible assets:
Excess purchase price over net assets acquired $ 64,277 $ 64,277
Curriculum 1,497 1,497
Accumulated amortization (13,746) (11,784)
----------- -----------
52,028 53,990
Deferred financing costs 8,423 7,605
Accumulated amortization (1,088) (259)
Other assets 2,417 3,583
----------- -----------
$ 61,780 $ 64,919
=========== ===========
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
(in thousands of dollars)
JULY 3, AUGUST 29,
1999 1998
----------- -----------
Senior Notes, 10.0% due May 15, 2008 (a) $ 145,000 $ 145,000
Borrowings under credit agreement (b) 43,250 40,000
Capital lease obligations 1,936 2,848
----------- -----------
190,186 187,848
Less current maturities of long-term debt and capital
lease obligations (6,187) (2,121)
----------- -----------
$ 183,999 $ 185,727
=========== ===========
a) The Senior Notes mature on May 15, 2008. Interest is payable
semi-annually on May 15 and November 15 of each year.
Commencing May 15, 2003, the Senior Notes are redeemable at
various redemption prices at Parent and La Petite's option.
The Senior Notes contain certain covenants that, among other
things, limit Parent and La Petite's ability to incur
additional debt, transfer or sell assets, and pay cash
dividends.
To reduce interest expense on the $145 million Senior Notes,
the Company entered into an interest rate swap transaction
with an imbedded collar during the third quarter. The fixed
rate debt was essentially exchanged for a variable rate
arrangement based on LIBOR plus a fixed percentage. The
imbedded collar covers the LIBOR portion of variable rate
swap, effectively setting maximum and minimum interest rates.
The notional value of this derivative was $145 million.
b) On May 11, 1998, Parent and La Petite entered into an
agreement (the Credit Agreement) providing for a term loan
facility in the amount of $40.0 million and a revolving credit
agreement, for working capital and other general corporate
purposes through May 2005, in the amount of $25 million.
Borrowings under the Credit Agreement are secured by
substantially all of the assets of the Parent, La Petite and
its subsidiaries. Loans under the Credit Agreement will bear
an interest rate per annum equal to (at Parent and La Petite's
option): (i) a rate equal to an adjusted London inter-bank
offered rate (LIBOR) plus a percentage based on La Petite's
financial performance or (ii) a rate equal to the higher of
Chase's prime rate, a certificate of deposit rate plus 1%, or
the Federal Funds rate plus 1/2
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of 1% plus in each case a percentage based on La Petite's
financial performance. Parent and La Petite are required to
pay fees of 0.5% per annum of the unused portion of the Credit
Agreement plus letter of credit fees, annual administration
fees, and agent arrangement fees. The Credit Agreement will
mature in May 2005. The term loan amortizes in an amount equal
to $1.0 million in each of the first five years, $10.0 million
in the sixth year and $25.0 million in the seventh year.
To reduce the impact of interest rate changes on the Term Loan
Facility, the Company entered into interest rate collar
agreements during the second quarter. The collar agreements
cover the LIBOR portion of the Term Loan Facility interest
rate percentage, effectively setting maximum and minimum
interest rates. As of July 3, 1999, the notional value of the
interest rate collar agreements was $39.3 million.
Scheduled maturities and mandatory prepayments of long-term debt and
capital lease obligations during the five years subsequent to July 3,
1999 are as follows (in thousands of dollars):
2000 $ 6,187
2001 1,740
2002 1,009
2003 1,000
2004 7,750
2005 and thereafter $ 172,500
---------------
$ 190,186
===============
4. OTHER LONG-TERM LIABILITIES
(in thousands of dollars)
JULY 3, AUGUST 29,
1999 1998
-------- ---------
Unfavorable lease, net of accumulated amortization $ 3,800 $ 4,848
Non-current reserve for closed academies 2,682 3,822
Long-term insurance liabilities 4,603 2,991
------- ---------
$ 11,085 $ 11,661
======= =========
In connection with the acquisition of the Company, an intangible
liability for unfavorable operating leases was recorded, which is being
amortized over the average remaining life of the leases.
The reserve for closed academies includes the long-term liability
related to leases for Academies which were closed and are no longer
operated by the Company.
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5. INCOME TAXES
The provisions for income taxes recorded in the Consolidated Statements
of Operations consisted of the following (in thousands of dollars):
44 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
July 3, August 29, August 30,
1999 1998 1997
----------- ----------- -------------
Refundable (Payable) Currently:
Federal $ 1,426 $ (4,231) $ 2,920
State 277 (822) 567
----------- ----------- -------------
Total 1,703 (5,053) 3,487
----------- ----------- -------------
Deferred:
Federal (593) 4,019 (186)
State (115) 780 (37)
----------- ----------- -------------
Total (708) 4,799 (223)
----------- ----------- -------------
$ 995 $ (254) $ 3,264
=========== =========== =============
The difference between the provision for income taxes, as reported in
the Consolidated Statements of Income, and the provision computed at
the statutory Federal rate of 34 percent is due primarily to state
income taxes and nondeductible amortization of the excess of purchase
price over the net assets acquired of $1.8 million, $2.1 million, and
$2.1 million in the 44 weeks ended July 3, 1999, the 52 weeks ended
August 29, 1998, and August 30, 1997, respectively. In addition, the
1999 fiscal year provision was impacted by the resolution of issues
raised by the IRS regarding the Company's benefit plan. (see note 8 to
the consolidated financial statements).
