<PAGE> 1
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 AUGUST 29, 1998
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
incorporation or organization) identification number)
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 November 24, 1998, 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 November 24, 1998, each of the
additional registrants had the number of outstanding shares, which is shown on
the following table.
<PAGE> 2
ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
Number of Shares
Jurisdiction of Commission IRS Employer of Common
Name Incorporation File Number Identification No. Stock Outstanding
- ---- --------------- ----------- ------------------ -----------------
<S> <C> <C> <C> <C>
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)
</TABLE>
2
<PAGE> 3
LPA HOLDING CORP.
INDEX
- --------------------------------------------------------------------------------
PART I.
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Item 1. Business 4
Item 2. Properties 7
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 16
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 31
PART III.
Item 10. Directors and Executive Officers of the Registrant 32
Item 11. Executive Compensation 34
Item 12. Security Ownership of Certain Beneficial Owners and Management 36
Item 13. Certain Relationships and Related Transactions 36
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 37
SIGNATURES 44
</TABLE>
3
<PAGE> 4
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). Vestar/LPT Limited Partnership retained common stock of Parent
having a value (based on the amount paid by the Investor for its common stock of
Parent) of $2.8 million (representing 3.0% of the outstanding common stock of
Parent on a fully diluted basis). Management retained common stock of Parent
having a value (based on the amount paid by the Investor for its common stock of
Parent) of $4.7 million (representing 5.0% of the common stock of Parent on a
fully diluted basis) and retained existing options to acquire 3.0% of Parent's
fully diluted common stock. In addition, Parent adopted a new stock option plan
covering 8.5% of its fully diluted common stock. Accordingly, management owns or
has the right to acquire, subject to certain performance requirements,
approximately 16.5% of the common stock of Parent on a fully diluted basis. The
Equity Investment was used, together with the proceeds of the offering of $145
million of 10% Senior Notes due 2008 and borrowings under a new credit
agreement, consisting of a term loan facility of $40 million and a revolving
credit facility providing loans of up to $25 million, to finance the
Recapitalization, to refinance substantially all of La Petite's outstanding
indebtedness and outstanding preferred stock (the Refinancing Transactions) and
to pay the fees and expenses relating to the foregoing. These transactions
closed on May 11, 1998. 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.
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:
4
<PAGE> 5
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.
As of August 29, 1998, the Company operated 736 educational facilities,
including 685 Journey Academies, 31 employer-based Academies and 20 Montessori
schools, located in 35 states and the District of Columbia, and had an
enrollment of approximately 83,000 full and part-time children. The Company's
Operating Capacity (as defined) as of August 29, 1998, was approximately 90,000
full-time children. For the 52 weeks ended August 29, 1998, estimated full-time
equivalent student (FTE) Utilization (as defined) was 65%.
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 August 29, 1998, the Company employed approximately 12,700 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.
5
<PAGE> 6
INSURANCE AND CLAIMS ADMINISTRATION
Since July 1989, the Company has maintained excess liability insurance covering
general liability and automotive liability, in addition to primary general
liability, automotive liability, workers compensation, property and casualty,
crime and directors' and officers' insurance. Management believes that the
coverage provided by these policies is adequate to meet the Company's needs.
Third-party administration and claims payments services for general liability
and auto liability are provided by LPA Services, Inc., a wholly owned subsidiary
of La Petite.
REGULATION AND GOVERNMENT INVOLVEMENT
Each Academy must be licensed under applicable state and local licensing laws
and is subject to a variety of state and local regulations. Although these state
and local regulations vary greatly from jurisdiction to jurisdiction,
governmental agencies generally review the safety, fitness and adequacy of the
buildings and equipment, the ratio of staff to children, the dietary program,
the daily curriculum and compliance with health standards. In a few
jurisdictions, new legislation or regulations have been enacted or are being
considered which establish requirements for employee background checks or other
clearance procedures for new employees of child care centers. For example, all
states in which the Company operates require criminal record checks for all
child care staff as part of licensing regulations and some require fingerprint
verification. Repeated failures by an Academy to comply with applicable
regulations can subject it to state sanctions, which might include being placed
on probation or, in more serious cases, suspension or revocation of the
Academy's license to operate. Management believes the Company is in substantial
compliance with all material regulations and licensing requirements applicable
to its businesses.
Although no federal license is required at this time, there are minimum
standards, which must be met to qualify for participation in certain federal
subsidy programs.
Government, at both the federal and state levels, is actively involved in
expanding the availability of child care services. Federal support is delivered
at the state level through government-operated educational and financial
assistance programs. Child care services offered directly by states include
training for child care providers and resource and referral systems for parents
seeking child care. In addition, the state of Georgia has an extensive
government-paid private sector preschool program in which the Company
participates.
In August and September of 1998, the National Highway Transportation Safety
Administration (NHTSA) issued interpretative letters that appear to modify 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 15-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. These interpretations will affect the type of vehicle that may be
purchased by the Company in the future for use in transporting children between
schools and the Company's centers. The Company anticipates that NHTSA's recent
interpretation and potential related changes in state and federal transportation
regulations will increase the cost to the Company of transporting children,
because school buses are more expensive to purchase and maintain, and may
require drivers who have commercial licenses.
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.
6
<PAGE> 7
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.
The Company has recently designed new prototypes for residential Academies and
Montessori schools, both of which are 9,500 square foot facility prototypes to
be built on one acre or more of commercially zoned property. The new residential
Academy prototype will have an operating capacity for approximately 175 children
and is a closed classroom design, without infant rooms, that reflects a
preschool environment and supports the latest curriculum improvements. The
Montessori school prototype will be divided into six equal-sized classrooms
which will each support 25 children, resulting in an operating capacity for
approximately 150 children. Management believes the new prototypes 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
August 29, 1998:
<TABLE>
<S> <C> <C> <C>
Alabama (18) Indiana (17) Nebraska (10) South Carolina (25)
Arizona (24) Iowa (9) Nevada (9) Tennessee (26)
Arkansas (8) Kansas (22) New Jersey (2) Texas (117)
California (58) Kentucky (4) New Mexico (4) Utah (4)
Colorado (25) Louisiana (1) North Carolina (30) Virginia (36)
Delaware (1) Maryland (15) Ohio (17) Washington, D. C. (2)
Florida (97) Minnesota (1) Oklahoma (24) Washington (16)
Georgia (53) Mississippi (3) Oregon (3) Wisconsin (2)
Illinois (16) Missouri (30) Pennsylvania (6) Wyoming (1)
</TABLE>
As of August 29, 1998, the Company operated 736 Academies, 662 of which were
leased under operating leases, 55 of which were owned and 19 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.
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 662 Academies from
approximately 400 investors.
7
<PAGE> 8
The leases have initial terms expiring as follows:
<TABLE>
<CAPTION>
YEARS INITIAL LEASE TERMS EXPIRE NUMBER OF ACADEMIES
<S> <C>
1999 73
2000 55
2001-2006 451
2007 and later 83
---
662
---
</TABLE>
The Company has generally been successful when it has sought to renew expiring
Academy leases.
In fiscal year 1998, the Company opened one Residential Academy.
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 November 24, 1998,
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
1998 and 1997. 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.
8
<PAGE> 9
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 53 Weeks 52 Weeks 52 Weeks
ENDED ENDED ENDED ENDED ENDED
AUGUST 29, AUGUST 30, AUGUST 31, AUGUST 26, AUGUST 27,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Operating revenue $ 314,933 $ 302,766 $ 300,277 $ 279,806 $ 274,195
Operating expenses:
Salaries, wages and benefits 166,501 159,236 155,046 142,757 135,765
Facility lease payments 39,641 39,332 39,587 39,901 38,906
Depreciation 13,892 13,825 13,680 13,501 12,535
Amortization of goodwill and other
intangibles 1,884 2,236 2,774 3,712 3,492
Restructuring charge(a) 11,700
Recapitalization costs(b) 8,724
Other 76,258 74,111 78,310 75,981 72,190
--------- --------- --------- --------- ---------
Total operating expenses 306,900 288,740 289,397 287,552 262,888
--------- --------- --------- --------- ---------
Operating income(loss) 8,033 14,026 10,880 (7,746) 11,307
Interest expense(c) 14,126 9,245 10,256 11,110 12,665
Minority interest in net
income of subsidiary 2,849 3,693 3,561 2,824 2,452
Interest income (885) (959) (903) (1,063) (825)
--------- --------- --------- --------- ---------
Loss before income taxes
and extraordimary item (8,057) 2,047 (2,034) (20,617) (2,985)
Provision (benefit) for income
taxes (254) 3,264 1,518 (6,155) 642
--------- --------- --------- --------- ---------
Income (loss) before
extraordinary item (7,803) (1,217) (3,552) (14,462) (3,627)
Extraordinary item - loss on
early retirement of debt(d) (5,525) (819) (1,610)
--------- --------- --------- --------- ---------
Net loss $ (13,328) $ (1,217) $ (4,371) $ (14,462) $ (5,237)
========= ========= ========= ========= =========
BALANCE SHEET DATA (at end of period)
Total assets $ 160,791 $ 171,160 $ 177,133 $ 195,604 $ 204,885
Subordinated debt 903 1,590 1,555 1,521
Total debt 185,727 85,903 86,590 99,186 102,352
Redeemable preferred stock 25,625 32,521 28,827 25,266 22,442
Stockholders' equity (105,701) 3,374 4,787 9,175 23,658
OTHER DATA
EBITDA(e) $ 32,533 $ 30,087 $ 27,334 $ 21,167 $ 27,334
Depreciation and amortization(f) 16,621 16,911 17,704 18,638 18,118
Capital expenditures 13,637 7,300 8,570 9,101 8,496
Proceeds from sale of assets 2,632 452 2,525 6,145 3,399
Academies at end of period 736 745 751 786 787
FTE utilization during the period (g) 65% 66% 64% 59% 59%
</TABLE>
9
<PAGE> 10
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, $0.9 million, $1.3 million, $1.4
million and $2.1 million of amortization of deferred financing costs and
accretion of the discount on the Convertible Debentures for fiscal years
1998, 1997, 1996, 1995 and 1994, 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 interest and 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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<PAGE> 11
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.
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.
1998 COMPARED TO 1997 RESULTS (IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
52 WEEKS ENDED 52 WEEKS ENDED
----------------------- -----------------------
August 29, Percent of August 30, Percent of
1998 Revenue 1997 Revenue
<S> <C> <C> <C> <C>
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 97.4 288,740 95.4
-------- ---- -------- ----
Operating income $ 8,033 2.6% $ 14,026 4.6%
======== ==== ======== ====
EBITDA $ 32,533 10.3% $ 30,087 9.9%
======== ==== ======== ====
Adjusted EBITDA $ 34,332 l0.9% $ 30,787 10.2%
======== ==== ======== ====
</TABLE>
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.
11
<PAGE> 12
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
same period in the prior year. 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 same
period in the prior year.
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 same period in the prior year. In
September 1997, the Company held a special conference to which all Academy
Directors were invited at which the Company articulated its future business
strategy for the growth of the Company. Total operating expenses for the 52
weeks ended August 29, 1998 include $1.2 million related to this conference.
Operating income and EBITDA. As a result of the foregoing, operating income was
$8.0 million for the 52 weeks ended August 29, 1998, as compared to $14.0
million during the same period in the prior year. 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 same period of fiscal year 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 $34.1 million for the 52 weeks ended August 29, 1998 as
compared to $30.8 million for the same period of fiscal year 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 same period of fiscal year 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 interest and 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.
12
<PAGE> 13
1997 COMPARED TO 1996 ACTUAL RESULTS (IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
52 WEEKS ENDED 52 WEEKS ENDED
---------------------- ------------------------
August 30, Percent of August 24, Percent of
1997 Revenue 1996 Revenue
<S> <C> <C> <C> <C>
Operating revenue $302,766 100.0% $294,836 100.0%
Operating expenses:
Salaries, wages and benefits 159,236 52.6 152,234 51.6
Facility lease payments 39,332 13.0 38,858 13.2
Depreciation 13,825 4.6 13,680 4.6
Amortization of goodwill
and other intangibles 2,236 0.7 2,773 0.9
Other 74,111 24.5 77,139 26.2
-------- ----- -------- -----
Total operating expenses 288,740 95.4 284,684 96.6
-------- ----- -------- -----
Operating income $ 14,026 4.6% $ 10,152 3.4%
======== ===== ======== =====
EBITDA $ 30,087 9.9% $ 26,605 9.0%
======== ===== ======== =====
Adjusted EBITDA $ 30,787 lO.2% $ 27,305 9.3%
======== ===== ======== =====
</TABLE>
Operating results for fiscal 1996 contained a 'leap week,' or 53 weeks in the
year, to catch up with the calendar. The extra week in 1996 added $5.4 million
to revenue and $0.7 million to EBITDA and operating income. For comparative
purposes, the above table presents the results of the first 52 weeks of fiscal
1996. The following discussion of results is based on the 52 week comparison.
Operating revenue. During the 52 weeks ended August 30, 1997 as compared to the
prior fiscal year, operating revenue increased 2.7%, FTE attendance increased
1.6% and Average Weekly FTE Tuition increased 0.9%. Excluding closed Academies
from both years, operating revenue increased 4.6%, FTE attendance increased 3.2%
and Average Weekly FTE Tuition increased 1.4%. The increase in attendance during
fiscal 1997 over fiscal 1996 was attributable to a successful fall enrollment
period and retention of the children throughout the year. The increase in the
Average Weekly FTE Tuition was principally due to selective increases in tuition
rates which took place in the second quarter of fiscal 1996, offset in part by
increased discounts implemented at the beginning of fiscal 1997 in connection
with the Parent's Partner Plan.
