<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 11, 1998
REGISTRATION NO. 333-56239
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST EFFECTIVE AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
LA PETITE ACADEMY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 8351 43-1243221
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
14 CORPORATE WOODS, 8717 WEST 110TH STREET,
SUITE 300,
OVERLAND PARK, KANSAS 66201
(913) 345-1250
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
LPA HOLDING CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6719 48-1144353
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
14 CORPORATE WOODS, 8717 WEST 110TH STREET,
SUITE 300,
OVERLAND PARK, KANSAS 66201
(913) 345-1250
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
LPA SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6411 74-2849053
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
14 CORPORATE WOODS, 8717 WEST 110TH STREET,
SUITE 300,
OVERLAND PARK, KANSAS 66201
(913) 345-1250
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JAMES R. KAHL
CHIEF EXECUTIVE OFFICER
14 CORPORATE WOODS, 8717 WEST 110TH
STREET, SUITE 300,
OVERLAND PARK, KANSAS 66201
(913) 345-1250
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
With a copy to:
JOHN J. SUYDAM, ESQ.
O'SULLIVAN GRAEV & KARABELL, LLP
30 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10112
(212) 408-2400
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC. As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
LA PETITE ACADEMY, INC.
LPA HOLDING CORP.
CROSS REFERENCE SHEET
PURSUANT TO REGULATION S-K, ITEM 501(B),
SHOWING LOCATION OF INFORMATION REQUIRED BY ITEMS OF FORM S-4
<TABLE>
<CAPTION>
FORM S-4 ITEM NUMBER AND CAPTION LOCATION OR CAPTION IN PROSPECTUS
-------------------------------- ---------------------------------
<S> <C> <C>
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus............................. Facing Page of Registration Statement; Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................... Inside Front and Outside Back Cover Pages of
Prospectus; Available Information
3. Risk Factors, Ratio of Earnings to Fixed Charges and
Other Information.................................... Prospectus Summary; Risk Factors; Selected Historical
Consolidated Financial and Other Data
4. Terms and Transaction................................ Prospectus Summary; The Exchange Offer; Description
of Notes
5. Pro Forma Financial Information...................... Unaudited Pro Forma Consolidated Financial
Information
6. Material Contracts with the Company Being Acquired... *
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters........ Plan of Distribution
8. Interests of Named Experts and Counsel............... *
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities....................... *
10. Information With Respect to S-3 Registrants.......... *
11. Incorporation of Certain Information by Reference.... *
12. Information With Respect to S-2 or S-3 Registrants... *
13. Incorporation of Certain Information by Reference.... *
14. Information With Respect to Registrants Other Than
S-2 or S-3 Registrants............................... Prospectus Summary; Risk Factors; Selected Historical
Consolidated Financial and Other Data; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business; Description of the
Credit Agreement; Certain United States Federal
Income Tax Considerations
15. Information With Respect to S-3 Companies............ *
16. Information With Respect to S-2 or S-3 Companies..... *
17. Information With Respect to Companies Other Than S-2
or S-3 Companies..................................... *
18. Information if Proxies, Consents or Authorization Are
to be Solicited...................................... *
19. Information if Proxies, Consents or Authorizations
Are Not to be Solicited, or in an Exchange Offer..... Management; Ownership of Securities; Certain
Relationships and Related Transactions
</TABLE>
- ------------------
* Not applicable or answer is in the negative.
<PAGE>
PROSPECTUS
LA PETITE ACADEMY, INC.
LPA HOLDING CORP.
$145,000,000 10% SERIES B SENIOR NOTES DUE 2008
------------------------
La Petite Academy, Inc. (the "Company") and LPA Holding Corp. ("Parent"
and, together with the Company, the "Issuers") issued their 10% Series B Senior
Notes due 2008 (the "New Notes") in exchange for their issued and outstanding
10% Senior Notes due 2008 (the "Old Notes," and the Old Notes and the New Notes,
collectively, the "Notes"). The terms of the New Notes are identical in all
material respects to the Old Notes, except that the New Notes have been
registered under the Securities Act of 1933, as amended (the "Securities Act").
We will pay interest on the New Notes semi-annually on May 15 and November
15 of each year. The New Notes will mature on May 15, 2008. We may redeem the
New Notes, in whole or in part, after May 15, 2003. In addition, we may redeem
in whole but not in part, all of the New Notes with the net proceeds of one or
more public equity offerings. Upon the occurrence of a change of control, each
holder of New Notes may require us to repurchase all or any part of the New
Notes. See "Description of Notes."
The New Notes are unsecured Senior Indebtedness and are subordinate to all
our existing and future Secured Indebtedness. The New Notes rank equally with
all our existing and future Senior Indebtedness and senior to all our
Subordinated Obligations. Each of our subsidiaries fully and unconditionally
guarantees the New Notes on a senior basis. Parent and our existing subsidiaries
have guaranteed our credit agreement and we are all jointly and severally liable
on a senior basis. At August 29, 1998, we had $185.7 million of Senior
Indebtedness outstanding, of which $40.7 million is secured. The Guarantors have
no Senior Indebtedness outstanding. See "Description of Notes--Ranking."