Deferred income taxes result from differences between the financial
reporting and tax basis of the Company's assets and liabilities. The
sources of these differences and their cumulative tax effects at July
3, 1999 and August 29, 1998 are estimated as follows (in thousands of
dollars):
JULY 3, AUGUST 29,
1999 1998
-------------- ---------------
Current deferred taxes:
Accruals not currently deductible $ 3,104 $ 3,768
Supplies (3,180) (2,411)
Prepaids and other (285) (233)
------------- ---------------
Net current deferred tax assets
(liabilities) $ (361) $ 1,124
============= ===============
Noncurrent deferred taxes:
Unfavorable leases $ 1,543 $ 1,968
Insurance reserves 1,869 1,214
Reserve for closed academies 1,089 1,552
Carryforward of net operating loss 2,003 2,166
Property and equipment 2,262 1,140
Intangible assets (172) (235)
Other 289 301
------------- ---------------
Net noncurrent deferred tax assets $ 8,883 $ 8,106
============= ===============
The Company has federal net operating loss carryforwards to
offset future taxable income through the tax year 2012. Management
believes that the deferred tax assets recorded on the balance sheet
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are recoverable and no reserve is required. As of July 3, 1999, only
the income tax returns for tax years subsequent to 1995 are open to
examination.
6. LEASES
Academy facilities are leased for terms ranging from 15 to 20 years.
The leases provide renewal options and require the Company to pay
utilities, maintenance, insurance and property taxes. Some leases
provide for annual increases in the rental payment and many leases
require the payment of additional rentals if operating revenue exceeds
stated amounts. These additional rentals range from 2% to 10% of
operating revenue in excess of the stated amounts and are recorded as
rental expense. Vehicles are also rented under various lease
agreements, most of which are cancelable within 30 days after a
one-year lease obligation. Substantially all Academy and vehicle leases
are operating leases. Rental expense for these leases were $39.1
million, $46.5 million, and $44.9 million, for the 44 weeks ended July
3, 1999, and 52 weeks ended August 29, 1998 and August 30, 1997,
respectively. Contingent rental expense of $1.4 million, $1.4 million,
and $1.5 million were included in rental expense for the 44 weeks ended
July 3, 1999, and the 52 weeks ended August 29, 1998 and August 30,
1997.
Aggregate minimum future rentals payable under facility leases as of
July 3, 1999 were as follows (in thousands of dollars):
Fiscal year ending:
2000 $ 38,766
2001 35,242
2002 29,808
2003 25,098
2004 19,931
2005 and thereafter 48,019
------------
$196,864
------------
7. REDEEMABLE PREFERRED STOCK & STOCKHOLDERS' EQUITY
The authorized stock of Parent, as of July 3, 1999, consists of:
(i) 30,000 shares of Series A Redeemable Preferred Stock, $.01 par
value, (the preferred stock) all of which were issued and
outstanding. The carrying value of the preferred stock is being
accreted to its redemption value of $30.0 million on May 11,
2008. The preferred stock is non-voting and mandatorily
redeemable on May 11, 2008. Dividends at 12.0% are cumulative
and if not paid on the June 30 or December 31 semi-annual
preferred stock dividend dates are added to the liquidation
value. The liquidation value per share was $1,143.444 as of
July 3, 1999 and $1,036.558 as of August 29, 1998. The
preferred stock may be exchanged for 12.0% Subordinated
Exchange Debentures due 2008, at Parent's option, subject to
certain conditions, in whole, but not in part, on any scheduled
dividend payment date. The preferred stock contains certain
restrictive provisions that limit the ability of Parent to pay
cash dividends.
(ii) 950,000 shares of Class A Common Stock, $.01 par value, (the
Class A Common Stock) of which 560,026 shares were issued and
outstanding as of July 3, 1999.
(iii) 20,000 shares of Class B Common Stock, $.01 par value, (the
Class B Common Stock) of which 20,000 shares were issued and
outstanding as of July 3, 1999. The Class B Common Stock votes
together with the Class A Common Stock as a single class, with
the holder of each share of common stock entitled to cast one
vote. The holders of the Class B Common Stock have the
exclusive right, voting separately as a class, to elect one
member to the
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Board of Directors of Parent. Each share of the Class B Common
Stock is convertible at the option of the holder, at any time,
into one share of Class A Common Stock.
(iv) Warrants to purchase 42,180 shares of Class A Common Stock at a
purchase price of $.01 per share any time on or before May 11,
2008. The Warrants were issued in connection with the sale of
Series A Redeemable Preferred Stock; the Company recognized a
discount on the preferred stock by allocating $5,645,000 to the
Warrants representing the fair value of the Warrants when
issued.
8. BENEFIT PLAN
The Company sponsors a defined contribution plan (the "Plan") for
substantially all employees. Until January 1, 1998 eligible
participants could make contributions to the Plan from 1% to 20% of
their compensation (as defined). The Company also made contributions at
the discretion of the Board of Directors. Contribution expense
attributable to this Plan was $0.3 million, $0 million, and $0.4
million, for the 44 weeks ended July 3, 1999, and the 52 weeks ended
August 29, 1998 and August 30, 1997.
The Plan was under audit by the Internal Revenue Service ("IRS") which
raised several issues concerning the Plan's operation. All issues
raised by the IRS have been satisfactorily resolved and the impact was
not material. However, recognizing some inherit deficiencies in the
Plan's design, the Company has petitioned the IRS for the right to
terminate the plan effective May 31, 1999.
9. RELATED PARTY TRANSACTIONS
MANAGEMENT CONSULTING AGREEMENT - The Company had entered into an
agreement for management consulting services with Vestar Management
Partners ("Vestar") pursuant to which Vestar made available to the
Company management consulting, corporate finance and investment advice
for which the Company paid an annual fee of $500,000. The agreement was
terminated on May 11, 1998.
TRANSACTIONS WITH CERTAIN FORMER INVESTORS - In 1992, the Company
entered into a joint venture with Benesse Corp. ("Benesse"), formerly
known as Fukutake Publishing Company, Ltd. The Company agreed in
principle to grant to Benesse exclusive rights to develop and operate
La Petite Academies in Japan. This agreement expired in March 1998 and
was not renewed. The Company was reimbursed for all of its
out-of-pocket expenses associated with assisting Benesse with the pilot
program. Benesse was a stockholder of Investment and certain former
directors of the Company were affiliates of Benesse until May 11, 1998.