The Company opened three new Academies and closed nine Academies during fiscal
1997. As a result, the Company operated six fewer Academies at the end of fiscal
1997 than at the end of fiscal 1996. Two of the closures were underperforming
employer-based centers, one closure was an underperforming residential Academy,
and the remaining six closures were due to management decisions not to renew the
leases of certain Academies at lease expiration.
Salaries, wages and benefits. Salaries, wages and benefits increased $7.0
million or 4.6% during the 52 weeks ended August 30, 1997, as compared to the
same period in the prior year. As a percentage of revenue, labor costs were
52.6% for the 52 weeks ended August 30, 1997 as compared to 51.6% during the
same period in the prior year. The increase in labor cost as a percentage of
revenue was principally due to staff merit increases effective January 1, 1997
and increased health care benefit costs.
Facility lease expense. Facility lease expense declined as a percentage of
revenue by 0.2% during the 52 weeks ended August 30, 1997 as compared to the
same period in the prior year. This decrease was primarily due to the closing of
46 Academies at various times during fiscal 1996.
Amortization of goodwill and other intangibles. Amortization of goodwill and
other intangibles decreased 19.4% during the 52 weeks ended August 30, 1997, as
the intangible asset for an in-place workforce became fully amortized during
fiscal 1996.
13
<PAGE> 14
All other operating costs. Other operating expenses declined as a percentage of
revenue by 1.7% to 24.5% for fiscal 1997 as compared to the same period in the
prior year. The reduction was primarily due to new management cost controls
which reduced insurance, auto, and Academy food and supply costs.
Operating income and EBITDA. As a result of the foregoing, operating income was
$14.0 million for the 52 weeks ended August 30, 1997, an increase of $3.9
million or 38.2% from the same period in the prior year. EBITDA was $30.1
million for the 52 weeks ended August 30, 1997 as compared to $26.6 million for
the same period in the prior year. Adjusted EBITDA, defined as EBITDA exclusive
of Vestar management and board fees which ceased with the recapitalization, was
$30.8 million for the 52 weeks ended August 30, 1997 as compared to $27.3
million for the same period of fiscal year 1996, an increase of 12.8%.
Interest expense. Interest expense for the 52 weeks ended August 30, 1997
declined $0.9 million or 8.7% from the same period in the prior year due to
prepayment of a term loan facility in May 1996.
Income tax rate. The effective income tax rate, after adding back nondeductible
goodwill amortization to pre-tax income, was approximately 40% for both years.
State income taxes accounted for the difference between the effective rate and
the statutory federal rate.
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.
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 for the Recapitalization. In
addition, La Petite has outstanding letters of credit in an aggregate amount
equal to $3.4 million and accordingly, $21.6 million remains available for
working capital purposes under the Revolving Credit Facility. The borrowings
under the Credit Agreement, 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 in amounts equal to specified percentages of the Company's excess
cash flow. The Term Loan Facility will terminate on May 11, 2005. The term loan
amortizes in an amount equal to $1.0 million in each of the first five years,
$10.0 million in the sixth year and $25.0 million in the seventh year. The
Revolving Credit Facility will terminate on the same date.
The Company currently has eight new Academies under construction and expects to
open approximately 35 new Academies between now and the end of fiscal 1999 and
35 in fiscal 2000. 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. In addition, the Company intends to explore other
efficient real estate financing transactions in the future.
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 cash return on its capitalized cost over the term of the
lease. In addition, many of the Company's leases provide for either
14
<PAGE> 15
contingent rentals if the Academy's operating revenue exceeds certain levels or
a fixed percentage increase every five years. 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.
Total capital expenditures for fiscal 1996, 1997 and 1998 were $8.6 million,
$7.3 million and $13.6 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 1996, 1997 and 1998 were $6.7 million, $7.0 million and
$9.2 million, respectively. Maintenance capital expenditures in 1998 included
$0.9 million for the installation of a national Academy Document and Management
Information Network (ADMIN) personal computer system. All of the ADMIN computers
are under 37 month capital leases which provide the Company the flexibility to
either purchase the PC's at lease expiration for the then market value or
replace the equipment with more modern technology.
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 1996, 1997 and 1998 were $9.4 million, $9.2 million and $9.9
million, respectively. Over the past three fiscal years, total expenditures for
the maintenance and upkeep of the Company's Academies have averaged
approximately $23,000 per Academy each year.
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 August 29, 1998, 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 the past two years, a period of low to moderate inflation,
the Company implemented selective increases in tuition rates, based on
geographic market conditions and class capacity utilization. The Company did not
experience a material decline in attendance as a result of these increases.
On September 1, 1997, the Federal Minimum Wage increased from $4.75 to $5.15 per
hour. This increase did not materially impact the Company's operations.
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 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. For payroll processing and human resources
information systems, the Company utilizes software under licensing arrangements
in which new year 2000 compliant releases are currently available to the Company
as part of the annual licensing fees, and are expected to be installed during
calendar year 1999. Also, during the spring of 1999, the Company will test all
of its smaller applications to insure that any year 2000 issues are corrected on
a timely basis.
15
<PAGE> 16
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 entered into a Credit Agreement providing for (a)
the Term Loan Facility in aggregate principal amount of $40 million and (b) the
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 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% and 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 full amount of the Term Loan Facility was drawn on May 11, 1998. A 1% change
in an applicable index rate would result in an increase or decrease in interest
expense of $ 400,000 per year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets as of August 29, 1998 and August 30, 1997
Consolidated Statements of Income for the 52 weeks ended August 29,
1998, 52 weeks ended August 30, 1997 and 53 weeks ended August 31, 1996
Consolidated Statements of Stockholders' Equity for the 52 weeks ended
August 29, 1998, 52 weeks ended August 30, 1997, and 53 weeks ended
August 31, 1996
Consolidated Statements of Cash Flows for the 52 weeks ended August 29,
1998, 52 weeks ended August 30, 1997 and 53 weeks ended August 31, 1996
Notes to Consolidated Financial Statements
16
<PAGE> 17
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 August 29, 1998 and August 30,
1997, and the related consolidated statements of income, stockholders' equity
and cash flows for the 52 weeks ended August 29, 1998, the 52 weeks ended August
30, 1997, and the 53 weeks ended August 31, 1996. 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 August 29, 1998 and August 30, 1997, and the results of their
operations and their cash flows for the 52 weeks ended August 29, 1998, the 52
weeks ended August 30, 1997 and the 53 weeks ended August 31, 1996 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
October 5, 1998
17
<PAGE> 18
LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 30,
ASSETS 1998 1997
Current assets:
<S> <C> <C>
Cash and equivalents $ 6,868 $ 23,971
Restricted cash investments (Note 1) 1,756 2,312
Accounts and notes receivable, net 7,002 4,976
Prepaid food and supplies 5,987 5,954
Other prepaid expenses 2,259 3,645
Refundable income taxes (Note 5) 1,776 559
Current deferred income taxes (Note 5) 1,124 1,024
-------- --------
Total current assets 26,772 42,441
Property and equiment, at cost:
Land 6,120 6,927
Buildings and leasehold improvements 71,754 64,811
Equipment 18,695 22,529
Facilities under construction 2,264 317
-------- --------
98,833 94,584
Less accumulated depreciation 37,839 33,460
-------- --------
Net property and equipment 60,994 61,124
Other assets (Note 2) 64,919 64,187
Deferred income taxes (Note 5) 8,106 3,408
-------- --------
$160,791 $171,160
======== ========
</TABLE>
18
<PAGE> 19
LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
<S> <C> <C>
Current liabilities:
Overdrafts due banks $ 2,890 $ 2,356
Accounts payable 7,447 6,224
Current reserve for closed academies 1,595 1,860
Current maturities of long-term debt and capital lease obligations 2,121 122
Accrued salaries, wages and other payroll costs 10,937 10,717
Accrued insurance liabilities 4,043 4,156
Accrued property and sales taxes 4,103 4,128
Accrued interest payable 4,771 719
Other current liabilities 5,572 4,761
--------- ---------
Total current liabilities 43,479 35,043
Long-term debt and capital lease obligations (Note 3) 185,727 85,903
Other long-term liabilities (Note 4) 11,661 14,319
Minority interest - Series A 12 1/8% cumulative redeemable exchangeable preferred
stock ($.01 par value); 2,000,000 shares authorized as of August 30, 1997 and no shares
authorized as of August 29, 1998; 800,000 shares issued and outstanding at aggregate
liquidation preference of $40.836 as of August 30, 1997, and no shares outstanding as of
August 29, 1998 32,521
Series A 12% redeemable preferred stock (S.01 par value per share); 30,000 shares
authorized, issued and outstanding at aggregate liquidation preference as of
August 29, 1998 (per share liquidation preference of $1,036.558) 25,625
Stockholders' equity:
10% cumulative convertible preferred stock ($.01 par value per share); 80,000 shares
authorized, issued and outstanding as of August 30, 1997, and no shares authorized,
issued or outstanding as of August 29, 1998 1
10% nonconvertible preferred stock ($.01 per value per share); 150,000 shares
authorized as of August 30, 1997, and no shares authorized as of August 29, 1998;
40,036 shares issued and outstanding as of August 30, 1997, and no shares issued or
outstanding as of August 29, 1998
Junior preferred stock ($.01 per value per share); 650,000 authorized as of August 30, 1997,
and no shares authorized as of August 29, 1998; 213,750 shares issued and outstanding as of
August 30, 1997, and no shares issued or outstanding as of August 29, 1998 2
Class A common stock ($.01 par value per share); 1,500,000 shares authorized and 852,160
shares issued and outstanding as of August 30, 1997; and 950,000 shares authorized and
560,026 shares issued and outstanding as of August 29, 1998 6 9
Class B common stock ($.01 par value per share); 350,000 shares authorized and none issued
and outstanding as of August 30, 1997; 20,000 shares authorized, issued and outstanding as of
August 29, 1998
Common stock warrants 5,645
Additional paid-in capital 34,234
Accumulated deficit (111,352) (30,573)
Less cost of treasury shares (299)
--------- ---------
Total stockholders' equity: (105,701) 3,374
--------- ---------
$ 160,791 $ 171,160
========= =========
</TABLE>
See notes to consolidated financial staternents
19
<PAGE> 20
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
AUGUST 29, 1998 AUGUST 30, 1997 AUGUST 31, 1996
<S> <C> <C> <C>
Operating revenue $ 314,933 $ 302,766 $ 300,277
Operating expenses:
Salaries, wages and benefits 166,501 159,236 155,046
Facility lease expense 39,641 39,332 39,587
Depreciation 13,892 13,825 13,680
Amortization of goodwill and other intangibles 1,884 2,236 2,774
Recapitalization costs (Note 1) 8,724
Other 76,258 74,111 78,310
--------- --------- ---------
306,900 288,740 289,397
--------- --------- ---------
Operating income 8,033 14,026 10,880
--------- --------- ---------
Interest expense 14,126 9,245 1O,256
Minority interest in net income of subsidiary 2,849 3,693 3,561
Interest income (885) (959) (903)
--------- --------- ---------
Net interest costs 16,090 11,979 12,914
--------- --------- ---------
Income (loss) before income taxes
and extraordinaory item (8,057) 2,047 (2,034)
Provision (benefit) for income taxes (254) 3,264 1,518
--------- --------- ---------
Loss before extraordinary item (7,803) (1,217) (3,552)
--------- --------- ---------
Extraordinary loss on retirement of
debt, net of applicable income taxes
of $3,776 and $546 (Note 11) (5,525) (819)
--------- --------- ---------
Net loss $ (13,328) $ (1,217) $ (4,371)
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 21
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
---------------------
NUMBER PREFERRED
OF SHARES AMOUNT STOCK WARRANTS
<S> <C> <C> <C> <C>
Balance, August 26, 1995 852,160 $ 9 $ 3 $
Dividends on preferred stock
Repurchase of common stock
Net loss
--------- --------- --------- ---------
Balance, August 31, 1996 852,160 9 3
Dividends on preferred stock
Repurchase of common stock
Net loss
--------- --------- --------- ---------
Balance, August 30, 1997 852,160 9 3
10% Cumulative Non Convertible
Preferred Dividend
Issuance of common stock 523,985 5
Repurchase of common stock
Redemption of preferred stocks (3)
Redemption of common stock (769,859) (8)
Issuance of Warrants 5,645
Equity issuance costs
Cancellation of treasury stock (26,260)
Preferred stock dividend (Note 7)
Net loss
--------- --------- --------- ---------
Balance, August 29, 1998 580,026 $ 6 $ $ 5,645
========= ========= ========= =========
<CAPTION>
TOTAL
PAID-IN ACCUMULATED TREASURY STOCKHOLDERS'
CAPITAL DEFICIT STOCK EQUITY
<S> <C> <C> <C> <C>
Balance, August 26, 1995 $ 32,099 $ (22,850) $ (86) $ 9,175
Dividends on preferred stock 1,006 (1,006) 0
Repurchase of common stock (17) (17)
Net loss (4,371) (4,371)
--------- --------- --------- ---------
Balance, August 31, 1996 33,105 (28,227) (103) 4,787
Dividends on preferred stock 1,129 (1,129) 0
Repurchase of common stock (196) (196)
Net loss (1,217) (1,217)
--------- --------- --------- ---------
Balance, August 30, 1997 34,234 (30,573) (299) 3,374