This Prospectus has been prepared for use by Chase Securities Inc. ("CSI")
in connection with offers and sales related to market-making transactions in the
Notes. CSI may act as principal or agent in such transactions. Such sales will
be made at prices related to prevailing market prices at the time of sale. See
"Plan of Distribution."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED
IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
DECEMBER , 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................................................ 1
Risk Factors.............................................................................................. 9
Use of Proceeds........................................................................................... 14
The Transactions.......................................................................................... 14
Capitalization............................................................................................ 15
Selected Historical Consolidated Financial and Other Data................................................. 16
Unaudited Pro Forma Consolidated Financial Information.................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 21
Business.................................................................................................. 27
Management................................................................................................ 38
Ownership of Securities................................................................................... 44
Certain Relationships and Related Transactions............................................................ 45
Description of the Credit Agreement....................................................................... 46
Description of the Notes.................................................................................. 48
Certain United States Federal Income Tax Considerations................................................... 72
Book-Entry; Delivery and Form............................................................................. 75
Plan of Distribution...................................................................................... 77
Legal Matters............................................................................................. 77
Experts................................................................................................... 77
Index to Financial Statements............................................................................. F-1
</TABLE>
------------------
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements, including statements
regarding:
o our financial condition
o our results of operations
o anticipated trends in our business, including trends in the child
care market
All statements other than statements of historical facts included in this
prospectus, including the statements under "Prospectus Summary--The Company,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" and located elsewhere in this prospectus regarding
our financial position, plans to increase revenues, reduce expenses and take
advantage of synergies and any statements regarding other future events are
forward-looking statements.
We have based these forward-looking statements largely on our expectations.
Forward-looking statements are subject to a number of risks and uncertainties,
many of which are beyond our control. Actual results could differ materially
from those anticipated as a result of the factors described in "Risk Factors."
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks and uncertainties, the forward-looking events and
circumstances discussed in this prospectus might not transpire. Prospective
purchasers should not place undue reliance on such forward-looking statements.
i
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed financial and other information contained
elsewhere in this Prospectus. Prospective investors are urged to read this
Prospectus in its entirety. All references to the "Company," "La Petite
Academy," "La Petite" or "we" mean La Petite Academy, Inc., its consolidated
subsidiary and predecessor, unless the context indicates otherwise. All
references to "Academies" mean all residential and employer-based La Petite
Academies and all Montessori schools that the Company operates, unless the
context indicates otherwise. All references to fiscal year in this Prospectus
refer to the fiscal year ending on the last Saturday in August of each year. All
references to market share and demographic data in this Prospectus are based on
industry and government publications and Company estimates.
THE COMPANY
GENERAL
We are the second largest operator of for profit preschool educational
facilities in the United States. We provide 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. We believe our superior educational programs, which
our curriculum department developed and regularly enhances, differentiate us
from our competitors. Our focus on quality educational services allows us to
capitalize on the increased awareness of the benefits of premium educational
instruction for preschool and elementary school age children. At our residential
and employer-based Academies, we use our proprietary
Journey(Registered) curriculum with the intent of maximizing a child's cognitive
and social development. We also operate Montessori schools which use 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, we operated 736 educational facilities, including
685 residential 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. Our operating
capacity as of August 29, 1998, was approximately 90,000 full-time children. For
the 52 weeks ended August 29, 1998, our estimated full-time equivalent student
("FTE") utilization was 65%.
THE CHILD CARE INDUSTRY
Favorable Demographics and Social Trends. The U.S. child care industry
(including home-based care, employer on-site care, and care delivered by private
facilities, government-sponsored institutions, church-affiliated centers,
colleges and universities, group child care center chains and civic groups such
as the YMCA) has grown at a compound annual growth rate of 12.1% from $5.7
billion in revenues in 1982 to an estimated $31.6 billion in 1997, and is
expected to grow at a 7.1% compound annual growth rate from 1998 until 2003,
according to Marketdata Enterprises, Inc. This growth has been, and is expected
to continue to be, driven by several demographic and social trends, including:
o an increase in the number of births in the 1990s as compared generally
to the 1970s and 1980s,
o an increase in the percentage of mothers in the workforce and
o a significant increase in the appreciation by parents of the benefits of
center-based preschool education and child care.
According to the United States Bureau of the Census (the "Census Bureau"),
in 1989 and each year since, the annual number of births has approximated
4.0 million per year and is expected to remain at that level through 2010.
Furthermore, the number of children under the age of five has grown from
approximately 16.1 million in 1975 to an estimated 20.2 million in 1995,
according to the Census Bureau. These trends are complemented by the continued
increase in the number of mothers entering the work force. According to the U.S.
Bureau of Labor Statistics, the labor force participation rate of mothers with
children under the age of six relative to all mothers with children under the
age of six, has increased from approximately 39% in 1975 to an estimated 62% in
1995.
1
<PAGE>
Growing Awareness of the Importance of Early Childhood Development. The
demand for quality child care is increasing as scientific research highlights
the importance of education during a child's early developmental years. Recent
essays and other scientific research into early childhood development have drawn
widespread media and political attention, increasing parents' awareness and
demand for quality educational facilities for their children.
Fragmented Industry. The U.S. child care industry is highly fragmented,
with the aggregate capacity of the top 50 for profit child care companies
serving approximately 1% of the potential child care market, or approximately
500,000 children out of an estimated 50 million children under the age of 12 in
the United States as of January 1, 1997, according to Child Care Information
Exchange. Based on a study sponsored by the National Association for the
Education of Young Children, we estimate that approximately 35% of all child
care centers are operated for profit, as independent businesses or as part of a
local or national chain. Non-profit centers, such as churches, employers,
government agencies and YMCAs, account for the remaining 65%. Of the
approximately 100,000 child care centers in the United States, only 4,400 are
operated by the top 50 for profit child care companies.