10. CONTINGENCIES
The Company has litigation pending which arose in the ordinary course
of business. Litigation is subject to many uncertainties and the
outcome of the individual matters is not presently determinable. It is
management's opinion that this litigation will not result in
liabilities that would have a material adverse effect on the Company's
financial statements.
11. EXTRAORDINARY LOSS
On May 11, 1998, the Company incurred a $5.5 million extraordinary loss
related (i) to the retirement of all the outstanding $85.0 million
principal amount of 9 5/8% Senior Notes due on 2001, (ii) the exchange
of all outstanding shares of La Petite's Class A Preferred Stock for
$34.7 million in aggregate principal amount of La Petite's 12 1/8%
Subordinated Exchange Debentures due 2003 and (iii) the retirement of
all the then outstanding exchange debentures. The loss principally
reflects the write-off of premiums and related deferred financing
costs, net of applicable income tax benefit.
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12. STOCK-BASED COMPENSATION
From time to time, the Board of Directors of Investment in their sole
discretion, granted non-qualified stock options, with respect to the
common stock of Investment, to key executives of the Company. Options
were granted pursuant to an agreement at the time of grant, and
typically become exercisable in equal cumulative installments over a
five-year period beginning one year after the date of grant. All such
options granted expire on the tenth anniversary of the grant date. No
market existed for the common stock of Investment, but options were
granted at prices that, in the opinion of the Board of Directors, were
equal to or greater than the fair value of the stock at the time of
grant.
Effective May 11, 1998, the Board of Directors of LPA Holding Corp
adopted the "1998 Stock Option Plan" and a separate "Stock Option
Agreement" with the Chief Executive Officer (together the "Plans"). The
Plans provide for the granting of Tranche A and Tranche B options to
purchase up to 60,074 shares of the Company's common stock. Options to
purchase 57,757 shares of the Company's common stock have been granted.
Tranche A options were granted at $66.92 per share, which approximates
the fair value of a share of common stock of the Company at the date of
grant. These options expire ten years from the date of grant and become
exercisable ratably over 48 months. Tranche B options were granted at
$133.83 per share, expire ten years from the date of grant and are
exercisable only in the event of a change in control or a registered
public offering of common stock which provides certain minimum returns
(as defined).
Stock option transactions during the past three years have been as
follows:
1998 PLANS
STOCK OPTIONS ISSUED PRIOR ---------------------------------------------------
TO RECAPITALIZATION TRANCHE A TRANCHE B
------------------------- -------------------------- ------------------------
WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG.
OPTIONS OPTION PRICE OPTIONS OPTION PRICE OPTIONS OPTION PRICE
------- -------------- ------- ----------------- ------- -------------
OPTIONS OUTSTANDING AT
AUGUST 31, 1996 76,294 $16.95
GRANTED 11,500 $35.00
CANCELED 15,500 $18.00
------- ----------
OPTIONS OUTSTANDING AT
AUGUST 30, 1997 72,294 $19.60
GRANTED 38,852 $66.92 13,205 $133.83
------- ------ ------ ---------
EXERCISED 51,577 $19.76
------- ----------
OPTIONS OUTSTANDING AT
AUGUST 29, 1998 20,717 $19.19 38,852 $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 43,352 $66.92 14,405 $133.83
======= ========== ======= ====== ====== =========
The Company accounts for all options in accordance with APB Opinion No.
25, which requires compensation cost to be recognized only on the
excess, if any, between the fair value of the stock at the date of
grant and the amount an employee must pay to acquire the stock. Under
this method, no compensation cost has been recognized for stock options
granted.
Had compensation cost for these options been recognized as prescribed
by SFAS No. 123, the Company's income (loss) would have been reduced by
(in thousands) $37 in 1999, $17 in 1998 and $19 in 1997. The Company is
privately owned and there is no market for its stock. The estimated
compensation element is based on the time value of money at the U.S.
Treasury rates assuming that the value of the stock will be at least
equal to the grant price when fully exercisable. The estimated
compensation expense above is assumed to be amortized over the vesting
period.
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13. SUBSEQUENT EVENT-ACQUISITION
On July 21, 1999 the Company acquired all the outstanding shares of
Bright Start, Inc. ("Bright Start") for $9.3 million in cash and
assumed approximately $2.0 million in debt. Bright Start operates 43
preschools in the states of Minnesota, Wisconsin, Nevada, and New
Mexico. For the year ended August 31, 1998 Bright Start had operating
revenue of $22.2 million and at August 31, 1998 total assets were $5.1
million. The acquisition will be accounted for under the purchase
method of accounting.
* * * * * * * * *
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and current position held by the
persons who are the directors and executive officers of the Company:
Name Age Position
- ---- --- --------
James R. Kahl..................................................................... 58 Chairman of the Board, Chief Executive
Officer, President and Director
Susan M. Stanton.................................................................. 51 Chief Operating Officer
Rebecca L. Perry.................................................................. 45 Executive Vice President, Operations
David J. Anglewicz................................................................ 52 Senior Vice President, Facility Services
Phillip M. Kane................................................................... 52 Senior Vice President, Finance and Chief
Financial Officer
Mary Jean Wolf.................................................................... 61 Senior Vice President, Organizational
Services (Separated from the Company in
August 1999)
Jeanette R. Carter ............................................................... 35 Senior Vice President, Parent Services and
Planning
Mitchell J. Blutt, M.D .................................................. ........ 42 Director
Robert E. King ................................................................... 63 Director
Stephen P. Murray ................................................................ 36 Director
Brian J. Richmand ................................................................ 45 Director
Terry D. Byers ................................................................... 45 Director
Ronald L. Taylor ................................................................. 55 Director
Barbara S. Feigin ................................................................ 61 Director
The business experience during the last five years and other information
relating to each executive officer and director of the Company is set forth
below.