10% Cumulative Non Convertible
Preferred Dividend 848 (848)
Issuance of common stock 70,120 70,125
Repurchase of common stock (41) (41)
Redemption of preferred stocks (59,271) (59,274)
Redemption of common stock (45,931) (57,092) (103,031)
Issuance of Warrants 5,645
Equity issuance costs (7,901) (7,901)
Cancellation of treasury stock (340) 340
Preferred stock dividend (Note 7) (1,270) (1,270)
Net loss (13,328) (13,328)
--------- --------- --------- ---------
Balance, August 29, 1998 $ 0 $(111,352) $ $(105,701)
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements
21
<PAGE> 22
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
AUGUST 29, AUGUST 30, AUGUST 31,
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACIIVITIES:
Net loss $ (13,328) $ (1,217) $ (4,371)
Adjustments to reconcile net loss to net cash from operating
activities
Noncash portion of extraordinary loss on retirement of debt 3,209 1,365
Depreciation and amortization 16,621 16,911 17,704
Deferred income taxes (4,799) 223 225
Minority interest in net income of La Petite Academy, Inc. 2,849 3,693 3,561
Changes in assets and liabilities:
Accounts and notes receivable (1,924) (1,402) (72)
Prepaid expenses and supplies 1,353 (980) 253
Accrued property and sales taxes (26) (125) (699)
Accrued interest payable 4,052 (20) 81
Other changes in assets and liabilities, net (783) (2,197) (2,839)
--------- --------- ---------
Net cash from operating activities 7,224 14,886 15,208
--------- --------- ---------
CASH FLOWS USED FOR INVESTING ACTIVITIES
Capital expenditures (13,637) (7,300) (8,570)
Proceeds from sale of assets 2,632 452 2,525
--------- --------- ---------
Net cash used for investing activities (11,005) (6,848) (6,045)
--------- --------- ---------
CASH FLOWS USED FOR FINANCING ACTIVITIES
Repayment of long-term debt and capital lease obligations (121,726) (900) (12,631)
Additions to long-term debt 185,000
Deferred financing costs (7,605) (225)
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 533 (2,873) 1,126
Decrease (increase) in restricted cash investments 556 6,915 (941)
--------- --------- ---------
Net cash from (used for) financing activities (13,322) 3,142 (12,671)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (17,103) 11,180 (3,508)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 23,971 12,791 16,299
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,868 $ 23,971 $ 12,791
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 9,229 $ 8,415 $ 8,926
Income taxes 2,084 5,470 1,031
Cash received during the period for:
Interest $ 1,000 $ 848 $ 903
Income taxes 207 1,154 650
Non cash investing and financing activities:
Capital lease obligations of $3,170, and $391 were
incurred during the 52 weeks ended August 29, 1998 and
August 30, 1997, respectively, when the Company entered
into leases for new computer equipment
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 23
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). Vestar/LPT Limited
Partnership retained common stock of Parent having a value (based on the
amount paid by the Investor for its common stock of Parent) of $2.8 million
(representing 3.0% of the outstanding common stock of Parent on a fully
diluted basis). Management retained common stock of Parent having a value
(based on the amount paid by the Investor for its common stock of Parent)
of $4.7 million (representing 5.0% of the common stock of Parent on a fully
diluted basis) and retained existing options to acquire 3.0% of Parent's
fully diluted common stock. In addition, Parent adopted a new stock option
plan covering 8.5% of its fully diluted common stock. Accordingly,
management owns or has the right to acquire, subject to certain performance
requirements, approximately 16.5% of the common stock of Parent on a fully
diluted basis. The Equity Investment was used, together with the proceeds
of the offering of $145 million of 10% Senior Notes due 2008 and borrowings
under a new credit agreement, consisting of a term loan facility of $40
million and a revolving credit facility providing loans of up to $25
million, to finance the Recapitalization, to refinance substantially all of
La Petite's outstanding indebtedness and outstanding preferred stock (the
Refinancing Transactions) and to pay the fees and expenses relating to the
foregoing. These transactions closed on May 11, 1998. Transaction expenses
included in operating expenses under the caption "Recapitalization Cost"
for this period include approximately $1.5 million in transaction bonuses
and $7.2 million for the cancellation of stock options and related taxes.
Parent, consolidated with La Petite and Services, is referred to herein as
the Company.
23
<PAGE> 24
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 - The Company has a 52-53 week fiscal year which ends on
the last Saturday in August.
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 the term of the related
lease or five to 10 years, whichever is less.
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.
24
<PAGE> 25
INCOME TAXES - The Company accounts for income taxes pursuant to Statement
of Financial Accounting Standards ("SFAS") No. 109, which requires the
Company to establish deferred tax assets and liabilities, as appropriate,
for all temporary differences, and to adjust 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 and preferred stock, approximate fair value. The estimated fair
values of Senior Notes and preferred stock at August 29, 1998 were $140.1
million and $31.1 million, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," as of the beginning of its 1997 fiscal year.
SFAS No. 121 establishes accounting standards for the impairment of
long-lived assets, certain intangibles, and goodwill related to those
assets. The adoption of this Statement did not have an effect on the
Company's consolidated financial statements.
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.
RECLASSIFICATIONS - Certain reclassifications to prior year amounts have
been made in order to conform to the current year present.
2. OTHER ASSETS
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 30,
1998 1997
<S> <C> <C>
Intangible assets:
Excess purchase price over net assets acquired $ 64,277 $ 64,277
Curriculum 1,497 1,497
Workforce 3,248
Accumulated amortization (11,784) (12,714)
-------- --------
53,990 56,308
Deferred financing costs 7,605 12,752
Accumulated amortization (259) (8,176)
Other assets 3,583 3,303
-------- --------
$ 64,919 $ 64,187
======== ========
</TABLE>
25
<PAGE> 26
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 30,
1998 1997
<S> <C> <C>
Convertible Debentures, 6.5% payable through
June 1, 2011 (a) $ $ 850
Senior Notes, 9.625% payable through August 1, 2001 85,000
Senior Notes, 10.0% due May l5, 2008 (b) 145,000
Borrowings under credit agreement (c) 40,000
Capital lease obligations 2,848 366
--------- ---------
187,848 86,216
Less unamortized discount (191)
Less current maturities of long-term debt and capital
lease obligations (2,121) (122)
--------- ---------
$ 185,727 $ 85,903
========= =========
</TABLE>
a) On June 23, 1998, the Convertible Debentures were called and retired at
face value.
b) 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.
c) On May 11, 1998, Parent and La Petite entered into an agreement (the
Credit Agreement) providing for a term loan facility in the amount of
$40.0 million and a revolving credit agreement, for working capital and
other general corporate purposes through May 2005, in the amount of $25
million. Borrowings under the Credit Agreement are secured by
substantially all of the assets of the Parent, La Petite and its
subsidiaries. Loans under the Credit Agreement will bear an interest
rate per annum equal to (at Parent and La Petite's option): (i) a rate
equal to an adjusted London inter-bank offered rate (LIBOR) plus a
percentage based on La Petite's financial performance or (ii) a rate
equal to the higher of Chase's prime rate, a certificate of deposit rate
plus 1%, or the Federal Funds rate plus 1/2 of 1% plus in each case a
percentage based on La Petite's financial performance. Parent and La
Petite are required to pay fees of 0.5% per annum of the unused portion
of the Credit Agreement plus letter of credit fees, annual
administration fees, and agent arrangement fees. The Credit Agreement
will mature in May 2005. The term loan amortizes in an amount equal to
$1.0 million in each of the first five years, $10.0 million in the sixth
year and $25.0 million in the seventh year.
Scheduled maturities and mandatory prepayments of long-term debt and
capital lease obligations during the five years subsequent to August 29,
1998 are as follows (in thousands of dollars):
1999 $ 2,121
2000 2,170
2001 1,557
2002 1,000
2003 and thereafter 181,000
--------
$187,848
========
26
<PAGE> 27
4. OTHER LONG-TERM LIABILITIES
(in thousands of dollars)
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 30,
1998 1997
<S> <C> <C>
Unfavorable lease, net of accumulated amortization $ 4,848 $ 6,085
Non-current reserve for closed academies 3,822 5,609
Long-term insurance liabilities 2,991 2,625
-------- -------
$ 11,661 $14,319
======== =======
</TABLE>
In connection with the acquisition of the Company, an intangible liability
for unfavorable operating leases was recorded, which is being amortized over
the average remaining life of the leases.
The reserve for closed academies includes the long-term liability related to
leases for Academies which were closed and are no longer operated by the
Company.
5. INCOME TAXES
The provisions for income taxes recorded in the Consolidated Statements of
Income consisted of the following (in thousands of dollars):
<TABLE>
<CAPTION>
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
AUGUST 29, 1998 AUGUST 30, 1997 AUGUST 31, 1996
<S> <C> <C> <C>
Payable Currently:
Federal $(4,231) $ 2,921 $ 1,481
State (821) 567 262
------- ------- -------
Total (5,052) 3,488 1,743
------- ------- -------
Deferred:
Federal 4,018 (187) (190)
State 780 (37) (35)
------- ------- -------
Total 4,798 (224) (225)
------- ------- -------
$ (254) $ 3,264 $ 1,518
======= ======= =======
</TABLE>
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 $2.1 million, $2.1 million, and $2.1 million in the 52
weeks ended August 29, 1998, August 30, 1997, and the 53 weeks ended August
31, 1996, respectively.
27
<PAGE> 28
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 August 29, 1998 and
August 30, 1997 are estimated as follows (in thousands of dollars):
<TABLE>
<CAPTION>
AUGUST 29, 1998 AUGUST 30, 1997
<S> <C> <C>
Current deferred taxes:
Accruals not currently deductible $ 3,768 $ 3,817
Supplies (2,411) (2,386)
Prepaids and other (233) (407)
------- -------
Net current deferred tax assets $ 1,124 $ 1,024
======= =======
Noncurrent deferred taxes:
Unfavorable leases $ 1,968 $ 2,471
Insurance reserves 1,214 1,067
Reserve for closed academies 1,552 2,277
Other 301 342
Carryforward of net operating loss 2,166
Property and equipment 1,140 (1,534)
Long-term debt (78)
Intangible assets (235) (311)
Deferred financing costs and other (826)
------- -------
Net noncurrent deferred tax assets $ 8,106 $ 3,408
======= =======
</TABLE>
The Company has federal net operating loss carryforwards to offset future
taxable income through the tax year 2012. As of August 29, 1998, only the
income tax returns for tax years subsequent to 1994 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
$46.5 million, $44.9 million, and $45.1 million, for the 52 weeks ended
August 29, 1998, 52 weeks ended August 30, 1997, and 53 weeks ended August
31, 1996, respectively. Contingent rental expense of $1.4 million, $1.5
million and $1.2 million were included in rental expense for the 52 weeks
ended August 29, 1998, 52 weeks ended August 30, 1997 and 53 weeks ended
August 31, 1996, respectively.
Aggregate minimum future rentals payable under facility leases as of August
29, 1998 were as follows (in thousands of dollars):
<TABLE>
<CAPTION>
Fiscal year ending:
<S> <C>
1999 $ 37,243
2000 34,572
2001 31,129
2002 25,777
2003 21,477
2004 and thereafter 48,672
----------
$ 198,870
==========
</TABLE>
28
<PAGE> 29
7. REDEEMABLE PREFERRED STOCK & STOCKHOLDERS' EQUITY
As a result of the Recapitalization, the authorized stock of Parent, as of
August 29, 1998, 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 as of August
29, 1998 was $1,036.558. 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 August 29, 1998.
(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 August 29, 1998. The Class B Common Stock votes together with the
Class A Common Stock as a single class, with the holder of each share
of common stock entitled to cast one vote. The holders of the Class B
Common Stock have the exclusive right, voting separately as a class,
to elect one member to the Board of Directors of Parent. Each share
of the Class B Common Stock is convertible at the option of the
holder, at any time, into one share of Class A Common Stock.
(iv) Warrants to purchase 42,180 shares of Class A Common Stock at a
purchase price of $.01 per share any time on or before May 11, 2008.
The Warrants were issued in connection with the sale of Series A
Redeemable Preferred Stock; the Company recognized a discount on the
preferred stock by allocating $5,645,000 to the Warrants representing
the fair value of the Warrants when issued.
8. BENEFIT PLAN
The Company sponsors a defined contribution plan (the "Plan") for
substantially all employees. Until January 1, 1998 eligible participants
could make contributions to the Plan from 1% to 20% of their compensation
(as defined). The Company also made contributions at the discretion of the
Board of Directors. Contribution expense attributable to this Plan was $0.0
million, $0.4 million, and $0.4 million for the 52 weeks ended August 29,
1998, August 30, 1997, and the 53 weeks ended August 31, 1996.
The Plan is currently under audit by the Internal Revenue Service ("IRS")
which has raised several issues concerning the Plan's operation. The
Company believes the Plan, as amended, operated pursuant to IRS and
Department of Labor regulations, but is no longer accepting contributions.
9. RELATED PARTY TRANSACTIONS
MANAGEMENT CONSULTING AGREEMENT - The Company had entered into an agreement
for management consulting services (the "Management Consulting Agreement")
with Vestar Management Partners ("Vestar") pursuant to which Vestar made
available to the Company
29
<PAGE> 30
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 position or results of
operations.
11. EXTRAORDINARY LOSS
On May 11, 1998, the Company incurred a $5.4 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 interest and
the write-off of premiums and related deferred financing costs, net of
applicable income tax benefit.