COMPETITIVE STRENGTHS
Strong Market Position and Brand Identities. Based on the number of
centers operated, children served, operating revenue and operating income, we
are the second largest provider of for profit preschool education and child care
services in the United States. Operating since 1968, we have built brand equity
in the markets we serve through the development of a network of Academies
concentrated in clusters in demographically desirable Metropolitan Statistical
Areas ("MSAs"). We believe that we benefit significantly from word-of-mouth
referrals from parents, educators and other school administrators.
Focused Educational Curriculum. Our focus is on educating the child rather
than simply providing traditional child care services. Our high quality
proprietary Journey curriculum was originally developed in 1991 by La Petite
educators with the assistance of experts in early childhood education with the
intent of maximizing a child's cognitive development while ensuring a positive
experience for the child. The curriculum emphasizes individuality and allows
children to progress at their own pace, building skills in a logical pattern
using a "hands-on" approach. We also operate Montessori schools, which target
education conscious parents, under the name Montessori Unlimited(Registered).
Attractive Business Model. We have achieved improvements in profitability
at the Academy level through a combination of (i) revenue enhancement and cost
management at the individual Academies and (ii) the economies of scale and
synergies realized through the clustering of Academies in economically and
demographically attractive areas. During the four fiscal years ended August
1994, we opened 100 residential Academies with an estimated Operating Capacity
of 125 children and an average facility size of 6,200 square feet. In addition,
our Montessori schools have proved to be successful with higher student
retention, tuition averaging approximately 20% more than at our residential and
employer-based Academies and more favorable teacher-student ratios, resulting in
increased profitability. In March 1998, we completed the installation in all of
our residential Academies of the first phase of a newly developed proprietary
management information system, the Academy Document Management and Information
Network ("ADMIN").
Geographically Diversified Operations. Our operations are geographically
diversified, with 736 Academies located throughout 35 states and the District of
Columbia as of August 29, 1998. The geographical diversity of our operations and
profitability mitigates the potential impact of regional economic downturns or
adverse changes in local regulations.
Experienced and Incentivized Management Team. Our top four members of
senior management average approximately ten years of experience with us. In
addition, our Area Vice Presidents and Regional Directors average over 13 years
and 11 years with us, respectively. Our management owns or has the right to
acquire, subject to certain performance requirements, approximately 15.6% of the
common stock of Parent on a fully diluted basis.
2
<PAGE>
BUSINESS STRATEGY
We believe we are well positioned for future growth as one of the leading
providers of quality educational care to preschool aged children. Our objective
is to grow our higher margin businesses and continue to be a leader in the
markets in which we operate.
Emphasize Educational Curriculum. Our curriculum department continually
evaluates and improves the quality of our educational materials and programs. We
have invested significant resources in developing our proprietary Journey
curriculum, used at both our residential and employer-based Academies. Our
Montessori schools are staffed with certified Montessori lead teachers who
follow traditional Montessori methods that appeal to education conscious
parents.
Capitalize on Reputation for Customer Driven Service. We believe that our
knowledge of parents' objectives and desires for their children's education
differentiates us from other child care providers. In order to better understand
customer needs, we conduct (i) focus groups with parents, (ii) bi-annual and
annual customer and employee satisfaction surveys (conducted by us and third
parties) and (iii) interviews with parents. Our Parent's Partner Plan was
designed in part to bridge the gap between what parents look for on a tour of
the facility and expect on a day-to-day basis and the requirements of a
professionally designed curriculum.
Increase Academy Profitability. We plan to improve Academy profitability
by increasing capacity utilization and tuition rates, managing costs and
leveraging our existing and newly built Academies to achieve economies of scale
and synergies. We intend to continue to increase capacity utilization by
emphasizing local marketing programs and improving customer retention and
loyalty. With the implementation of ADMIN, we have the ability to maximize
revenue by charging customers a premium for services in high demand.
Build Academies and Montessori Schools in Attractive Markets. We intend to
expand within existing markets and enter new markets with Academies and
Montessori schools concentrated in clusters. Over the last three years, we have
made significant investments in personnel and infrastructure to facilitate our
future growth. We currently expect to open approximately 35 Academies in fiscal
1999 and 35 Academies in fiscal 2000. We have recently designed a new prototype
for our Academies. New Academies will be approximately 9,500 square feet, built
on sites of approximately one acre, have an Operating Capacity of approximately
175 children for residential Academies and 150 children for Montessori schools
and incorporate a closed classroom concept.
Pursue Strategic Opportunities. In addition to accelerating new Academy
development, we may seek to acquire existing child care centers where
demographics and facility conditions complement our business strategy. We
believe our competitive position, economies of scale and financial strength will
enable us to capitalize on selective acquisition opportunities in the fragmented
child care industry. We may also engage in cross-marketing opportunities with
manufacturers and marketers of educational products.
3
<PAGE>
THE TRANSACTIONS
On March 17, 1998, LPA Investment LLC (the "Investor"), a limited liability
company owned by an affiliate of Chase Capital Partners ("CCP") and by an entity
controlled by Robert E. King, a Director of the Company, and Vestar/LPA
Investment Corp., our parent company, which was renamed LPA Holding Corp.
("Parent"), entered into a Merger Agreement 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 Parent (other than the shares of common stock retained by
Vestar/LPT Limited Partnership ("Vestar") and our management) owned by the
existing stockholders of the Parent (the "Existing Stockholders") were converted
into the right to receive cash and (ii) the Existing Stockholders received the
cash as of the date of the closing of the Transactions. 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 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 option plan (the "New 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.
We used the Equity Investment, the proceeds of the offering of the Old
Notes (the "Offering") and borrowings under the Credit Agreement to finance the
Recapitalization, to refinance substantially all of our outstanding indebtedness
and outstanding preferred stock (the "Refinancing Transactions") and to pay
related fees and expenses. See "Ownership of Securities."