James R. Kahl has been Chairman of the Board in May 1998. Mr. Kahl has
been a Director of the Company since September 1993, the Chief Executive
Officer of the Company since July 1993 and President since May 1997. Mr. Kahl
was an Executive Vice President at Knott's Berry Farm from 1991 to February
1993. From 1988 to 1991, Mr. Kahl was the Senior Vice President, Operations of
the Contract Food and Services Division, Health Care and Education Group at
the Marriott Corporation in Washington, D.C. From 1982 to 1988, Mr. Kahl held
various other executive positions with the Marriott Corporation. Prior to
joining the Marriott Corporation, Mr. Kahl held various positions with Arthur
Andersen & Co. between 1964 and 1982, including Partner and Managing Partner.
He has an M.B.A. from the University of Wisconsin and is a Certified Public
Accountant.
Susan M. Stanton became Chief Operating Officer of the Company in January 1999.
From 1993 to 1998, Ms. Stanton was President and Chief Operating Officer of
Payless Cashways, Inc. and had prior duties with Payless as Senior Vice
President-Merchandising and Marketing from 1989 to 1993, Senior Vice
President-Administration & Corporate Planning from 1986 to 1989, and
Vice President Corporate Planning from 1984 to 1986. From 1981 to 1983,
Susan was the Director of Administration for Jackson County, Missouri,
Kansas City. Susan has a B.S. from the University of Santa Clara and an M.A.
from the University of Houston.
Rebecca L. Perry has been Executive Vice President of Operations since May 1997.
From July 1993 to May 1997, Ms. Perry was a Senior Vice President and Eastern
Operating Officer. From 1988 to June 1993, she was Assistant Vice President of
Operations with supervisory responsibility for the operations of the Company in
14 southern and Midwestern states. From 1985 to 1988, she served as Divisional
Director of Florida and from 1981 to 1985, she served as Regional Director of
Tampa.
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36
David J. Anglewicz has been Senior Vice President, Facility Services since March
1997. From July 1993 to March 1997, Mr. Anglewicz was Executive Vice
President-Property Development and Chief Administrative Officer. Mr. Anglewicz
has been involved in the development of over 500 of the Academies throughout the
United States since he joined the Company in 1985. Mr. Anglewicz has an M.B.A.
from the University of Illinois and a B.S. from the Lawrence Technological
University.
Phillip M. Kane has been Senior Vice President, Finance and Chief Financial
Officer since 1994. From 1989 to 1993, Mr. Kane was the Chief Financial Officer
of the U.S. Department of Housing and Urban Development. From 1974 to 1989, Mr.
Kane held various financial management positions with Knight-Ridder, including
Vice President and Controller. Prior to joining Knight-Ridder, Mr. Kane was
associated with Arthur Andersen & Co. Mr. Kane has a B.A. from the University of
Miami (Fla.) and is a Certified Public Accountant.
Mary Jean Wolf has been Senior Vice President, Organizational Services since
August 1997. From September 1991 to August 1997, Ms. Wolf was an independent
consultant specializing in executive transition and other human resources
issues. From July 1987 to June 1991, she was a Senior Vice President and Chief
Human Resource Officer with Dime Savings Bank of New York, and from September
1978 to December 1985, she was Vice President of Personnel with Trans World
Airlines. Ms. Wolf has a B.S. from Drexel University and a M.B.A. from New York
University Graduate School of Business. On August 13, 1999, Ms. Wolf separated
from the Company.
Jeanette R. Carter has been Senior Vice President, Parent Services and Planning,
since August 1998 with supervisory responsibility for marketing, strategic
planning, curriculum and customer services. From October 1996 to August 1998,
Ms. Carter served as Vice President, Marketing and Planning. Ms. Carter joined
the company in December 1994. Previously, Ms. Carter held various account
management positions with marketing and advertising firms working primarily on
multi-site retail accounts. Ms. Carter has a B.A. from the University of
Missouri.
Mitchell J. Blutt, M.D. has been a Director of the Company since May 1998. Dr.
Blutt has been an Executive Partner of CCP since December 1992. From December
1988 to November 1992 he was a General Partner of CCP. Dr. Blutt has a B.A. and
a M.D. from the University of Pennsylvania and a M.B.A. from The Wharton School
of the University of Pennsylvania. He is a director of the Hanger Orthopedic
Group, Vista Healthcare Asia, Pte., Ltd., Digital Entertainment Network, Medical
Arts Press, Fisher Scientific International, Inc., DJ Orthopedics, Inc., and is
a trustee of the University of Pennsylvania.
Robert E. King has been a Director of the Company since May 1998. Mr. King is
Chairman of Salt Creek Ventures, LLC, a private equity company he founded in
1994. Salt Creek Ventures, LLC is an organization specializing in equity
investments in technology companies. Mr. King has been involved over the past 33
years as a corporate executive and entrepreneur in technology-based companies.
From 1983 to 1994, he was President and Chief Executive Officer of The Newtrend
Group. Mr. King has participated as a founding investor in five companies. Mr.
King has a B.A. from Northwestern University. He serves on the Board of
Directors of DeVry, Inc., American Floral Services, Inc., COLLEGIS, Inc.,
Premier Systems Integrators, Inc. and eduprise.com, inc.