12. STOCK-BASED COMPENSATION
From time to time, the Board of Directors of Investment in their sole
discretion, granted non-qualified stock options, with respect to the common
stock of Investment, to key executives of the Company. Options were granted
pursuant to an agreement at the time of grant, and typically become
exercisable in equal cumulative installments over a five-year period
beginning one year after the date of grant. All such options granted expire
on the tenth anniversary of the grant date. No market existed for the
common stock of Investment, but options were granted at prices that, in the
opinion of the Board of Directors, were equal to or greater than the fair
value of the stock at the time of grant.
Effective May 11, 1998, the Board of Directors of LPA Holding Corp adopted
the "1998 Stock Option Plan" and a separate "Stock Option Agreement" with
the Chief Executive Officer (together the "Plans"). The Plans provide for
the granting of Tranche A and Tranche B options to purchase up to 60,074
shares of the Company's common stock. Options to purchase 52,057 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).
30
<PAGE> 31
Stock option transactions during the past three years have been as follows:
<TABLE>
<CAPTION>
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
------------------------------ ------------------------------ ---------------------------
<S> <C> <C> <C> <C> <C> <C>
OPTIONS OUTSTANDING AT
AUGUST 26, 1995 42,294 $ 16.11
GRANTED 34,000 $ 18.00
------ -------
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
====== ======= ====== ======= ====== ========
</TABLE>
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) $17 in 1998, $19 in 1997 and $17 in 1996. 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.
* * * * * * * * *
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
31
<PAGE> 32
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:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
James R. Kahl................................ 57 Chairman of the Board, Chief Executive Officer, President and Director
Rebecca L. Perry............................. 44 Executive Vice President, Operations
David J. Anglewicz........................... 51 Senior Vice President, Facility Services
Phillip M. Kane.............................. 51 Senior Vice President, Finance and Chief Financial Officer
Mary Jean Wolf............................... 61 Senior Vice President, Organizational Services
Mitchell J. Blutt, M.D....................... 41 Director
Robert E. King............................... 62 Director
Stephen P. Murray............................ 35 Director
Brian J. Richmand............................ 44 Director
</TABLE>
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 became 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.
Rebecca L. Perry has been Executive Vice President of Operations since May 1997.
From July 1993 to May 1997, Ms. Perry was a Senior Vice President and Eastern
Operating Officer. From 1988 to June 1993, she was Assistant Vice President of
Operations with supervisory responsibility for the operations of the Company in
14 southern and Midwestern states. From 1985 to 1988, she served as Divisional
Director of Florida and from 1981 to 1985, she served as Regional Director of
Tampa.
David J. Anglewicz has been Senior Vice President, Facility Services since March
1997. From July 1993 to March 1997, Mr. Anglewicz was Executive Vice
President-Property Development and Chief Administrative Officer. Mr. Anglewicz
has been involved in the development of over 500 of the Academies throughout the
United States since he joined the Company in 1985. Mr. Anglewicz has an M.B.A.
from the University of Illinois and a B.S. from the Lawrence Technological
University.
Phillip M. Kane has been Senior Vice President, Finance and Chief Financial
Officer since 1994. From 1989 to 1993, Mr. Kane was the Chief Financial Officer
of the U.S. Department of Housing and Urban Development. From 1974 to 1989, Mr.
Kane held various financial management positions with Knight-Ridder, including
Vice President and Controller. Prior to joining Knight-Ridder, Mr. Kane was
associated with Arthur Andersen & Co. Mr. Kane has a B.A. from the University of
Miami (Fla.) and is a Certified Public Accountant.
32
<PAGE> 33
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 an M.B.A. from New York
University Graduate School of Business.
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 an M.B.A. from The Wharton School
of the University of Pennsylvania. He is a director of the Hanger Orthopedic
Group, UtiliMed, Vista Healthcare Asia, Pte., Ltd., Senior Psychology Services
Management, Medical Arts Press and Fisher Scientific International, Inc., among
others.
Robert E. King has been a Director of the Company since May 1998. Mr. King is
Chairman of Salt Creek Ventures, LLC, a company he founded in 1994. Salt Creek
Ventures, LLC is an organization specializing in equity investments in software,
computer services, transaction processing and other information-based 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. and Premier Systems Integrators, Inc.
Stephen P. Murray became a Director of the Company in 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, Home Products, Inc., Futurecall Telemarketing,
American Floral Services, The Cornerstone Group, Medical Arts Press and Regent
Lighting Corporation.
Brian J. Richmand became a Director of the Company in May 1998. Mr. Richmand has
been a General Partner of CCP since August 1993. From 1986 to August 1993, Mr.
Richmand was a partner with the law firm of Kirkland & Ellis. He has a B.S. from
The Wharton School of the University of Pennsylvania and a J.D. from Stanford
Law School. Mr. Richmand is a director of Transtar Metals, L.L.C., Riverwood
International Corp., Qualitech Steel Corporation and Western Pork Production
Corporation.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The members of the Board of Directors do not receive compensation for their
service on the Board of Directors or any committee thereof but will be
reimbursed for their out-of-pocket expenses. The Company may, in the future,
have persons who are neither officers of the Company nor affiliated with CCP or
the Investor serve on its Board of Directors. Such persons may receive customary
compensation for services on the Board of Directors of the Company.
33
<PAGE> 34
ITEM 11. EXECUTIVE COMPENSATION
The following table provides certain summary information concerning compensation
earned for the 52 weeks ended August 29, 1998 ("1998"), August 30, 1997
("1997"), and the 53 weeks ended August 31, 1996 ("1996") 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 (1)
<TABLE>
<CAPTION>
ANNUAL LONG-TERM ALL OTHER
COMPENSATION COMPENSATION COMPENSATION
------------ ------------ ------------
NUMBER OF
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTION/SAR AWARDS
<S> <C> <C> <C> <C> <C>
James R. Kahl, 1998 $ 297,500 $ 143,000 21,780 $ 400,000(1)
Chief Executive Officer & President 1,152,556(2)
1997 280,000 125,000
1996 265,000 142,500 10,000
Rebecca L. Perry, 1998 172,500 33,000 5,100 150,000(1)
Executive Vice President, Operations 1997 130,000 60,000 1,000
1996 110,000 40,900 5,000
David J. Anglewicz, 1998 150,000 26,000 1,575 75,000(1)
Senior Vice President, 1997 150,000 15,000
Facility Services 1996 142,000 35,000
Phillip M. Kane, 1998 170,000 31,000 5,100 150,000(1)
Senior Vice President, Finance and 1997 160,000 28,000 1,000
Chief Financial Officer 1996 150,000 41,400 5,000
Mary Jean Wolf 1998 150,000 28,000 3,750 10,000(1)
Senior Vice President, 1997 8,654(3)
Organization Services
</TABLE>
(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 1998, 1997 and 1996 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 option in accordance with Mr. Kahl's employment contract.
(3) 1997 compensation covers 3 weeks from August 11, 1997 through August 30,
1997.
34
<PAGE> 35
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
<TABLE>
<CAPTION>
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
---- --------------- -------- ------------- -------------
<S> <C> <C> <C> <C>
James R. Kahl, N/A (1) $3,137,000 10,295 / 0 (2) $433,300 / 0
CEO & President 1,127 / 16,898 (3) 0 / 0
0 / 3,755 (4) 0 / 0
Rebecca L. Perry, N/A (1) 678,000 0 / 0 (2) 0 / 0
EVP, Operations 225 / 3,375 (3) 0 / 0
0 / 1,500 (4) 0 / 0
David J. Anglewicz, 70 / 1,055 (3) 0 / 0
SVP, Facility Services 0 / 450 (4) 0 / 0
Phillip M. Kane, N/A (1) 868,100 4,959 / 0 (2) 208,300 / 0
SVP, Finance & CFO 225 / 3,375 (3) 0 / 0
0 / 1,500 (4) 0 / 0
Mary Jean Wolf 141 / 2,109 (3) 0 / 0
SVP, Org. Services 0 / 1,500 (4) 0 / 0
</TABLE>
(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).
(2) Also pursuant to the Recapitalization, those options not exercised were
retained by the key executives. All of these options became fully
exercisable as a result of the Recapitalization.
(3) 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.
(4) Effective May 18, 1998 the Board of Directors granted to certain key
executives Tranche B options at $133.83 per share. These options are
exercisable only in the event of a change in control or a registered public
offering of common stock, which provides certain minimum returns (as
defined) over the transaction price.
(5) The equity of the Company is not traded and there is no market for pricing
the value of the options. "In the Money" calculations are based on the
enterprise value from the May 11, 1998 Recapitalization adjusted for the new
debt, preferred stock, common shares issued and retired, warrants and
options and an adjustment for a control premium related to the
Recapitalization.
35
<PAGE> 36
OPTIONS/SAR GRANTS
<TABLE>
<CAPTION>
NUMBER OF POTENTIAL REALIZABLE
SECURITIES % OF TOTAL VALUE (3) AT ASSUMED ANNUAL
UNDERLYING OPTIONS/SAR'S EXERCISE OR RATES OF STOCK PRICE
OPTIONS/SAR'S GRANTED TO BASE PRICE EXPIRATION APPRECIATION FOR OPTION TERM
NAME GRANTED EMPLOYEES ($/SHARE) DATE 5%($) 10% ($)
---- ------------- ------------- ----------- ---------- -----------------------------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR 1998
James R. Kahl 18,025 (1) 46% $ 66.92 May 18, 2008 735,200 1,851,300
3,755 (2) 28% $133.83 May 18, 2008 134,400
Rebecca L. Perry 3,600 (1) 9% $ 66.92 May 18, 2008 146,800 369,800
1,500 (2) 11% $133.83 May 18, 2008 53,700
David J. Anglewicz 1,125 (1) 3% $ 66.92 May 18, 2008 45,900 115,500
450 (2) 3% $133.83 May 18, 2008 16,100
Phillip M. Kane 3,600 (1) 9% $ 66.92 May 18, 2008 146,800 369,800
1,500 (2) 11% $133.83 May 18, 2008 53,700
Mary Jean Wolf 2,250 (1) 6% $ 66.92 May 18, 2008 91,800 231,100
1,500 (2) 11% $133.83 May 18, 2008 53,700
</TABLE>
(1) Tranche A options
(2) Tranche B options
(3) The potential realizable value of the options granted in fiscal year 1998
to each of these executive officers 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 of $66.92 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 $107.71 and such
value at a 10% assumed annual appreciation rate over that term is $169.63.
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 entered into employment agreements, each dated as of the date of the
closing of the Transactions (the 'Employment Agreements'), with James R. Kahl,
Rebecca L. Perry and Phillip M. Kane. The Employment Agreements provide for Mr.
Kahl, Ms. Perry and Mr. Kane to receive a base salary, subject to annual
performance adjustments, of $297,500, $172,500 and $170,000, respectively, plus
a bonus of up to 180%, 75% and 75%, respectively, of base salary. The terms of
the Employment Agreement are as follows: for Mr. Kahl, four years, for Ms.
Perry, one year and for 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. 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.
36
<PAGE> 37
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See pages 16 to 31 of this Annual Report on Form 10-K for financial
statements of LPA Holding Corp. as of August 29, 1998 and August 30,
1997 and for the 52 weeks ended August 29, 1998, and 52 weeks ended
August 30, 1997 and 53 weeks ended August 31, 1996.
(a) 2. Financial Statement Schedules
The following additional financial data should be read in conjunction
with the consolidated financial statements for the 52 weeks ended
August 29, 1998, and 52 weeks ended August 30, 1997 and 53 weeks ended
August 31, 1996. 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
37
<PAGE> 38
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.
(b) Reports on Form 8-K
Current Report on Form 8-K filed on July 10, 1997 reporting the merger
on June 1, 1997 of La Petite Holdings Corp. with and into La Petite
Academy, Inc.
38
<PAGE> 39
LPA HOLDING CORP.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 30,
BALANCE SHEETS 1998 1997
<S> <C> <C>
ASSETS:
Investment in La Petite Academy, Inc. $ (9,862) $ 3,466
-------- -------
$ (9,862) $ 3,466
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Payable to La Petite Academy, Inc. 70,214 92
-------- -------
Total current liabilities 70,214 92
Series A 12% redeemable preferred stock ($.01 par value per share);
30,000 shares authorized, issued and outstanding at aggregate liquidation
preference as of August 29, 1998 (per share liquidation preference of
$1,036.558) 25,625
Stockholders' equity:
10% cumulative convertible preferred stock (S.01 par value per share); 80,000
shares authorized, issued and outstanding as of August 30, 1997, and no shares
authorized, issued or outstanding as of August 29, 1998 1
10% nonconvertible preferred stock ($.01 par value per share); 150,000 shares
authorized as of August 30, 1997, and no shares authorized as of August 29,
1998; 40,036 shares issued and outstanding as of August 30, 1997, and no
shares issued or outstanding as of August 29, 1998
Junior preferred stock ($.01 par value per share); 650,000 authorized as of
August 30, 1997, and no shares authorized as of August 29, 1998; 213,750
shares issued and outstanding as of August 30, 1997, and no shares issued or
outstanding as of August 29, 1998 2
Class A common stock ($.01 par value per share); 1,500,000 shares authorized
and 852,160 shares issued and outstanding as of August 30, 1997; and 950,000
shares authorized and 560,026 shares issued and outstanding as of August 29,
1998 6 9
Class B common stock (S.01 par value per share); 350,000 shares authorized and
none issued and outstanding as of August 30, 1997; 20,000 shares authorized,
issued and outstanding as of August 29, 1998
Common stock warrants 5,645
Additional paid-in capital 34,234
Accumulated deficit (111,352) (30,573)
Less cost of treasury shares (299)
--------- --------
(105,701) 3,374
--------- --------
$ (9,862) $ 3,466
========= ========
</TABLE>
See notes to consolidated financial statements included
in Part II of the Annual Report on Form 10-K.