The Refinancing Transactions consisted of (i) the defeasance of all of our
outstanding $85 million principal amount of 9 5/8% Senior Secured Notes due 2001
(the "Senior Notes"), (ii) the exchange of all outstanding shares of our
Class A Preferred Stock (the "Class A Preferred Stock") for $34.7 million in
aggregate principal amount of our 12 1/8% Subordinated Exchange Debentures due
2003 (the "Exchange Debentures"), (iii) the defeasance of all of the then
outstanding Exchange Debentures and (iv) the retirement of all our outstanding
6 1/2% Convertible Subordinated Debentures due 2011 (the "Convertible
Debentures").
In connection with the Recapitalization and the Refinancing Transactions,
we entered into a new credit agreement (the "Credit Agreement") providing for a
$40 million term loan facility (the "Term Loan Facility") and a $25 million
revolving loan facility (the "Revolving Credit Facility"), which is available
for our working capital requirements. See "Description of the Credit Agreement."
The Offering, the Recapitalization, the Equity Investment, the borrowings
under the Credit Agreement and the Refinancing Transactions are collectively
referred to as the "Transactions." The Transactions closed on May 11, 1998.
4
<PAGE>
OWNERSHIP
As a result of the Recapitalization, the Investor beneficially owns 80.5%
of the common stock of Parent on a fully diluted basis and $30 million of
redeemable preferred stock of Parent. CCP owns a majority of the economic
interests of the Investor and owns a majority of the voting interests of the
Investor. CCP is the private equity group of The Chase Manhattan Corporation,
the largest bank holding company in the United States, and is one of the largest
private equity organizations in the United States, with over $5.0 billion under
management. Through its affiliates, CCP invests in leveraged buyouts,
recapitalizations and venture capital opportunities by providing equity and
mezzanine debt capital. Since its inception in 1984, CCP has made over 550
direct investments in a variety of industries.
------------------------
Our principal executive offices are located at 8717 West 110th Street,
Suite 300, Overland Park, Kansas 66210 and our telephone number is
(913) 345-1250.
5
<PAGE>
SUMMARY DESCRIPTION OF THE NEW NOTES
The following summary is qualified in its entirety by the more detailed
information set forth under the caption "Description of Notes" contained
elsewhere in this Prospectus.
<TABLE>
<S> <C>
Issuers................................... La Petite Academy, Inc. and LPA Holding Corp.
Securities Offered........................ $145,000,000 aggregate principal amount of 10% Series B Senior Notes
due 2008.
Maturity Date............................. May 15, 2008.
Interest Payment Dates.................... May 15 and November 15 of each year.
Sinking Fund.............................. None.
Optional Redemption....................... We may redeem the Notes at our option, in whole or in part, at any
time on or after May 15, 2003, at the redemption prices set forth
herein, plus accrued and unpaid interest, if any, to the redemption
date. We may also redeem up to 35% of the aggregate principal amount
of the Notes at our option, at any time prior to May 15, 2001, at a
redemption price equal to 110% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the redemption date, with the
net cash proceeds of one or more Equity Offerings (as defined
herein), except that at least 65% of the original aggregate principal
amount of the Notes must remain outstanding after such redemption.
See "Description of Notes--Optional Redemption of the Notes."
Change of Control......................... Upon the occurrence of a Change of Control, each holder of Notes may
require us to purchase all or a portion of the holder's Notes at a
price equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest, if any, to the date of purchase. See
"Description of Notes--Change of Control."
Restrictive Covenants..................... We have entered into an Indenture (as defined herein) which contains
certain covenants that, among other things, limits our ability and
the ability of our Restricted Subsidiaries (as defined herein) to:
o incur additional indebtedness,
o make investments,
o make restricted payments, including dividends or other
distributions,
o incur liens,
o enter into certain transactions with affiliates, or
o enter into certain mergers or consolidations or sell all or
substantially all of the assets of the Company and its subsidiaries
These covenants are subject to a number of significant exceptions and
qualifications. See "Description of Notes--Certain Covenants."
Guarantees................................ Each of our subsidiaries fully and unconditionally guarantees the New
Notes on an unsecured, senior basis. Parent and our subsidiaries have
guaranteed the Credit Agreement and are jointly and severally liable
with us on a senior basis. We have secured our obligations under the
Credit Agreement by pledges of all of our capital stock and the stock
of our subsidiaries, as well as security interests in, or liens on,
substantially all of our tangible and intangible assets and the
assets of Parent and our subsidiaries.
Ranking................................... The New Notes are unsecured Senior Indebtedness, subordinated in
right of payment to all of our existing and future Secured
Indebtedness. At August 29, 1998, we had $185.7 million of Senior
Indebtedness outstanding, of which $40.7 million is secured. The
Guarantors had no Senior Indebtedness outstanding.
</TABLE>
6
<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table presents summary historical financial and other data
for Parent and the Company on a consolidated basis. The historical consolidated
data for the fiscal years ended August 31, 1996, August 30, 1997 and August 29,
1998 have been derived from and should be read in conjunction with the audited
consolidated financial statements and the related notes included elsewhere in
this Prospectus.
The unaudited pro forma financial data are derived from the unaudited pro
forma financial statements and the related notes included elsewhere herein that
give pro forma effect to the Transactions.