Stephen P. Murray has been a Director of the Company since May 1998. Mr. Murray
has been a General Partner of CCP since June 1994. From November 1988 to June
1994, Mr. Murray was a Principal at CCP. Prior thereto, he was a Vice President
with the Middle-Market Lending Division of Manufacturers Hanover. Mr. Murray has
a B.A. from Boston College and an M.B.A. from Columbia Business School. He is a
director of The Vitamin Shoppe, Vitamin Shoppe.com, Starbelly, Inc., Home
Products, Inc., Futurecall Telemarketing, American Floral Services, The
Cornerstone Group, Medical Arts Press and Regent Lighting Corporation.
Brian J. Richmand has been a Director of the Company since May 1998. Mr.
Richmand has been a General Partner of CCP since August 1993. From 1986 to
August 1993, Mr. Richmand was a partner with the law firm of Kirkland & Ellis.
He has a B.S. from The Wharton School of the University of
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37
Pennsylvania and a J.D. from Stanford Law School. Mr. Richmand is a director of
Transtar Metals, L.L.C., Riverwood International Corp., Reiman Publishing,
L.L.C., and American Media, Inc.
Terry D. Byers became a Director of the Company in December 1998. Ms. Byers has
more than 17 years experience in information technology ranging from hands-on
systems design and development to executive management. She has extensive
experience in designing and architecting enterprise-level IT infrastructures,
developing and integrating business information systems, implementing large ERP
applications, and developing and deploying technology-based solutions to
clients. Terry is a Sr. VP and the Chief Technology Officer for American Floral
Services, Inc. located in Oklahoma City. She holds a bachelors of business
administration degree in computer science from the University of Central
Oklahoma.
Ronald L. Taylor became a Director of the Company in April 1999. Mr. Taylor is
president and chief operating officer of DeVry, Inc. and Keller Graduate School
of Management, Inc. He is chairman of the proprietary schools advisory committee
for the Illinois Board of Higher Education; is a member of the Institutional
Action Committee; is a commissioner for the Commission on Adult Learning and
Educational Credentials, American Council on Education; is a mentor for the Next
Generation Leadership Institute at Loyola University Chicago; is a member of the
board of directors of the Illinois State Chamber of Commerce; serves on the
board of directors of SPR, Inc., DeVry, Inc., and the Better Business Bureau of
Chicago & Northern Illinois, Inc. Mr. Taylor has a bachelor's degree from
Harvard and received his MBA from Stanford University.
Barbara S. Feigin became a Director of the Company in August 1999. Ms. Feigin is
a consultant specializing in strategic marketing and branding. She served as
Executive Vice President and Worldwide Director of Strategic Services and was as
a member of the Agency Policy Council for Grey Advertising, Inc. from 1983 to
1999. Ms. Feigin is a director of Circuit City Stores, Inc., VF Corporation, and
Vitamin Shoppe.com. Ms. Feigin is a graduate of Whitman College, where she has
served as a member of the Board of Overseers, and of the Harvard Radcliffe
Program in Business Administration.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The members of the Board of Directors are reimbursed for out-of-pocket expenses
related to their service on the Board of Directors or any committee thereof. In
addition, members of the Board of Directors who are neither officers of the
Company nor affiliated with CCP or the Investor are entitled to receive an
attendance fee of $1,000 for each meeting attended.
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ITEM 11. EXECUTIVE COMPENSATION
The following table provides certain summary information concerning compensation
earned for the 44 weeks ended July 3, 1999 ("1999"), for the 52 weeks ended
August 29, 1998 ("1998"), and the 52 weeks ended August 30, 1997 ("1997"), on
behalf of the Company's Chief Executive Officer and the other most highly
compensated executive officers whose salary and bonus exceeded $100,000 for the
fiscal year:
SUMMARY COMPENSATION TABLE
COMPENSATION FOR THE PERIOD
---------------------------
ANNUAL LONG-TERM ALL OTHER
COMPENSATION COMPENSATION COMPENSATION (1)
------------ ------------- ----------------
NUMBER OF
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTION/SAR AWARDS
James R. Kahl, 1999 $264,366
Chief Executive Officer & President 1998 297,500 $143,000 21,780 $ 400,000 (1)
1,152,556 (2)
1997 280,000 125,000
Susan Stanton, 1999 120,192 (3) 24,000 5,700
Chief Operating Officer
Rebecca L. Perry, 1999 155,490
Executive Vice President, Operations 1998 172,500 33,000 5,100 150,000 (1)
1997 130,000 60,000 1,000
David J. Anglewicz, 1999 133,240
Senior Vice President, 1998 150,000 26,000 1,575 75,000 (1)
Facility Services 1997 150,000 15,000
Phillip M. Kane, 1999 149,742
Senior Vice President, Finance and 1998 170,000 31,000 5,100 150,000 (1)
Chief Financial Officer 1997 160,000 28,000 1,000
Mary Jean Wolf 1999 134,083
Senior Vice President, 1998 150,000 28,000 3,750 10,000 (1)
Organization Services 1997 8,654 (4)
(1) Represents Recapitalization bonuses paid to certain members of management
by selling shareholders out of sales proceeds. Perquisites and other
personal benefits for the fiscal years 1999, 1998, and 1997 paid to the
named officers did not, as to any of them, exceed the lesser of $50,000 or
10 percent of the sum of their respective salary and bonus.
(2) Represents reimbursement for tax consequences on the exercise and sale of
stock options in accordance with Mr. Kahl's employment contract.
(3) 1999 compensation covers 25 weeks from January 11, 1999 through July 3,
1999.
(4) 1997 compensation covers 3 weeks from August 11, 1997 through August 30,
1997.