39
<PAGE> 40
LPA HOLDING CORP.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
STATEMENTS OF OPERATIONS AUGUST 29, 1998 AUGUST 30, 1997 AUGUST 31, 1996
<S> <C> <C> <C>
Minority interest in net income of subsidiary $ 2,849 $ 3,693 $ 3,561
-------- -------- --------
Loss before equity in net incline of subsidiary (2,849) (3,693) (3,561)
Equity in net income (loss) of La Petite Academy, Inc (10,479) 2,476 (810)
-------- -------- --------
Net loss $(13,328) $ (1,217) $ (4,371)
======== ======== ========
</TABLE>
See notes to consolidated financial statements included
in Part II of the Annual Report on Form 10-K
40
<PAGE> 41
LPA HOLDING CORP.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS OF DOLLARS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
AUGUST 29, AUGUST 30, AUGUST 31,
STATEMENTS OF CASH FLOWS 1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(13,328) $ (1,217) $ (4,371)
Adjustments to reconcile net loss to net cash from operating
activities:
Minority interest in net income of La Petite Academy, Inc. 2,849 3,693 3,561
Equity in net income (loss) of La Petite Academy, Inc 10,479 (2,476) 810
-------- -------- --------
Net cash from operating activities $ 0 $ 0 $ 0
======== ======== ========
</TABLE>
See notes to consolidated financial statements included
in Part II of the Annual Report on Form 10-K
41
<PAGE> 42
LPA HOLDING CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
AUGUST 30, COSTS AND AUGUST 29,
DESCRIPTION 1997 EXPENSES WRITE-OFFS 1998
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $ 83 $ 1,717 $ 1,604 $ 196
----- ------- ------- -----
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
AUGUST 31, COSTS AND AUGUST 30,
DESCRIPTION 1996 EXPENSES WRITE-OFFS 1997
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $ 82 $ 1,475 $ 1,474 $ 83
----- ------- ------- -----
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
AUGUST 26, COSTS AND AUGUST 31,
DESCRIPTION 1995 EXPENSES WRITE-OFFS 1996
<S> <C> <C> <C> <C>
Allowance for doubtful accounts (a) $ 722 $ 1,109 $ 1,749 $ 82
----- ------- ------- -----
</TABLE>
(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 timely basis.
(continued)
42
<PAGE> 43
LPA HOLDING CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
RESERVE FOR CLOSED ACADEMIES
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
AUGUST 30, COSTS AND CHARGED TO AUGUST 29,
DESCRIPTION 1997 EXPENSES RESERVE 1998
<S> <C> <C> <C> <C>
Reserve for Closed Academies $ 7,469 $ $ 2,052 $ 5,417
-------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
AUGUST 31, COSTS AND CHARGED TO AUGUST 30,
DESCRIPTION 1996 EXPENSES RESERVE 1997
<S> <C> <C> <C> <C>
Reserve for Closed Academies $ 10,893 $ $ 3,424 $ 7,469
-------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
AUGUST 26, COSTS AND CHARGED TO AUGUST 31,
DESCRIPTION 1995 EXPENSES RESERVE 1996
<S> <C> <C> <C> <C>
Reserve for Closed Academies $ 13,711 $ $ 2,818 $10,893
-------- ------- ------- -------
</TABLE>
(concluded)
43
<PAGE> 44
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 November 24, 1998.
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 November 24, 1998.
/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
- -----------------------------------------
By: Robert E. King
Director
44
<PAGE> 45
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 November 24, 1998.
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
45
<PAGE> 46
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 November 24, 1998.
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
46
<PAGE> 1
EX-10.18
STOCK OPTION AGREEMENT dated as of the date set forth on the signature page
hereto, between LPA HOLDING CORP., a Delaware corporation (the "Company"), and
the optionee set forth on the signature page hereto (the "Optionee").
The Company, whether acting through its Board of Directors (the "Board") or
a committee thereof (the "Committee") has granted to the Optionee, effective as
of the date of this Agreement, an option under the Company's 1998 Stock Option
Plan (the "Plan") to purchase up to the number of shares of the Class A Common
Stock, $.01 par value, of the Company (the "Class A Common Stock") set forth on
the signature page hereto, on the terms and subject to the conditions set forth
in this Agreement and the Plan.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements contained in this Agreement, the parties hereto agree as follows:
1. THE PLAN.
The terms and provisions of the Plan are hereby incorporated into this
Agreement as if set forth herein in their entirety. In the event of a conflict
between any provision of this Agreement and the Plan, the provisions of this
Agreement shall control. A copy of the Plan is attached hereto as EXHIBIT A.
Capitalized terms used herein and not otherwise defined shall have the meanings
ascribed thereto in the Plan.
2. OPTION; OPTION PRICE.
On the terms and subject to the conditions of this Agreement, the
Optionee is hereby granted Tranche A Options and Tranche B Options
(collectively, the "Option") to purchase Shares at the Option Price set forth on
the signature page hereto. The Option is not intended to qualify for federal
income tax purposes as an "incentive stock option" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code").
3. TERM.
The term of the Option (the "Option Term") shall commence on the date
hereof and expire on the tenth anniversary of the date hereof, unless the Option
shall have sooner been terminated in accordance with the terms of the Plan or
this Agreement.
4. NEW DEFINITIONS.
"DDR Percentage" shall mean: (a) 33- 1/3 % during the period commencing
on the first anniversary of the Grant Date; (b) 66-2/3% during the period
commencing on the second anniversary of the Grant Date; and (c) on and after the
third anniversary of the Grant Date, 100%.
"Disability" of the Optionee shall mean the inability of the Optionee
to perform in all material respects all of his duties and responsibilities to
the Company by reason of a physical or mental disability or infirmity (i) for a
continuous period of six months or (ii) at such earlier time as the Optionee
submits satisfactory medical evidence that he has a physical or mental
disability or infirmity which is reasonably likely to prevent him from
<PAGE> 2
returning to the performance of his work duties for six months or longer. The
date of such Disability shall be on the last day of such six-month period or the
fifteenth day following the day on which the Optionee submits such satisfactory
medical evidence, as the case may be.
"Financing Default" shall mean an event which would constitute (or
with notice or lapse of time or both would constitute) an event of default
(which event of default has not been waived) under any of the following, as
they may be amended, supplemented or restated from time to time:
(i) any agreement under which an amount of Indebtedness of
the Company or any of its subsidiaries in excess of $1,000,000 is
outstanding as of the time of the aforementioned event, and any
extensions, renewals, refinancings or refundings thereof in whole or
in part (provided that the Company shall use its reasonable best
efforts to provide that such agreement is not more restrictive with
respect to the Company's ability to obtain distributions for the
purpose of repurchasing Common Stock held by the Optionee than the
Credit Agreement dated as of May 11, 1998, among the Company, La
Petite Academy, Inc., The Chase Manhattan Bank and NationsBank, N.A.,
as in effect on the date hereof);
(ii) any provision of the Company's Certificate of
Incorporation or any of its subsidiaries' certificates of
incorporation as in effect on the date hereof.
"Grant Date" shall mean the date on which the Option provided for in
this Agreement was granted.
"Indebtedness" means, without duplication, (a) all obligations for
borrowed money or with respect to deposits or advances of any kind, (b) all
obligations evidenced by (or which customarily would be evidenced by) bonds,
debentures, notes or similar instruments, (c) all reimbursement obligations with
respect to letters of credit and similar instruments, (d) all obligations under
conditional sale or other title retention agreements relating to property or
assets purchased, (e) all obligations incurred, issued or assumed as the
deferred purchase price of property or services other than accounts payable
incurred and paid on terms customary in the business (it being understood that
the "deferred purchase price" in connection with any purchase of property or
assets shall include only that portion of the purchase price which shall be
deferred beyond the date on which the purchase is actually consummated), (f) all
obligations secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any lien on property
owned or acquired, whether or not the obligations secured thereby have been
assumed, (g) all obligations under forward sales, futures, options and other
similar hedging arrangements (including interest rate hedging or protection
agreements), (h) all obligations to purchase or otherwise pay for merchandise,
materials, supplies, services or other property under an arrangement which
provides that payment for such merchandise, materials, supplies, services or
other property shall be made regardless of whether delivery of such merchandise,
materials, supplies, services or other property is ever made
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<PAGE> 3
or tendered, (i) all guaranties of obligations of others and (j) all capitalized
lease obligations.
"Optionee Group" shall mean and include the Optionee and/or any
transferee pursuant to a Transfer of Options or Optioned Shares permitted under
Section 15 of the Plan.
"Retirement" shall mean, with respect to the Optionee, the Optionee's
retirement as an employee of the Company on or after reaching age 65 (or such
earlier age as may otherwise be determined by the board of directors of the
Company) after at least five years employment with the Company after the Grant
Date.
5. ACCELERATED VESTING OF OPTIONS.
Upon the termination of Optionee's employment by the Company due to
the death, Disability or Retirement of Optionee, the number of Tranche A Options
and Tranche B Options which shall be Vested Options shall be the greater of (i)
the number of such Options which have vested pursuant to the Plan and (ii) the
DDR Percentage multiplied by the sum of the Tranche A Options and the Tranche B
Options which were granted on the Grant Date.
6. COMPANY'S OBLIGATION TO PURCHASE.
(a) Upon the termination of Optionee's employment by the Company
due to the death, Disability or Retirement of Optionee or by the Company without
Cause, Optionee (or, in the case of death, the Optionee Group) shall have the
right, subject to Section 7 hereunder, to require the Company to purchase all
Vested Options and Optioned Shares owned by the Optionee for the 90 days
immediately following the date of termination, for the Fair Market Value.
Notwithstanding anything to the contrary set forth in Section 8(c) of the Plan,
if the Optionee's employment with the Company is terminated by the Company
without Cause, the Option represented hereby shall not automatically terminate
until the 91st day immediately following the date of such termination, at which
time, such Option shall terminate, become null and void and be of no further
force or effect.
(b) The Optionee's rights pursuant to Section 6(a) shall be
exercised by delivering a written notice to the Company of the Optionee's or the
Optionee Group's intention to sell all such Options or Optioned Shares. The
closing of the purchase shall take place at the principal office of the Company
on a date specified by the Company no later than the fifteenth day after receipt
of such notice.
7. CERTAIN LIMITATIONS ON CERTAIN PURCHASES OF OPTIONS OR COMMON STOCK.
(a) The Company shall not be obligated to purchase any Optioned
Shares or any Options at any time pursuant to Section 6 and shall not be
entitled to purchase any Optioned Shares or any Options at any time pursuant to
Section 10 of the
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<PAGE> 4
Plan (i) to the extent that the purchase of such shares or Options (together
with any other purchases of shares of Common Stock or Options pursuant to
Section 6 or Section 10 of the Plan, or pursuant to similar provisions in other
Option Agreements (the Other Option Agreements") would result (A) in a violation
of any law, statute, rule, regulation, policy, guideline, order, writ,
injunction, decree or judgment promulgated or entered by any federal, state,
local or foreign court or governmental authority applicable to the Company or
any of its property or (B) after giving effect thereto (including any dividends
or other distributions or loans from a subsidiary of the Company to the Company
in connection therewith), in a Financing Default or (ii) if immediately prior to
such purchase, there exists a Financing Default which prohibits such purchase
including any dividends or other distributions or loans from a subsidiary of the
Company to the Company in connection therewith. The Company shall within 20 days
of learning of any such fact so notify Optionee or members of the Optionee Group
that it is neither obligated, nor entitled to elect to purchase, Optioned Shares
or Options.
(b) Anything to the contrary contained in Section 6 of this
Agreement or Section 10 of the Plan notwithstanding, any Optioned Shares or
Options which the Optionee or a member of the Optionee Group has elected to sell
to the Company or which the Company has elected to purchase from the Optionee or
members of the Optionee Group, but which in accordance with Section 7 (a) hereof
are not purchased at the applicable time provided in Section 6 hereof, shall be
purchased by the Company on the tenth day after such date or dates that the
Company after due inquiry learns that (after taking into account any purchases
to be made at such time pursuant to Other Option Agreements and any other
agreements or instruments to which any of the Company and its subsidiaries is a
party or by which any of them is bound on a pro rata basis therewith (subject to
any binding obligation to do otherwise pursuant to any such agreement or
instrument)) it is no longer permitted to defer purchasing such shares under
Section 7(a) hereof, and the Company shall give the Optionee or Optionee Group
five business days prior notice of any such purchase.