The summary pro forma data do not purport to represent what the results of
operations or financial position would have been if the Transactions had been
completed as of the date or for the periods presented, nor do such data purport
to represent the results of operations for any future period. See "Unaudited Pro
Forma Consolidated Financial Information," "Selected Historical Consolidated
Financial and Other Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the historical consolidated financial
statements and the notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
52 WEEKS ENDED(a)
---------------------------------- 53 WEEKS ENDED
AUGUST 29, 1998 AUGUST 30, 1997 AUGUST 31, 1996(b)
--------------- --------------- ------------------
(DOLLARS IN THOUSANDS, EXCEPT ACADEMY DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenue........................................... $ 314,933 $ 302,766 $300,277
Operating expenses.......................................... 306,900 288,740 289,397
Operating income............................................ 8,033 14,026 10,880
Interest expense(c)......................................... 14,126 9,245 10,256
Net loss.................................................... (13,328) (1,217) (4,371)
OTHER FINANCIAL DATA:
EBITDA (as defined)(d)...................................... $ 32,533 $ 30,087 $ 27,334
Cash flows from operating activities ....................... 7,224 14,886 15,208
Cash flows from investing activities ....................... (11,005) (6,848) (6,045)
Cash flows from financing activities ....................... (13,322) 3,142 (12,671)
Depreciation................................................ 13,892 13,825 13,680
Amortization of goodwill and other intangibles.............. 1,884 2,236 2,774
Capital expenditures........................................ 13,637 7,300 8,570
Ratio of earnings to fixed charges(e)....................... (e) 1.1x (e)
ACADEMY DATA:
Number of Academies......................................... 736 745 751
Operating Capacity (at end of period)(f).................... 89,666 90,601 91,049
FTE Utilization(g).......................................... 65% 66% 64%
Average Weekly FTE Tuition(h)............................... $ 104 $ 98 $ 97
PRO FORMA DATA:
Cash interest expense(i).................................... 18,200
Ratio of earnings to fixed charges(e)....................... (e)
</TABLE>
<TABLE>
<CAPTION>
AS OF AUGUST 29, 1998
----------------------
<S> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and restricted cash.................................................. $ 8,624
Working capital............................................................................. (16,707)
Total assets................................................................................ 160,791
Total long term debt........................................................................ 185,727
Redeemable preferred stock.................................................................. 25,625
Stockholders' equity (deficit).............................................................. (105,701)
</TABLE>
(footnotes on next page)
7
<PAGE>
(footnotes for previous page)
- ------------------
(a) Our fiscal year ends on the last Saturday in August. The first quarter
consists of 16 weeks and the second, third and fourth quarters each consist
of 12 weeks. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview" for a discussion of
seasonality.
(b) Fiscal 1996 was a 53 week year ending on August 31, 1996.
(c) Interest expense includes $0.8 million, $0.9 million and $1.3 million of
amortization of deferred financing expense and accretions of the discount on
the Convertible Debentures for fiscal 1998, 1997 and 1996.
(d) EBITDA is defined herein as net income before non-cash restructuring
charges, extraordinary items, net interest expense, taxes, depreciation and
amortization. EBITDA is not intended to represent cash flow from operations
as defined by generally accepted accounting principles and should not be
considered as an alternative to net income as an indicator of our operating
performance or to cash flows as a measure of liquidity. EBITDA is presented
because we believe that EBITDA represents a more consistent financial
indicator of our ability to service its debt.
(e) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as income before income taxes and extraordinary items, plus
fixed charges. Fixed charges consists of interest expense on all
indebtedness, amortization of deferred financing costs, and one-third of
rental expense on operating leases representing that portion of rental
expense that we deemed to be attributable to interest. For the historical
52 weeks ended August 29, 1998 and 53 weeks ended August 31, 1996, the
deficiency of earnings to fixed charges was $8.1 million and $2.0 million,
respectively. For the Pro Forma 52 weeks ended August 29, 1998, the
deficiency of earnings to fixed charges was $13.8 million.
(f) As a result of our targeted teacher-student ratios, the physical layout of
certain residential Academies and the typical layout of Montessori Schools,
our Academies have an operating capacity ("Operating Capacity")
approximately 8% below Licensed Capacity. "Licensed Capacity" measures the
overall capacity of our Academies based upon applicable state licensing
regulations.
(g) "FTE Utilization" is the ratio of "full-time equivalent" ("FTE") students to
the total Operating Capacity for all of our Academies. FTE attendance is not
a measure of the absolute number of students attending our Academies.
Rather, it is an approximation of the full-time equivalent number of
students based on our estimates and weighted averages. For example, a
student attending full-time is equivalent to one FTE, while a student
attending only one-half of each day is equivalent to 0.5 FTE.
(h) We calculate the "Average Weekly FTE Tuition" by dividing total operating
revenue by the number of weeks in the applicable period and by the number of
FTE students for the applicable period.
(i) Pro forma cash interest expense is defined as interest expense exclusive of
bank agency fees and amortization of deferred financing costs.
8
<PAGE>
RISK FACTORS
In addition to the other information set forth in this Prospectus, the
following factors should be considered carefully in evaluating an investment in
the Notes offered by this Prospectus.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
As a result of the Offering and the borrowings under the Credit Agreement,
we have a highly leveraged capital structure and our consolidated indebtedness
is substantial in relation to our stockholders' equity. As of August 29, 1998,
we had consolidated indebtedness of approximately $185.7 million (exclusive of
unused commitments under the Credit Agreement) and a stockholders' deficit of
$40.7 million.