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39
The following tables present information relating to grants to executive
officers of options to purchase common stock of Company:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION/SAR VALUES
NUMBER OF
SECURITIES
UNDERLYING VALUE OF
UNEXERCISED IN-THE-MONEY
OPTIONS/SARs OPTIONS/SARs
AT FY END (#) AT FY END (5)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) REALIZED UNEXERCISABLE UNEXERCISABLE
James R. Kahl, 10,295/0 (1) 433,300/0
CEO & President 4,882/13,143 (2) 0/0
0/3,755 (3) 0/0
Susan Stanton 469/4,031 (4) 0/0
Chief Operating Officer 0/1,200 (4)
Rebecca L. Perry, 0/0 (1) 0/0
EVP, Operations 975/2,625 (2) 0/0
0/1,500 (3) 0/0
David J. Anglewicz, 305/820 (2) 0/0
SVP, Facility Services 0/450 (3) 0/0
Phillip M. Kane, 4,959/0 (1) 208,300/0
SVP, Finance & CFO 975/2,625 (2) 0/0
0/1,500 (3) 0/0
Mary Jean Wolf 609/1,641 (2) 0/0
SVP, Org. Services
0/1,500 (3) 0/0
(1) Pursuant to the Recapitalization, certain key executives simultaneously
exercised options at various prices and sold the related shares at $133.83
per share (the transaction price). Those options not exercised were
retained by the key executives. All of these options became fully
exercisable as a result of the Recapitalization.
(2) Effective May 18, 1998 the Board of Directors granted to certain key
executives Tranche A options at $66.92 per share, an amount which
approximates the fair value of a share of common stock of the Company at
the date of the grant. These options become exercisable ratably over
forty-eight months and expire ten years from the date of grant.
(3) Effective May 18, 1998 the Board of Directors granted to certain key
executives Tranche B options at $133.83 per share. These options are
exercisable only in the event of a change in control or a registered public
offering of common stock, which provides certain minimum returns (as
defined) over the transaction price.
(4) Effective January 11, 1999 the Board of Directors granted Susan
Stanton 4,500 Tranche A options at $66.92 per share and 1,200 Tranche B
options at $133.83 per share.
(5) The equity of the Company is not traded and there is no market for pricing
the value of the options. "In the Money" calculations are based on the
enterprise value from the May 11, 1998 Recapitalization
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40
adjusted for the new debt, preferred stock, common shares issued and
retired, warrants and options and an adjustment for a control premium
related to the Recapitalization.
OPTIONS/SAR GRANTS
NUMBER OF POTENTIAL REALIZABLE
SECURITIES % OF TOTAL VALUE (3) AT ASSUMED ANNUAL
UNDERLYING OPTIONS/SAR's EXERCISE OR RATES OF STOCK PRICE
OPTIONS/SAR's GRANTED TO BASE PRICE EXPIRATION APPRECIATION FOR OPTION TERM
NAME GRANTED EMPLOYEES ($/SHARE) DATE 5% ($) 10% ($)
----- ------- --------- ---------- ---------- ------ -------
FISCAL YEAR 1999
Susan Stanton 4,500 (1) 79% $ 66.92 January 11, 2009 $189,385 $479,940
1,200 (2) 21% $133.83 January 11, 2009 0 $ 47,692
(1) Tranche A options
(2) Tranche B options
(3) The potential realizable value of the options granted in fiscal year 1999
was calculated by multiplying those options by the excess of (a) the
assumed fair value of a share of common stock at the end of the option's
ten year term, based on a 5% or 10% annual increase in value from the
fair value at date of issue over (b) the base price shown. This
calculation does not take into account any taxes or other expenses which
might be owed. The assumed fair value at a 5% assumed annual appreciation
rate over the 10-year term is $109.91 and such value at a 10% assumed
annual appreciation rate over that term is $173.57. The 5% and 10%
appreciation rates are set forth in the Securities and Exchange
Commission rules and no representation is made that the common stock will
appreciate at these assumed rates or at all.
EMPLOYMENT CONTRACTS
The Company has entered into employment agreements with James R. Kahl, Susan
Stanton, Rebecca L. Perry and Phillip M. Kane. The Employment Agreements provide
for Mr. Kahl, Ms. Stanton, Ms. Perry and Mr. Kane to receive a base salary,
subject to annual performance adjustments, of $312,500, $250,000, $181,000 and
$177,000, respectively, plus a bonus of up to 180%, 120%, 75% and 75%,
respectively, of base salary. The terms of the Employment Agreement are as
follows: for Mr. Kahl, four years from May 11, 1998, for Ms. Stanton, Ms. Perry,
and Mr. Kane, one year, in each case subject to one year automatic renewals.
Each Employment Agreement also provides that the executive is entitled to
participate in the health and welfare benefit plans available to the Company's
other senior executives. The Employment Agreements provide for severance in the
case of a termination without 'cause' or a resignation with 'good reason' (each
as defined in the applicable Employment Agreement) in an amount equal to the
base salary plus bonus for Mr. Kahl, and in an amount equal to the base salary
for Ms. Stanton, Ms. Perry and Mr. Kane. If Mr. Kahl terminates his employment
with good reason after a change of control, Mr. Kahl would be entitled to two
years' base salary and bonus. The Employment Agreements also contain customary
non-disclosure, non-competition and non-solicitation provisions.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not applicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
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PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See pages 18 to 34 of this Annual Report on Form 10-K for financial
statements of LPA Holding Corp. as of July 3, 1999 and August 29, 1998
and for the 44 weeks ended July 3, 1999, and 52 weeks ended August 30,
1998 and 52 weeks ended August 30, 1997.
(a) 2. Financial Statement Schedules
The following additional financial data should be read in conjunction
with the consolidated financial statements for the 44 weeks ended July
3, 1999, and 52 weeks ended August 29, 1998 and 52 weeks ended August
30, 1997. The condensed financial information of LPA Services, Inc. is
not presented do to its immateriality. Other schedules not included
with these additional financial statement schedules have been omitted
because they are not applicable or the required information is
contained in the consolidated financial statements or notes thereto.
SCHEDULES
Schedule I - Condensed Financial Statements of Registrants
Schedule II - Valuation and Qualifying Accounts
(a) 3. Exhibits
EXHIBIT
NUMBER DESCRIPTION
3.1* Amended and Restated Certificate of Incorporation of LPA
Holding Corp.