(c) If at any time the Company is required to purchase any shares
of Common Stock or Options pursuant to Section 6 hereof or pursuant to Section
10 of the Plan, the Company shall pay the purchase price for the shares of
Common Stock and Options it purchases (i) by the cancellation of any
Indebtedness, if any, owing from the Optionee to the Company or any of its
subsidiaries and (ii) then, by the Company's delivery of a bank cashier's check
or certified check for the remainder of the purchase price, if any, against
delivery of the certificates or other instruments representing the Common Stock
so purchased, duly endorsed, provided that if a Financing Default exists or,
after giving effect to such payment (including any dividends or other
distributions or loans from a subsidiary of the Company to the Company in
connection therewith) would exist, which prohibits such cash payment, the
portion of the cash payment so prohibited shall be made, to the extent such
payment is not prohibited by a Financing Default or would not result (after
giving effect to any dividends or other distributions or loans from a subsidiary
of the Company to the Company in connection therewith) in a Financing Default,
by the Company's delivery of a junior subordinated promissory note (which shall
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<PAGE> 5
be subordinated and subject in right of payment to the prior payment of all
Indebtedness of the Company including, (a "Junior Subordinated Note") containing
the terms set forth in Annex A hereto. If, in a purchase pursuant to Section 6
of this Agreement or Section 10 of the Plan, the Company will pay all or any
portion of the purchase price for Optioned Shares and Options with a Junior
Subordinated Note, the Company shall give the Optionee or members of the
Optionee Group notice of the amount of such note at least 20 days prior to such
purchase, and the Optionee or members of the Optionee Group shall have, in the
case of a purchase pursuant to Section 6, ten days thereafter to rescind its
election to sell the Optioned Shares and Options. The Company shall have the
right set forth in Section 7(c) (i) of this Agreement, whether or not the
Optionee or the member of the Optionee Group selling such Optioned Shares or
Options is an obligor of the Company. If the Optionee or the Optionee Group opts
to rescind its election to sell Optioned Shares and Options, the Optionee or the
Optionee Group may exercise its right to require the Company to purchase its
Optioned Shares or Options for a period of ten business days after receiving
notice that the Company will not pay any portion of the purchase price with a
Junior Subordinated Note. If the Company pays all or any portion of the purchase
price for the Optioned Shares with a Junior Subordinated Note, and then resells
the purchased Optioned Shares, the Junior Subordinated Note shall become
immediately payable, unless prohibited by the Credit Agreement or any other
agreement of the Company or its subsidiaries (after giving effect to any
dividends or other distributions or loans from a subsidiary of the Company to
the Company in connection therewith).
8. TAXES UPON EXERCISE.
As soon as practicable following the exercise of Options, the Company
shall pay to Optionee a lump sum payment in an amount equal to the difference
between the long term capital gains tax rates and the marginal income tax rates
applicable to the Optionee, as then in effect, with respect to the income
realized upon exercise of the Options. In addition, the Company shall pay to
Optionee such additional amounts, if any, as are necessary to place Optionee in
the same after-tax financial position that he would have been if the payment in
the preceding sentence had not been taxable to the Optionee; provided, however,
that any payments specified in this Section shall only be required to be made if
the Company is entitled to a deduction in connection with the exercise of the
Options; and provided, further, that the amounts payable under this Section
shall in no event exceed the net after-tax cost savings to the Company resulting
from the deductibility of the amounts arising out of the exercise of Options and
the payments under this Section (regardless of whether the Company has taxable
income in respect of which the definition can be applied).
9. RESTRICTION ON TRANSFER.
The Option may not be Transferred, pledged, assigned, hypothecated or
otherwise disposed of in any way by the Optionee and may be exercised during the
lifetime of the Optionee only by the Optionee or in accordance with the
provisions of the Plan. The
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<PAGE> 6
Option shall not be subject to execution, attachment or similar process. Any
attempted Transfer of the Option contrary to the provisions hereof, and the levy
of any execution, attachment or similar process upon the Option, shall be null
and void and without effect.
10. OPTIONEE'S EMPLOYMENT.
Nothing in the Option shall confer upon the Optionee any right to
continue to be employed by the Company or any Affiliate of the Company or
interfere in any way with the right of the Company or any Affiliate of the
Company or stockholders, as the case may be, to terminate the Optionee's
employment or retention by the Company or any Affiliate of the Company or to
increase or decrease the Optionee's compensation at any time.
11. NOTICES.
All notices, claims, certificates, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given and delivered if personally delivered or if sent by
nationally-recognized overnight courier guaranteeing next day delivery, by
telecopy, or by registered or certified mail, return receipt requested and
postage prepaid, addressed as follows:
(a) if to the Company, to it at:
LPA Holding Corp.
c/o La Petite Academy, Inc.
14 Corporate Wood
8717 West 110th Street
Suite 300
Overland Park, KS 66201
Attention: President
Telecopier: (913) 345-9601
Telephone: (913) 345-1250
with a copy to:
LPA Investment LLC
c/o Chase Capital Partners
380 Madison Avenue, 12th Floor
Attention: Stephen Murrey
Telecopier: (212) 622-3101
Telephone: (212) 622-3100
and a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
41st Floor
New York, NY 10112
Attention: John J. Suydam
Telecopier: (212) 728-5950
Telephone: (212) 408-2400 and
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<PAGE> 7
(b) if to the Optionee, to him at his address set forth in the
Company's records.
or to such other address as the party to whom notice is to be given may have
furnished to the other party in writing in accordance herewith. Any such notice
or communication shall be deemed to have been received (i) in the case of
personal delivery, on the date of such delivery (or if such date is not a
business day, on the next business after the date sent), (ii) in the case of
nationally-recognized overnight courier, on the next business day after the date
sent, (iii) in the case of telecopy transmission, when received (or if not sent
on a business day, on the next business day after the date sent), and (iv) in
the case of mailing, on the third business day following that on which the piece
of mail containing such communication is posted.
12. WAIVER OF BREACH.
The waiver by either party of a breach of any provision of this
Agreement must be in writing and shall not operate or be construed as a waiver
of any other or subsequent breach.
13. OPTIONEE'S UNDERTAKING.
The Optionee hereby agrees to take whatever additional actions and
execute whatever additional documents the Company may in its reasonable judgment
deem necessary or advisable in order to carry out or effect one or more of the
obligations or restrictions imposed on the Optionee pursuant to the express
provisions of this Agreement and the Plan.
14. MODIFICATION OF RIGHTS.
Anything contained in this Agreement or the Plan to the contrary
notwithstanding, no provision of this Agreement may be modified or amended
without the prior written consent of the Company and the Optionee, and no
interpretation, modification, amendment or termination of any provision of the
Plan that would adversely affect the rights of the Optionee under or with
respect to the Plan or this Agreement shall be effective as to the Optionee
without the Optionee's prior written consent.
15. GOVERNING LAW.
All questions concerning the construction, interpretation and validity
of this Agreement shall be governed by and construed and enforced in accordance
with the domestic laws of the State of New York, without giving effect to any
choice or conflict of law provision or rule (whether in the State of New York or
any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of New York. In furtherance of the foregoing,
the internal law of the State of New York will
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<PAGE> 8
control the interpretation and construction of this Agreement, even if under
such jurisdiction's choice of law or conflict of law analysis, the substantive
law of some other jurisdiction would ordinarily apply.
16. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, and each
such counterpart shall be deemed to be an original, but all such counterparts
together shall constitute but one agreement.
17. ENTIRE AGREEMENT.
This Agreement and the Plan (and the other writings referred to herein)
constitute the entire agreement between the parties with respect to the subject
matter hereof and thereof and supersede all prior written or oral negotiations,
commitments, representations and agreements with respect thereto.
18. SEVERABILITY.
It is the desire and intent of the parties hereto that the provisions
of this Agreement be enforced to the fullest extent permissible under the laws
and public policies applied in each jurisdiction in which enforcement is sought.
Accordingly, if any particular provision of this Agreement shall be adjudicated
by a court of competent jurisdiction to be invalid, prohibited or unenforceable
for any reason, such provision, as to such jurisdiction, shall be ineffective,
without invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of this Agreement or affecting the validity or
enforceability of such provision in any other jurisdiction. Notwithstanding the
foregoing, if such provision could be more narrowly drawn so as not to be
invalid, prohibited or unenforceable in such jurisdiction, it shall, as to such
jurisdiction, be so narrowly drawn, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction.
* * * *
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<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written below.
LPA HOLDING CORP.
By: /s/ Stephen P. Murray
----------------------------------------
Name: Stephen P. Murray
Title: Chief Financial Officer and
Secretary
/s/ James R. Kahl
-------------------------------------------
Optionee: James R. Kahl
Number of Shares
of Class A Common Stock
for Tranche A Options: 18,025
-------
Number of Shares
of Class A Common Stock
for Tranche B Options: 3,755
-------
Option Price for Tranche A
Options: $ 66.92
-------
Option Price for Tranche B
Options: $133.83
-------
Date: May 11, 1998
-------------------------------
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<PAGE> 10
ANNEX A
TERMS OF
JUNIOR SUBORDINATED PROMISSORY NOTE (THE "NOTE")
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT The portion of the purchase price of the Optioned Shares and
Options being purchased with the Note (i.e., the portion
which cannot be paid by the cancellation of Indebtedness or
paid in cash in accordance with Section 7 of the Option
Agreement.
- --------------------------------------------------------------------------------
INTEREST The publicly announced base rate of The Chase Manhattan
Bank, or if no such rate is available, the prime rate as
quoted in The Wall Street Journal, on the date of issuance.
Interest will accrue and compound annually and will be
payable on the Maturity Date.
- --------------------------------------------------------------------------------
MATURITY DATE The first business day on which the Note may be paid without
resulting in a Financing Default under the Company's
Indebtedness outstanding on the date of issuance.
- --------------------------------------------------------------------------------
REDEMPTION The Note may be prepaid in whole or in part at any time and
from time to time without premium or penalty.
- --------------------------------------------------------------------------------
<PAGE> 1
EX-10.19
LPA HOLDING CORP.
1998 STOCK OPTION PLAN
(Adopted by the Board of Directors of LPA Holding Corp. as of May 18, 1998)
1. PURPOSE OF THE PLAN.
The purpose of the LPA HOLDING CORP. 1998 STOCK OPTION PLAN (the
"Plan") is (i) to further the growth and success of LPA Holding Corp., a
Delaware corporation (the "Company") and its subsidiaries, by permitting
employees of the Company and its subsidiaries to acquire shares (the "Shares")
of Class A Common Stock, $.01 par value (the "Class A Common Stock"), of the
Company, thereby increasing such employees' personal interest in such growth and
success and (ii) to provide a means of rewarding outstanding contribution by
such persons to the Company and its subsidiaries. Options granted under this
Plan (the "Options") may be either "incentive stock options" under the
provisions of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or non-qualified stock options.
2. DEFINITIONS.
As used in this Plan, the following capitalized terms shall have
the meanings set forth below:
"AFFILIATE" means, with respect to any Person, any other Person
that is controlled by, controlling or under common control with, such Person.
Notwithstanding anything to the contrary contained herein, with respect to the
Company, the term "Affiliate" shall include LPA Investment LLC and each of its
members and each Person in which LPA Investment LLC or such members hold or have
the right to acquire, collectively, more than 25% of the voting Equity
Interests.
"BOARD" has the meaning set forth in Section 3(a).
"CAPITAL STOCK" means any and all shares, interests,
participation or other equivalents (however designated) of corporate stock,
including all Common Stock and preferred stock.
"CAUSE" shall have the meaning defined in an employment or
similar agreement between the Company and the Optionee, or, if there is no
employment or similar agreement between the Company and the Optionee that
defines what constitutes a termination for cause for purposes of such agreement,
what constitutes "Cause" shall be determined by the Committee in good faith.
<PAGE> 2
"CHANGE-IN-CONTROL" means the occurrence of one or more of the
following:
(a) a sale to any Person (or group of related Persons) other
than an Affiliate or Affiliates of the Company of all or substantially all of
the assets of the Company or of La Petite Academy, Inc.;
(b) a sale by the Company of Capital Stock (whether by merger
or otherwise), if any such sale is made to a Person (or group of related
Persons) other than an Affiliate or Affiliates of the Company, which Person or
Persons, after giving effect to such sale, will own more than 50% of the
outstanding Capital Stock of the Company or
(c) a sale by the stockholders of the Company of Capital
Stock, if any such sale is made to a Person (or group of related Persons) other
than an Affiliate or Affiliates of the Company, which Person or Persons, after
giving effect to such sale, will own more than 50% of the outstanding Capital
Stock of the Company.
"CODE" has the meaning set forth in Section 1.
"COMMITTEE" has the meaning set forth in Section 3(a). In the
event that a Committee has not been established pursuant to Section 3(a), all
references to "Committee" shall mean the Board.
"COMMON STOCK" means the Class A Common Stock and the Class B
Common Stock, par value $.01, of the Company.
"COMPANY" has the meaning set forth in Section 1.
"DRAG-ALONG GRANTEES" has the meaning set forth in Section 12(a).
"EFFECTIVE DATE" means the date the Plan is approved by the
stockholders of the Company.
"EQUITY INTEREST" means (a) with respect to a corporation, any
and all Capital Stock or warrants, options or other rights to acquire Capital
Stock (but excluding any debt security which is convertible into, or
exchangeable for, Capital Stock) and (b) with respect to a partnership, limited
liability company or similar Person, any and all units, interests, rights to
purchase, warrants, options or other equivalents of, or other ownership
interests in, any such Person.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"EXPIRATION DATE" has the meaning set forth in Section 8.
"FAIR MARKET VALUE" means the fair value of Shares or other
property on the date of any determination as reasonably determined in good faith
by the Committee after taking into consideration all factors which it deems
appropriate, including, without limitation, in respect of Shares, recent sale
and offer prices of the Shares in private transactions negotiated at arms'
length.
2
<PAGE> 3
"INTERNAL RATE OF RETURN" means, with respect to a Share, the
pre-tax compounded annual internal rate of return realized thereon assuming
such Share was purchased by one Person on the Original Issue Date at a price
equal to the Investor's Buy-In Price and such Share was held continuously by
such Person from the Original Issue Date through the date of calculation of the
internal rate of return and including, as a return on such Share, any cash
dividends, distributions or redemptions made by the Company or any Subsidiary
in respect of Share during such period.