The degree to which we are leveraged could have important consequences to
the holders of the Notes, including, but not limited to, the following: (i) a
substantial portion of our cash flow from operations will be required to be
dedicated to the payment of interest on, and principal of, our indebtedness,
including the Notes, thereby reducing the funds available for other purposes;
(ii) our ability to obtain additional financing in the future, as needed, may be
significantly impaired (including our ability to obtain additional financing for
working capital, capital expenditures, acquisitions or other corporate purposes
and to obtain sale leaseback financing); (iii) certain of our indebtedness is at
variable rates of interest, which could result in higher interest expense in the
event of increases in interest rates; (iv) all the indebtedness outstanding
under the Credit Agreement is secured by pledges of all our capital stock and
our existing subsidiary, as well as the capital stock of all of our future
subsidiaries, and security interests in, or liens on, substantially all of our
other tangible and intangible assets including our Parent and our existing
subsidiary, as well as all of our future subsidiaries, and such indebtedness
will mature prior to the maturity of the Notes; (v) our ability to compete
through capital improvement and expansion may be limited and (vi) our ability to
adjust to changing market conditions and to withstand competitive pressures
could be limited, and we may be vulnerable in the event of a downturn in general
economic conditions or its business.
Our ability to make scheduled payments (and to refinance our obligations)
with respect to our indebtedness (including the Notes) will depend upon our
future operating performance, which, in turn, will be affected by general
economic and competitive conditions and by financial, business and other
factors, many of which are beyond our control. For the 52 weeks ended
August 29, 1998, on a pro forma basis after giving effect to the Transactions,
our consolidated cash interest expense was approximately $18.2 million. We
anticipate that our cash flow, together with borrowings under the Credit
Agreement, will be sufficient to meet our operating expenses and to service our
debt requirements as they become due. If we are unable to generate sufficient
cash flow from operations in the future or borrow under the Credit Agreement in
an amount sufficient to meet our operating expenses and to service our debt
requirements as they become due, we will have to adopt an alternative strategy
that may include actions such as reducing or delaying capital expenditures,
selling assets, restructuring or refinancing our indebtedness, changing our
corporate structure or seeking additional equity capital. There can be no
assurance that any of these actions could be effected in a timely manner on
satisfactory terms, if at all, or that any of these actions would enable us to
continue to meet our operating expenses and to service our debt requirements as
they become due. In addition, the terms of the agreements governing our existing
and future indebtedness, including the terms of the Credit Agreement and the
Indenture, may prohibit us from taking any of these actions. The failure to
generate sufficient cash flow from operations, to borrow under the Credit
Agreement or to adopt an alternative strategy could materially adversely affect,
among other things, our ability to pay interest on, and to repay the principal
of, the Notes and the market value of the Notes. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
UNSECURED STATUS OF NOTES AND GUARANTEES
The Indenture permits us, our Parent and our Restricted Subsidiaries to
incur Secured Indebtedness, including indebtedness under the Credit Agreement,
which is secured by security interests in, or liens on, substantially all
tangible and intangible assets of us, our Parent and our existing subsidiary, as
well as all of our future subsidiaries. The Notes and the Guarantees are
unsecured and therefore will not have the benefit of any collateral.
Accordingly, in the event of a bankruptcy, liquidation, reorganization or
similar proceeding for us, our Parent or a Guarantor, the lenders of such
Secured Indebtedness would have the right to foreclose upon such
9
<PAGE>
collateral to the exclusion of the holders of the Notes, notwithstanding the
existence of an event of default with respect to the Notes or the applicable
Guarantee. In such event, our assets or the assets of our Parent or the
Guarantors, as the case may be, constituting such collateral would first be used
to repay in full all amounts outstanding under such Secured Indebtedness,
resulting in all or a portion of our assets or the assets of such Guarantors
being unavailable to satisfy claims of holders of the Notes and other unsecured
indebtedness.
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The terms and conditions of the Credit Agreement impose restrictions on our
ability to, among other things, incur indebtedness or issue certain equity
securities, incur liens, undergo certain fundamental changes, make loans or
advances, incur guarantees or make acquisitions, undertake asset sales, engage
in sale and leaseback transactions, enter into hedging agreements, pay dividends
in respect of, make distributions on or repurchase or redeem capital stock or
certain indebtedness, enter into transactions with affiliates, enter into
certain restrictive agreements, amend certain material documents, make capital
expenditures and engage in mergers and consolidations. The Credit Agreement also
requires us to maintain specified financial ratios and satisfy certain tests,
including, without limitation a maximum leverage ratio, a fixed charge coverage
ratio and a minimum EBITDA (as defined in the Credit Agreement) test. The terms
and conditions of the Indenture impose restrictions on our ability and the
ability of our Restricted Subsidiaries to, among other things, incur additional
indebtedness, pay dividends on and redeem capital stock, redeem certain
subordinated obligations, make investments, undertake sales of assets and
subsidiary stock, grant liens on our assets and the assets of our Parent and our
Restricted Subsidiaries, engage in certain transactions with affiliates, sell or
issue capital stock of our Restricted Subsidiaries and engage in consolidations,
mergers and transfers of all or substantially all the assets of the Issuers. Our
ability to comply with these and other terms and conditions of the Credit
Agreement and the Indenture may be affected by general economic and competitive
conditions and by financial, business and other factors, many of which are
beyond our control. A breach of any of these covenants could result in a default
under the Credit Agreement or the Indenture. In addition, the lenders under the
Credit Agreement could elect to declare all amounts outstanding under the Credit
Agreement, together with accrued and unpaid interest, to be immediately due and
payable. If we are unable to repay such amounts, such lenders would have the
right to proceed against the collateral granted to them to secure such
indebtedness and other amounts. See "Description of the Credit Agreement" and
"Description of Notes."