3.2* Certificate of Designations, Preferences and Rights of Series
A Redeemable Preferred Stock of LPA Holding Corp.
3.3* Bylaws of LPA Holding Corp.
3.4* Amended and Restated Certificate of Incorporation of La Petite
Academy, Inc.
3.5* Bylaws of La Petite Academy, Inc.
4.1* Indenture among LPA Holding Corp., La Petite Academy, Inc.,
LPA Services, Inc. and PNC Bank, National Association dated as
of May 11, 1998
10.1* Purchase Agreement among Vestar/LPA Investment Corp., La
Petite Academy, Inc., LPA Services, Inc., Chase Securities
Inc. and NationsBanc Montgomery Securities LLC dated May 6,
1998
10.2* Exchange and Registration Rights Agreement among La Petite
Academy, Inc., LPA Holding Corp., LPA Services, Inc., Chases
Securities Inc., NationsBanc Montgomery Securities LLC dated
May 11, 1998
10.3* Merger Agreement by and between LPA Investment LLC and
Vestar/LPA Investment Corp. dated as of March 17, 1998
10.5* Stockholders Agreement among LPA Holding Corp., Vestar/LPT
Limited Partnership, LPA Investment LLC and the management
stockholders dated as of May 11, 1998
10.6* 1998 Stock Option Plan and Stock Option Agreement for LPA
Holding Corp. dated as of May 18, 1998
10.7* Preferred Stock Registration Rights Agreement between LPA
Holding Corp. and LPA Investment LLC dated May 11, 1998
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42
EXHIBIT
NUMBER DESCRIPTION
10.8* Registration Rights Agreement among LPA Holding Corp.,
Vestar/LPT Limited Partnership, the stockholders listed
therein and LPA Investment LLC, dated May 11, 1998
10.9* Employment Agreement among LPA Holding Corp., La Petite
Academy, Inc. and James R. Kahl
10.10* Employment Agreement among LPA Holding Corp., La Petite
Academy, Inc. and Rebecca Perry
10.11* Employment Agreement among LPA Holding Corp., La Petite
Academy, Inc. and Phillip Kane
10.12* Credit Agreement dated as of May 11, 1998 among La Petite
Academy, Inc., LPA Holding Corp., Nationsbank, N.A., and The
Chase Manhattan Bank
10.13* Pledge Agreement among La Petite Academy, Inc., LPA Holding
Corp., Subsidiary Pledgors and Nationsbank, N.A. dated as of
May 11, 1998
10.14* Security Agreement among La Petite Academy, Inc., LPA Holding
Corp., Subsidiary Guarantors and Nationsbank, N.A. dated as of
May 11, 1998
10.15* Parent Guarantee Agreement among LPA Holding Corp. and
Nationsbank, N.A. dated as of May 11, 1998
10.16* Subsidiary Guarantee Agreement among Subsidiary Guarantor of
La Petite Academy, Inc., LPA Services, Inc. and Nationsbank,
N.A. dated as of May 11, 1998
10.17* Indemnity, Subrogation and Contribution Agreement among
La Petite Academy, Inc., LPA Services, Inc., as Guarantor and
Nationsbank, N.A. dated as of May 11, 1998
10.18** James Kahl option agreement
10.19** 1998 Stock Option Plan
12.1* Statement regarding computation of ratios
21.1* Subsidiaries of Registrant
23.2* Consent of Deloitte & Touche LLP
24.1* Powers of Attorney (included on the signature page)
27.1 Financial Data Schedule
* Incorporated by reference to the Exhibits to La Petite
Academy, Inc.'s Registration Statement on Form S-4,
Registration No. 333-56239, filed with the Securities and
Exchange Commission on June 5, 1998.
** Incorporated by reference to the Exhibits to La Petite
Academy, Inc.'s 10-K filed with the Securities and Exchange
Commission on November 24, 1998.
(b) Reports on Form 8-K
Current report on Form 8-K filed on June 25, 1999 reporting the change
of the Company's fiscal year to be the period starting on the first
Sunday in July and ending on the first Saturday in July in the
subsequent year.
42
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LPA HOLDING CORP.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
JULY 3, AUGUST 29,
BALANCE SHEETS 1999 1998
----------- -------------
ASSETS:
Investment in La Petite Academy, Inc. $ (10,659) $ (9,862)
----------- ------------
$ (10,659) $ (9,862)
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Payable to La Petite Academy, Inc. 70,214 70,214
----------- ------------
Total current liabilities 70,214 70,214
Series A 12% redeemable preferred stock ($.01 par value per share); 29,310 25,625
30,000 shares authorized, issued and outstanding at aggregate
liquidation preference of $1,036.558 as of August 29, 1998 and
of $1,143.444 as of July 3, 1999 (Note 7)
Stockholders' deficit:
Class A common stock ($.01 par value per share); 950,000 shares 6 6
authorized and 560,026 shares issued and outstanding as of August 29,
1998 and July 3, 1999
Class B common stock ($.01 par value per share); 20,000 shares
authorized, issued and outstanding as of August 29, 1998 and July 3,
1999
Common stock warrants 5,645 5,645
Accumulated deficit (115,834) (111,352)
----------- ------------
Total stockholder's deficit (110,183) (105,701)
----------- ------------
$ (10,659) $ (9,862)
=========== ============
See notes to consolidated financial statements included in Part II of the
Annual Report on Form 10-K.
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44
LPA HOLDING CORP.