"INVESTOR'S BUY-IN PRICE" means, with respect to the Option
Price, $133.83.
"MERGER AGREEMENT" means the Agreement and Plan of Merger dated
as of March 17, 1998 among LPA Investment LLC and Vestar/LPA Investment Corp.,
as it may be amended, supplemented or restated from time to time.
"MINIMUM RETURN" means, in respect of a Share, the greater of (i)
a total return equal to 150% of the Investor's Buy-In Price and (ii) an Internal
Rate of Return of 20%.
"NOTICE" has the meaning set forth in Section 13(b).
"OPTION" has the meaning set forth in Section 1.
"OPTION AGREEMENT" has the meaning set forth in Section 4(c).
"OPTION PRICE" has the meaning set forth in Section 5(a).
"OPTIONED SHARES" has the meaning set forth in Section 13(b).
"OPTIONEES" has the meaning set forth in Section 4(a).
"ORIGINAL ISSUE DATE" means the Closing Date (as defined in the
Merger Agreement).
"PERSON" is to be construed in the broadest sense and means and
includes any natural person, company, limited liability company, partnership,
joint venture, corporation, business trust, or unincorporated organization or
any national, federal, state, municipal, local, territorial, foreign or other
government or any department, commission, board, bureau, agency, regulatory
authority or instrumentality thereof, or any court, judicial, administrative or
arbitral body or public or private tribunal.
"PRO RATA PORTION" has the meaning set forth in Section 12(a).
"QUALIFIED CHANGE-IN-CONTROL" means a Change-in-control in which
the aggregate consideration (including all cash and the Fair Market Value of
other property) received by the Company or its stockholders would provide a
holder of Shares as of the Effective Date with at least the Minimum Return in
respect of such Shares.
"QUALIFIED PUBLIC OFFERING" means an underwritten, registered
public offering of Common Stock of the Company in which the median of the range
of the per Share prices
3
<PAGE> 4
estimated by the lead underwriter for such public offering at the time that the
preliminary prospectus is filed with the SEC would provide a selling stockholder
that owned Shares as of the Effective Date with at least the Minimum Return in
respect of such Shares.
"RECAPITALIZATION" has the meaning set forth in Section 14(a).
"REPURCHASE RIGHT" has the meaning set forth in Section 10(a).
"RULE 16b-3" has the meaning set forth in Section 3(a).
"SEC" means the Securities and Exchange Commission.
"SHARES" has the meaning set forth in Section 1.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"STOCKHOLDERS AGREEMENT" means the Stockholders Agreement, dated
as of May 11, 1998 among LPA Holdings Corp., Vestar/LPT Limited Partnership, LPA
Investment LLC and the other parties thereto, as the same may be amended,
supplemented or modified from time to time.
"TAG-ALONG GRANTORS" has the meaning set forth in Section 12(a).
"TRANCHE A OPTIONS" has the meaning set forth in Section 4(d).
"TRANCHE B OPTIONS" has the meaning set forth in Section 4(d).
"TRANCHE B OPTION VESTING EVENT" means the occurrence of the
earlier of (i) the consummation of a Qualified Change-in-Control and (ii) the
consummation of a Qualified Public Offering.
"TRANSFER" means, with respect to any security (including any
Option), a sale, transfer, assignment, encumbrance, pledge or other disposition
of such security either voluntarily or involuntarily and with or without
consideration (including, without limitation, by way of foreclosure or other
acquisition by any lender with respect to any shares pledged to such lender by
an Optionee).
"VESTED OPTION" means an option which has vested in accordance
with this Agreement, or pursuant to an Option Agreement, as the case may be.
3. ADMINISTRATION OF THE PLAN
(a) Stock Option Committee. This Plan shall be administered by a
three-person committee (the "Committee") comprised of three members of the Board
of Directors of the Company (the "Board"), appointed from time to time by the
Board. The Committee shall have the power and authority to grant Options under
this Plan; provided, however, that, so long as the Company shall be required to
comply with Rule 16b-3 promulgated by the SEC under the Exchange Act ("Rule
16b-3") in order to permit officers and directors of the Company to be
4
<PAGE> 5
exempt from the provisions of Section 16(b) of the Exchange Act with respect to
transactions effected pursuant to this Plan, each member of the Committee, at
the effective date of his or her appointment to the Committee and at all times
thereafter while serving on the Committee, shall be a "disinterested person"
within the meaning of Rule 16b-3.
(b) Procedures. The members of the Committee shall from time to time
select a Chairman from among the members of the Committee. The Committee shall
adopt such rules and regulations as it shall deem appropriate concerning the
holding of meetings and the administration of this Plan. A majority of the
entire Committee shall constitute a quorum and the actions of a majority of the
members of the Committee present at a meeting at which a quorum is present, or
actions approved in writing by all of the members of the Committee shall be the
actions of the Committee.
(c) Administration. Except as may otherwise be expressly reserved to
the Board as provided herein, and, with respect to any Option, except as may
otherwise be provided in the Option Agreement evidencing such Option, the
Committee shall have all powers with respect to the administration of this Plan,
including the interpretation of the provisions of this Plan and any Option
Agreement, and all decisions of the Committee, shall be conclusive and binding
on all participants in this Plan.
4. GRANT OF OPTIONS; SHARES SUBJECT TO THIS PLAN.
(a) Power to Grant Options. Subject to the provisions of this Plan,
the Committee shall have the power and authority, in its sole discretion, to
determine:
(i) the persons (from among the class of persons eligible to
receive Options under this Plan) to whom Options shall be granted (the
"Optionees");
(ii) the time or times at which Options shall be granted; and
(iii) the number of Shares subject to such Option.
(b) Eligibility. Options may be granted under this Plan at any time
and from time to time on or prior to the tenth anniversary of the Effective Date
to any person who is an employee of the Company or any of its Subsidiaries at
the time of grant. Notwithstanding anything contained in Section 4(a) to the
contrary, Options which are "incentive stock options" may not be granted to any
Person in any one taxable year of the Company in excess of 25% of the Options
issued or issuable under this Plan.
(c) Option Agreements. Each Option shall be evidenced by a written
agreement (an "Option Agreement"), in substantially the form of Exhibit A
hereto, with such changes thereto as are consistent with this Plan as the
Committee shall deem appropriate. Each Option Agreement shall be executed by the
Company and the Optionee. Notwithstanding any other provision of this Plan to
the contrary, the Committee may, in its discretion, provide that, with respect
to any Option, the terms of the Option Agreement evidencing such Option shall
control any conflicts between provisions of this Plan and provisions of such
Option Agreement.
5
<PAGE> 6
(d) Tranche A Options and Tranche B Options. Three-quarters of the
Options granted shall vest in accordance with Section 6 ("Tranche A Options")
and one-quarter of the options granted shall vest in accordance with Section 7
("Tranche B Options").
(e) Date of Grant. The date of grant of an Option under this Plan
shall be the date as of which the Committee approves the grant.
(f) Number of Shares. Subject to any equitable adjustments for
Recapitalizations pursuant to Section 14 and subject to the vesting provisions
set forth herein, each Option shall be exercisable for one Share. Subject to any
equitable adjustments for Recapitalizations pursuant to Section 14, the number
of Shares subject at any one time to Options granted under this Plan, and the
number of Shares theretofore issued and delivered pursuant to the exercise of
Options granted under this Plan, shall be 60,074 Shares. If and to the extent
that Options granted under this Plan terminate, expire or are canceled without
having been fully exercised, new Options may be granted under this Plan with
respect to the Shares covered by the unexercised portion of such terminated,
expired or canceled Options.
(g) Character of Shares. The Shares issuable upon exercise of Options
granted under this Plan shall be (i) authorized but unissued Shares, (ii) Shares
held in the Company's treasury or (iii) a combination of the foregoing.
(h) Reservation of Shares. The Company shall use commercially
reasonable efforts to ensure that the number of Shares reserved for issuance
under this Plan shall at all times be equal to the maximum number of Shares
which may be purchased at such time pursuant to outstanding Options.
5. OPTION PRICE
(a) General. The exercise price (the "Option Price") for each Share
subject to an Option shall be determined by the Committee and set forth in the
Option Agreement, except that (i) the exercise price for the Tranche A Options
granted on the Effective Date shall be 50% of the Investor's Buy-In Price
(subject to equitable adjustment for Recapitalizations affecting the Class A
Common Stock) and (ii) the exercise price for the Tranche B Options granted on
the Effective Date shall be 100% of the Investor's Buy-In Price (subject to
equitable adjustment for Recapitalizations affecting the Class A Common Stock).
(b) Incentive Stock Options. No incentive stock option may be granted
under the Plan to an employee who owns, directly or indirectly (within the
meaning of Sections 422(b)(6) and 424(d) of the Code), Capital Stock possessing
more than 10% of the total combined voting power of all classes of stock of the
Company or any of its subsidiaries, unless (i) the Option Price of the Shares of
Class A Common Stock subject to such incentive stock option is fixed at not less
than 110% of the Fair Market Value on the date of grant of such Shares and (ii)
such incentive stock option by its terms is not exercisable after the expiration
of five years from the date it is granted.
6
<PAGE> 7
(c) Repricing of Options. Subsequent to the date of grant of any
Option, the Committee may (i) in its sole discretion, establish a new Option
Price for such Option so as to decrease the Option Price of such Option or (ii)
with the consent of the Optionee, establish a new Option Price for such Option
so as to increase the Option Price of such Option.
6. EXERCISABILITY AND VESTING OF TRANCHE A OPTIONS
(a) All Tranche A Options granted on the Effective Date shall be
subject to vesting as set forth in this Section 6, and all Options granted after
the Effective Date shall be subject to vesting as determined by the Committee
and set forth in the applicable Option Agreement.
(b) One-forty-eighth of the Tranche A Options shall become Vested
Options on the last day of each month following the date of grant if the
Optionee is employed by the Company on such date.
(c) All of the Tranche A Options shall become Vested Options
immediately prior to a Change-in-Control if the Optionee is employed by the
Company or one of its subsidiaries at such time.
(d) Notwithstanding anything to the contrary contained in this Plan,
each Tranche A Option shall cease vesting as of the time that an Optionee's
employment with the Company and/or its subsidiaries is terminated for any reason
(including a termination by resignation, death, disability or without Cause) and
no Tranche A Option which is not a Vested Option as of such time shall become a
Vested Option thereafter. All decisions by the Committee with respect to any
calculations pursuant to this Section (absent manifest error) shall be final and
binding on all Optionees.
7. EXERCISABILITY AND VESTING OF TRANCHE B OPTIONS
(a) If a Tranche B Option Vesting Event shall occur, then all of the
Tranche B Options shall immediately become Vested Options if the Optionee is
employed by the Company or one of its subsidiaries at the time of such Tranche B
Option Vesting Event.
(b) Notwithstanding anything to the contrary contained in this Plan,
each Tranche B Option shall cease vesting as of the time that an Optionee's
employment with the Company and/or its subsidiaries is terminated for any reason
(including a termination by resignation, death, disability or without Cause) and
no Tranche B Option which is not a Vested Option as of such time shall become a
Vested Option thereafter. All decisions by the Committee with respect to any
calculations pursuant to this Section (absent manifest error) shall be final and
binding on all Optionees.
8. AUTOMATIC TERMINATION OF OPTION
Each Option granted under this Plan shall automatically terminate and
shall become null and void and be of no further force or effect upon the first
of the following to occur (the "Expiration Date"):
7
<PAGE> 8
(a) the tenth anniversary on which such Option is granted;
(b) subject to Section 8(e), if an Optionee terminates his employment
with the Company other than due to death or disability, or the Company
terminates the Optionee's employment for Cause, the tenth day following the date
of such termination;
(c) subject to Section 8(e), if an Optionee's employment with the
Company is terminated by the Company for any reason other than for Cause, death
or disability, the sixtieth day following the date of such termination;
(d) subject to Section 8(e), if an Optionee's employment with the
Company is terminated due to the death or disability of the Optionee, six months
after the date of such death or disability;
(e) with respect to Options granted after the Effective Date, the
expiration of such other period of time or the occurrence of such other event as
the Committee, in its discretion, may provide in the Option Agreement governing
such Option; or
(f) in the case of Tranche B Options, the earlier of (i) a
consummation of a Change-in-Control which is not a Qualified Change-in-Control
and (ii) the consummation of a public offering of Common Stock which is not a
Qualified Public Offering.
9. REGISTRATION ON FORM S-8.
On or prior to the first anniversary of a public offering by the
Company of Capital Stock, the Company will file or cause to be filed, and will
use commercially reasonable efforts to cause to be effective, a registration
statement on Form S-8 with respect to the sale of Shares purchased upon the
exercise of Options; provided that the Company may delay such filing on one or
more occasions for up to 180 days if the Company determines that the filing of a
Form S-8 would require disclosure that the Company deems advisable to defer.
10. REPURCHASE OF SHARES
(a) If an Optionee ceases to be employed by the Company for any
reason, the Company shall have the right, but not the obligation, to repurchase
each Vested Option (or portion thereof) and each Share owned by such Optionee
(the "Repurchase Right") beginning on the day of termination of the Optionee's
employment with the Company.
(b) The Repurchase Right may be exercised by delivery of a notice of
exercise to the Optionee, at the address of such Optionee set forth in the
Company's records, specifying the number of Vested Options and Shares to be
repurchased.