PURCHASE OF THE NOTES UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Notes will have
the right to require us to repurchase all or any part of such holder's Notes at
a purchase price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of repurchase. The occurrence of certain
events which would constitute a Change of Control would also constitute an event
of default under the Credit Agreement. In addition, the Credit Agreement will
effectively prohibit our repurchase of the Notes in the event of a Change of
Control unless all amounts outstanding under the Credit Agreement are repaid in
full. Our failure to repurchase any Notes upon the occurrence of a Change of
Control would result in an event of default under the Indenture. The inability
to repay all indebtedness outstanding under the Credit Agreement, if
accelerated, would also constitute an event of default under the Indenture. In
the event of a Change of Control, there can be no assurance that we will have
sufficient assets to satisfy all obligations under the Credit Agreement and the
Indenture. Agreements governing our future indebtedness may also contain
prohibitions of certain events and transactions which would constitute a Change
of Control. See "Description of Notes--Change of Control."
LICENSING REQUIREMENTS AND GOVERNMENT REGULATIONS
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 licensing requirements and 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 many 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, many of the states in which we operate require criminal
record
10
<PAGE>
checks for all child care staff as part of their licensing regulations, and some
states in which we operate require fingerprint verification. Repeated failures
by an Academy to comply with applicable regulations may subject the Academy to
state sanctions, which might include fines, corrective orders, being placed on
probation or, in more serious cases, suspension or revocation of the Academy's
license to operate. We believe we are in substantial compliance with all
material licensing requirements and regulations applicable to our businesses.
Although there are presently no federal licensing requirements, a child
care center must satisfy certain minimum standards to qualify for participation
in certain federal subsidy programs. We believe we have substantially satisfied
all material standards necessary to qualify for participation in the federal
subsidy programs relevant to our business.
IMPACT OF POSSIBLE LOSS OF GOVERNMENT FUNDING
During fiscal 1997, we estimate approximately 5% to 10% of our operating
revenues were generated from federal and state child care assistance programs.
Funding for such programs is subject to changes in federal and state
environments and governmental appropriations processes, which are unpredictable
and beyond our control. Accordingly, there is no assurance that funding for such
federal and state programs will continue at current levels and a significant
reduction in such funding may have an adverse impact on us. Although additional
funding for child care will be available for low income families as part of the
welfare reform included in legislation signed by President Clinton in August
1996, no assurance can be given that we will benefit from any such additional
funding. In addition, although the Internal Revenue Code of 1986, as amended
(the "Code"), makes certain tax incentives available to parents utilizing child
care programs, such provisions of the Code are subject to change. See
"Business--Government Regulation."
ADVERSE PUBLICITY; ABILITY TO OBTAIN INSURANCE
As a result of adverse publicity concerning reported incidents of alleged
child physical and sexual abuse at child care centers and the length of time
before the expiration of applicable statutes of limitations for the filing of
child abuse and personal injury claims (typically a number of years after the
child reaches the age of majority), many operators of child care centers have
had difficulty obtaining general liability insurance, child abuse liability
insurance or similar liability insurance or have been able to obtain such
insurance only at high rates. To date, we have been able to obtain insurance in
amounts we believe to be appropriate. There can be no assurance, however, that
our insurance premiums will not increase in the future as a consequence of
conditions in the insurance business generally or our experience in particular
or that continuing publicity with respect to alleged instances of child abuse
will not result in our being unable to obtain insurance. Like our competitors,
we are periodically subject to claims of child abuse arising out of alleged
incidents at our Academies. In addition, any adverse publicity concerning
reported incidents of alleged physical or sexual abuse of children at our
Academies or at other child care centers could affect occupancy levels at our
Academies.
SEASONALITY
Our revenues and the initial success of new Academies are subject to
seasonal variation. New enrollments are generally highest in September and
January because children return to child care and/or school after summer and
holiday vacation. Academies which open at other times usually experience a lower
rate of enrollment during early months of operation. Enrollment generally
decreases 5% to 10% during holiday periods and summer months.
CONTROL BY KING AND CCP
All of our outstanding common stock is held by our Parent. All of the
outstanding shares of preferred stock of our Parent are owned by the Investor,
and approximately 80.5% of the fully diluted common stock of our Parent is owned
by the Investor. CCP owns a majority of the economic interests of the Investor,
and a majority of the voting interests of the Investor is owned by an entity
controlled by Robert E. King, a Director of us and our Parent. Mr. King is
entitled to three votes as a director of us and our Parent. However, pursuant to
an operating agreement between CCP and the Investor (the "Operating Agreement"),
CCP has the right to elect a majority of the directors of the Investor if
certain triggering events occur, and the Investor may not take certain actions
in
11
<PAGE>
respect of the common stock of our Parent held by the Investor without the
consent of CCP. See "Ownership of Securities."
Accordingly, the Investor controls our affairs and has the power to elect
all of our directors (other than James R. Kahl, the Chairman of the Board,
President and Chief Executive Officer), appoint new management and approve any
action requiring the approval of our stockholders, including adopting amendments
to our Certificate of Incorporation and approving mergers or sales of all or
substantially all of our assets. Circumstances may occur in which the interests
of the Investor, as the majority stockholder of our Parent, may conflict with
the interests of the holders of Notes. See "Management," "Ownership of
Securities" and "Certain Relationships and Related Transactions."
COMPETITION
The United States preschool education and child care industry is highly
fragmented and competitive. Our competition consists principally of local
nursery schools and child care centers, some of which are non-profit (including
church-affiliated centers), providers of services that operate out of their
homes and other for profit companies which may operate a number of centers.