SCHEDULE I- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS OF DOLLARS)
44 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JULY 3, AUGUST 29, AUGUST 30,
STATEMENTS OF OPERATIONS 1999 1998 1997
------------- ------------- ------------
Minority interest in net income of subsidiary $ $ 2,849 $ 3,693
------------- ------------- ------------
Loss before equity in net income of subsidiary (2,849) (3,693)
Equity in net income (loss) of La Petite Academy, Inc (797) (10,479) 2,476
------------ ------------- ------------
Net loss $ (797) $ (13,328) $ (1,217)
============ ============= ============
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45
LPA HOLDING CORP.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS OF DOLLARS)
44 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JULY 3, AUGUST 29, AUGUST 30,
STATEMENTS OF CASH FLOW 1999 1998 1997
------------ ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (797) $ (13,328) $ (1,217)
Adjustments to reconcile net loss to net cash from operating
activities:
Minority interest in net income of La Petite Academy, Inc. 0 2,849 3,693
Equity in net (income) loss of La Petite Academy, Inc 797 10,479 (2,476)
------------ ------------- -------------
Net cash from operating activities $ 0 $ 0 $ 0
============ ============= =============
See notes to consolidated financial statements included in Part II of the Annual
Report on Form 10-K.
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46
LPA HOLDING CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
BALANCE AT CHARGED TO BALANCE AT
AUGUST 29, COSTS AND JULY 3,
DESCRIPTION 1998 EXPENSES WRITE-OFFS 1999
------------ ------------ ------------ ------------
Allowance for doubtful accounts $ 196 $ 1,397 $ 1,287 $ 306
------------ ------------ ------------ ------------
BALANCE AT CHARGED TO BALANCE AT
AUGUST 30, COSTS AND AUGUST 29,
DESCRIPTION 1997 EXPENSES WRITE-OFFS 1998
------------ ------------ ------------ ------------
Allowance for doubtful accounts $ 83 $ 1,717 $ 1,604 $ 196
------------ ------------ ------------ ------------
BALANCE AT CHARGED TO BALANCE AT
AUGUST 31, COSTS AND AUGUST 30,
DESCRIPTION 1996 EXPENSES WRITE-OFFS 1997
------------ ------------ ------------ ------------
Allowance for doubtful accounts $ 82 $ 1,475 $ 1,474 $ 83
------------ ------------ ------------ ------------
BALANCE AT CHARGED TO BALANCE AT
AUGUST 26, COSTS AND AUGUST 31,
DESCRIPTION 1995 EXPENSES WRITE-OFFS 1996
------------ ------------ ------------ ------------
Allowance for doubtful accounts (a) $ 722 $ 1,109 $ 1,749 $ 82
------------ ------------ ------------ ------------
(a) During the fourth quarter of fiscal 1996, the company performed an audit
of its third party receivable balances and wrote off substantially all of
its uncollectible accounts. In addition, the Company implemented new
procedures and controls to ensure write-offs are recorded on a a timely
basis.
(continued)
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LPA HOLDING CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
RESERVE FOR CLOSED ACADEMIES
BALANCE AT CHARGED TO BALANCE AT
AUGUST 30, COSTS AND CHARGED TO JULY 3,
1998 EXPENSES RESERVE 1999
------------ ------------ ------------ ------------
Reserve for Closed Academies $ 5,417 $ $ 1,369 $ 4,048
------------- ------------- ------------- -------------
BALANCE AT CHARGED TO BALANCE AT
AUGUST 30, COSTS AND CHARGED TO AUGUST 29,
DESCRIPTION 1997 EXPENSES RESERVE 1998
------------- ------------- ------------- -------------
Reserve for Closed Academies $ 7,469 $ $ 2,052 $ 5,417
------------- ------------- ------------- -------------
BALANCE AT CHARGED TO BALANCE AT
AUGUST 31, COSTS AND CHARGED TO AUGUST 30,
DESCRIPTION 1996 EXPENSES RESERVE 1997
------------- ------------- ------------- -------------
Reserve for Closed Academies $ 10,893 $ $ 3,424 $ 7,469
------------- ------------- ------------- -------------
BALANCE AT CHARGED TO BALANCE AT
AUGUST 26, COSTS AND CHARGED TO AUGUST 31,
DESCRIPTION 1995 EXPENSES RESERVE 1996
------------- ------------- ------------- -------------
Reserve for Closed Academies $ 13,711 $ $ 2,818 $ 10,893
------------- ------------- ------------- -------------
(concluded)
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on September 30, 1999.
LPA Holding Corp.
/s/ James R. Kahl
-------------------------------
By: James R. Kahl
Chairman of the Board, Chief Executive
Officer, President and Director and duly
Authorized representative of the registrant
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed by the following persons on
behalf of the registrant and in the capabilities indicated on September 30,
1999.
/s/ James R. Kahl /s/ Stephen P. Murray
- ------------------------------------ -----------------------------------
By: James R. Kahl By: Stephen P. Murray
Chairman of the Board, Chief Executive Director
Officer, President and Director
/s/ Mitchell J. Blutt, M.D. /s/ Brian J. Richmand
- ------------------------------------ -----------------------------------
By: Mitchell J. Blutt, M.D. By: Brian J. Richmand
Director Director
/s/ Robert E. King /s/ Terry D. Byers
- ------------------------------------ -----------------------------------
By: Robert E. King By: Terry D. Byers
Director Director
/s/ Ronald L. Taylor /s/ Barbara Feigin
- ------------------------------------ -----------------------------------
By: Ronald L. Taylor By: Barbara Feigin
Director Director
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49
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on September 30, 1999.
La Petite Academy, Inc.
/s/ Phillip M. Kane
-----------------------------------
By: Phillip M. Kane
Senior Vice President, Chief Financial
Officer and duly authorized representative
of the registrant
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50
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on September 30, 1999.
LPA Services, Inc.
/s/ Phillip M. Kane
-----------------------------------
By: Phillip M. Kane
Vice President of Finance, Chief Financial
Officer and duly authorized representative
of the registrant
50