(c) The repurchase price for Vested Options and Shares shall be the
Fair Market Value thereof.
8
<PAGE> 9
(d) The Company shall have the right to assign its Repurchase Rights
to any Affiliate of the Company.
11. DRAG-ALONG RIGHT
(a) If, prior to the consummation of a Qualified Public Offering, (i)
stockholders of the Company holding more than 50% of the outstanding shares of
Common Stock (assuming all Options are exercised) (the "Drag-Along Grantees")
enter into an agreement with any Person or Persons, to Transfer (pursuant to a
merger or otherwise) all shares of Common Stock then held by such Drag-Along
Grantees, the Drag-Along Grantees shall be entitled, at their option, to require
each Optionee to sell all Shares held by such Optionee (together with all
Options then outstanding and held by such Optionee), by providing such Optionee
with notice at least fifteen days prior to consummation of the proposed
transaction, setting forth in reasonable detail the material terms and
conditions of the proposed transaction or offering, and the price per share at
which such Optionee shall be required to sell all of his or her Shares (which
price per share shall be equal to the same price per share that the Drag-Along
Grantees shall receive pursuant to the proposed transaction) and/or Options.
(b) Immediately prior to the closing of the proposed transaction
(notice of the date, place and time of which shall be designated by the Company
and provided to such Optionee in writing at least five business days prior
thereto), if requested by the Drag-Along Grantees, such Optionee shall exercise
all Vested Options. To the extent that Vested Options are not exercised, such
Optionee shall be entitled to receive the consideration that would have been
received had the Option been exercised less the Option Price in respect of all
such Vested Options. At such closing, the Optionee shall deliver certificates
evidencing all Shares then held by such Optionee, duly endorsed for transfer to
the proposed transferee, against the purchase price therefor and all Option
Agreements to which the Optionee is a party. Such Shares and Options shall be
delivered free and clear of all liens, charges, encumbrances and other security
interests. None of the Drag-Along Grantees nor the Company shall have any
liability or obligation to deliver the purchase price payable pursuant to this
Section, except to the extent that any such Drag-Along Grantees or the Company
receive the consideration thereof from the proposed purchaser. All consideration
payable pursuant to this Section shall be payable in the same form as the
consideration received by the Drag-Along Grantees.
(c) The Drag-Along Optionees shall have the right to assign its rights
pursuant to this Section to the Company or any Affiliate of the Company.
(d) The rights granted pursuant to this Section shall terminate upon
consummation of a Qualified Public Offering.
12. TAG-ALONG RIGHT
(a) If stockholders of the Company holding more than 50% of the
outstanding shares of Common Stock (assuming all Options are exercised) (the
"Tag-Along Grantors") enter into an agreement with any Person or Persons to
Transfer Shares (pursuant to a merger or otherwise) representing more than 25%
of the outstanding shares of Common Stock, then each Optionee
9
<PAGE> 10
shall have the right to include a Pro Rata Portion of Shares owned by such
Optionee in the proposed transaction by providing a notice of exercise to the
Company at any time on or before five business days following the last day that
a Drag-Along Notice may be given. The term "Pro Rata Portion" means the total
number of Shares held by such Optionee multiplied by a fraction, the numerator
of which is the total number of shares of Common Stock proposed to be disposed
of by the Tag-Along Grantors in the proposed transaction and the denominator of
which is the total number of shares of Common Stock outstanding on a
fully-diluted basis.
(b) At the closing of the proposed transaction (notice of the date,
place and time of which shall be designated by the Company and provided to each
such Optionee in writing at least five business days prior thereto), such
Optionee shall deliver certificates evidencing the Pro Rata Portion of the
Shares owned by such Optionee, duly endorsed for transfer to the proposed
purchaser, against delivery of the purchase price therefor. Such Shares shall be
delivered free and clear of all liens, charges, encumbrances and other security
interests. None of the Tag-Along Grantors or the Company shall have any
liability or obligation to deliver the purchase price payable pursuant to this
Section, except to the extent that any such Tag-Along Grantors or the Company
receive the consideration thereof from the proposed purchaser. All consideration
payable pursuant to this Section shall be payable in the same form as the
consideration received by the Tag-Along Grantors.
(c) The rights granted pursuant to this Section shall terminate upon
consummation of a public offering of Shares that is registered under the
Securities Act.
13. PROCEDURE FOR EXERCISE
(a) Payment. At the time an Option is granted under this Plan, the
Committee shall, in its discretion, specify one or more of the following forms
of payment which may be used by an Optionee upon exercise of his Option:
(i) cash or personal or certified check payable to the Company in
an amount equal to the aggregate Option Price of the Shares with
respect to which the Option is being exercised and the aforementioned
form of payment shall be the only form available on or after a
Qualified Public Offering;
(ii) stock certificates (in negotiable form) representing Shares
having a Fair Market Value on the date of exercise equal to the
aggregate Option Price of the Shares with respect to which the Option
is being exercised;
(iii) Vested Options, valued for such purposes at the Fair Market
Value per share of Class A Common Stock on the date of exercise, net
of the Option Price for each such Share; or
(iv) a combination of the methods set forth in clauses (i), (ii)
and (iii) above.
(b) Notice. An Optionee (or other person, as provided in Section
15(c)) may exercise a Vested Option granted under this Plan in whole or in part
(but for the purchase of whole Shares
10
<PAGE> 11
only), as provided in the Option Agreement evidencing his Option, by delivering
a written notice (the "Notice") to the Secretary of the Company. The Notice
shall include:
(i) a statement that the Optionee elects to exercise the Vested
Option;
(ii) the number of Shares with respect to which the Vested Option
is being exercised (the "Optioned Shares");
(iii) the method of payment for the Optioned Shares (which method
must be available to the Optionee under the terms of his or her Option
Agreement);
(iv) the date upon which the Optionee desires to consummate the
purchase (which date must be prior to the termination of such Option);
(v) a copy of any election filed by the Optionee pursuant to
Section 83(b) of the Code; and
(vi) such further provisions consistent with this Plan as the
Committee may from time to time require.
The exercise date of a Vested Option shall be the date on which the Company
receives the Notice from the Optionee.
(c) Issuance of Certificates. The Company shall issue a stock
certificate in the name of the Optionee (or such other person exercising the
Option in accordance with the provisions of the Plan) for the Shares purchased
upon exercise of an Option as soon as practicable after receipt of the Notice
and payment of the aggregate Option Price for such Shares. Neither the Optionee
nor any person exercising a Vested Option in accordance with the provisions of
the Plan shall have any privileges as a stockholder of the Company with respect
to any Shares of stock subject to an Option granted under this Plan until the
date of issuance of a stock certificate pursuant to this Section 13(c).
14. ADJUSTMENTS
(a) Changes in Capital Structure. If the Class A Common Stock is
changed by reason of a stock split, reverse stock split or stock combination,
stock dividend or distribution, or recapitalization, or converted into or
exchanged for other securities as a result of a merger, consolidation or
reorganization (each such event being a "Recapitalization"), the Committee shall
make such adjustments in the number and class of shares of stock available under
this Plan as shall be necessary to preserve to an Optionee rights substantially
proportionate to his rights existing immediately prior to such transaction or
event (but subject to the limitations and restrictions on such rights),
including, without limitation, a corresponding adjustment changing the number
and class of shares allocated to, and the Option Price of, each Option or
portion thereof outstanding at the time of such change and the number of shares
that vest pursuant to this Plan.
11
<PAGE> 12
(b) Special Rules. The following rules shall apply in connection with
Section 14(a) above:
(i) no adjustment shall be made for cash dividends or the
issuance to stockholders of rights to subscribe for additional Shares;
and
(ii) any adjustments referred to in Section 14(a) shall be made
by the Committee in its sole and absolute discretion, and shall be
conclusive and binding on all persons holding any Options granted
under this Plan.
15. RESTRICTIONS ON OPTIONS AND OPTIONED SHARES.
(a) No Options shall be granted under this Plan, and no Shares shall
be issued and delivered upon the exercise of Options granted under this Plan,
unless and until the Company and/or the Optionee shall have complied with all
applicable Federal or state registration, listing and/or qualification
requirements and all other requirements of law or of any regulatory agencies
having jurisdiction.
(b) The Committee in its sole and absolute discretion may, as a
condition to the exercise of any Vested Option granted under this Plan, require
an Optionee (i) to represent in writing that the Shares received upon exercise
of a Vested Option are being acquired for investment and not with a view to
distribution and (ii) to make such other representations and warranties as are
reasonably deemed appropriate by the Company to satisfy the requirements of
applicable law, including, without limitation, an applicable private placement
exemption of the Securities Act as determined by the Committee. Stock
certificates representing Shares acquired upon the exercise of Vested Options
that have not been registered under the Securities Act shall, if required by the
Committee, bear the following legend and such additional legends as may be
required by the Option Agreement evidencing a particular Option:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE SHARES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES
UNDER THE SECURITIES ACT OR AN OPINION OF COUNSEL TO THE ISSUER HEREOF THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT."
(c) No Option granted under this Plan may be Transferred by the
Optionee, except by will or by the laws of descent and distribution. A Vested
Option may be exercised during the lifetime of the Optionee only by the
Optionee. If an Optionee dies, his or her Vested Options shall thereafter be
exercisable, during the period specified in Section 8(d) or the applicable
Option Agreement (as the case may be), by his or her executors or administrators
to the full extent (but only to such extent) to which such Options were
exercisable by the Optionee at the time of his or her death.
12
<PAGE> 13
(d) No Share issued upon the exercise of an Option may be Transferred
except (i) as otherwise provided by this Plan, (ii) by will, (iii) by the laws
of descent and distribution or (iv) to the Company or any Affiliate of the
Company.
16. EFFECTIVE DATE AND TERMINATION OF THE PLAN.
(a) This Plan shall become effective on the Effective Date.
(b) No Options may be granted after the tenth anniversary of the
Effective Date.
(c) Any Option outstanding as of the tenth anniversary of the
Effective Date shall remain in effect until the earlier of the exercise thereof
and the Expiration Date with respect to such Option.
17. WITHHOLDING TAXES.
Whenever under this Plan, Shares are to be delivered to an Optionee,
the Company shall be entitled to require as a condition of delivery that the
Optionee remit or, in appropriate cases, agree to remit when due, an amount
sufficient to satisfy all current or estimated future Federal, state and local
withholding taxes and employment taxes relating thereto.
18. MISCELLANEOUS
(a) Each Option granted under this Plan may contain such other terms
and conditions not inconsistent with this Plan as may be determined by the
Committee, in its sole and absolute discretion.
(b) Number and Gender. With respect to words used in this Plan, the
singular form shall include the plural form, the masculine gender shall include
the feminine gender, and vice-versa, as the context requires.
(c) Captions. The use of captions in this Plan is for convenience. The
captions are not intended to provide substantive rights.
(d) Amendment of Plan. This Plan may be modified or amended in any
respect by the Board.
(e) Governing Law. All questions concerning the construction,
interpretation and validity of this Plan and the instruments evidencing the
Options granted hereunder shall be governed by and construed and enforced in
accordance with the domestic laws of the State of New York, without giving
effect to any choice or conflict of law provision or rule (whether in the State
of New York or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of New York. In furtherance of the
foregoing, the internal law of the State of New York will control the
interpretation and construction of this Plan, even if
13
<PAGE> 14
under such jurisdiction's choice of law or conflict of law analysis, the
substantive law of some other jurisdiction would ordinarily apply.
(f) Exchange Act Compliance. The Corporation will use its commercially
reasonable efforts to cause the exemption from Section 16 of the Exchange Act
afforded by such Rule 16b-3 to be available at the time the Company has a class
of equity securities registered under Section 12 of the Exchange Act.
(g) No Evidence of Employment or Service Nothing contained in this
Plan or in any Option Agreement shall confer upon any Optionee any right with
respect to the continuation of his or her employment by or service with the
Company or any of its Affiliates or interfere in any way with the right of the
Company or any such Affiliate (subject to the terms of any separate agreement to
the contrary) at any time to terminate such employment or service or to increase
or decrease the compensation of the Optionee from the rate in existence at the
time of the grant of an Option.
(h) Status of Optionees. Any Optionee who receives Shares under this
Plan shall be a "Management Stockholder" for purposes of the Stockholders
Agreement. If any conflict exists between this Plan and the Stockholders
Agreement, this Plan shall control with respect to any Options and Optioned
Shares, and the Stockholder Agreement shall control with respect to any other
securities.
* * * * *
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF AUGUST 29, 1998 AND THE STATEMENT OF INCOME FOR THE FIFTY-TWO WEEKS
ENDED AUGUST 29, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-21-1998
<PERIOD-END> AUG-21-1998
<CASH> 6,868
<SECURITIES> 0
<RECEIVABLES> 7,002
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,772
<PP&E> 98,833
<DEPRECIATION> 37,839
<TOTAL-ASSETS> 160,791
<CURRENT-LIABILITIES> 43,479
<BONDS> 185,727
25,625
0
<COMMON> 6
<OTHER-SE> (105,707)
<TOTAL-LIABILITY-AND-EQUITY> 160,791
<SALES> 0
<TOTAL-REVENUES> 314,933
<CGS> 0
<TOTAL-COSTS> 306,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,126
<INCOME-PRETAX> (8,057)
<INCOME-TAX> (254)
<INCOME-CONTINUING> (7,803)
<DISCONTINUED> 0
<EXTRAORDINARY> (5,525)
<CHANGES> 0
<NET-INCOME> (13,328)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