Local nursery schools and child care centers generally charge less for their
services than we charge. Many church-affiliated and other non-profit child care
centers have no or lower rental costs than us and may receive donations or other
funding to cover operating expenses and may utilize volunteers for staffing.
Consequently, tuition rates at these facilities are often lower than our rates.
Additionally, fees for home-based care are normally lower than fees for
center-based care because providers of home care do not always have to satisfy
the same health, safety or operational regulations as our centers. Our
competition also consists of other large, national, for profit child care
companies that may have more aggressive tuition discounting and other pricing
policies than us.
IMPACT OF RECESSION
Demand for our services may be subject to general economic conditions, and
our revenues depend, in part, on the number of working mothers and working
single parents who require child care services. Recessionary pressure on the
economy, and a consequent reduction in the size of the labor force, may
adversely impact our business, financial condition and results of operations as
a result of the general tendency of parents who are not employed to cease using
child care services.
FRAUDULENT CONVEYANCE STATUTES
The incurrence by us and the Guarantors of indebtedness (such as the Notes
and the Guarantees) in connection with the Transactions may be subject to review
under relevant federal and state fraudulent conveyance and similar statutes in a
bankruptcy or reorganization case or lawsuit commenced by or on behalf of our
creditors. Under these statutes, if a court were to find that, after giving
effect to the issuance of the Notes and the incurrence of the Guarantees, we
(i) incurred such indebtedness with the intent of hindering, delaying or
defrauding present or future creditors, (ii) received less than the reasonably
equivalent value in consideration for incurring such indebtedness, and, at the
time of the incurrence of such indebtedness we (a) were insolvent or were
rendered insolvent by reason of such incurrence, (b) were engaged or were about
to engage in a business or transaction for which our remaining unencumbered
assets constituted unreasonably small capital or (c) intended to incur, or did
incur, or believed that we would incur, debts beyond our ability to pay as they
matured or became due, such court might subordinate the Notes or the applicable
Guarantee to our presently existing or future indebtedness, void the issuance of
the Notes or the incurrence of such Guarantee and direct the repayment of any
amounts paid thereunder to our creditors or take other actions detrimental to
holders of the Notes.
The measure of insolvency under fraudulent conveyance statutes will vary
depending upon the law of the jurisdiction being applied. Generally, however, a
debtor will be considered insolvent with respect to a particular date if on such
date the sum of all its liabilities, including contingent liabilities, was
greater than the value of all its assets at fair valuation or if the present
fair saleable value of its assets was less than the amount required to repay its
probable liabilities, including contingent liabilities, as they become absolute
and matured.
If a court were to find that any component of the Transactions constituted
a fraudulent transfer, to the extent proceeds from the Offering were used to
finance such component, the court might find that we or the Guarantor
12
<PAGE>
did not receive reasonably equivalent value in consideration for incurring the
indebtedness represented by the Notes and the Guarantee. The Guarantee may be
subject to the additional claim that, because the Guarantee was incurred for our
benefit (and only indirectly for the benefit of the Guarantor), the obligations
of the Guarantor thereunder were incurred for less than reasonably equivalent
value.
We believe that we received equivalent value at the time the indebtedness
under the Notes or the Guarantee was incurred. In addition, after giving effect
to the Transactions, we and the Guarantor (a) believe that we were not insolvent
or rendered insolvent, (b) believed that we were not engaged or about to be
engaged in a business or transaction for which our remaining unencumbered assets
constitute unreasonably small capital or (c) did not intend to incur, did not
incur, and did not believe that we would incur, debts beyond our ability to pay
as they mature or become due. These beliefs and intentions were based upon
analyses of internal cash flow projections and estimated values of assets and
liabilities at the time of the Offering. There can be no assurance, however,
that a court passing on these issues would make the same determination.
LACK OF A PUBLIC MARKET FOR THE NEW NOTES
The New Notes are a new class of securities with no established trading
market. We do not intend to list the New Notes on any national securities
exchange or to seek the admission thereof to trading in the Nasdaq National
Market. We have been advised by CSI that CSI currently makes a market in the New
Notes. CSI is not obligated to do so, however, and any market-making activities
with respect to the New Notes may be discontinued at any time without notice. In
addition, such market-making activity is subject to the limits imposed by the
Securities Act and the Exchange Act. Accordingly, no assurance can be given that
an active public or other market will develop for the New Notes or as to the
liquidity of the trading market for the New Notes. If a trading market does not
develop or is not maintained, holders of the New Notes may experience difficulty
in reselling the New Notes or may be unable to sell them at all. If a market
develops for the New Notes, future trading prices of the New Notes will depend
on many factors, including, among other things, prevailing interest rates, our
financial condition and results of operations, and the market for similar notes.
Depending on those and other factors, the New Notes may trade at a discount from
their principal amount.
13
<PAGE>
USE OF PROCEEDS
The Issuers did not receive any proceeds from the Exchange Offer because it
was an even exchange for the Old Notes. The net proceeds to the Issuers from the
Old Notes were approximately $140 million, after deducting the Initial
Purchasers' discounts and fees and expenses of the Offering. The Issuers used
such net proceeds, together with the proceeds from the Equity Investment and
borrowings under the Credit Agreement, to consummate the Recapitalization and
the Refinancing Transactions and to pay fees and expenses related to the
foregoing.
THE TRANSACTIONS
On March 17, 1998, the Investor and Parent entered into a Merger Agreement
pursuant to which a wholly owned subsidiary of the Investor was merged into
Parent to effect the Recapitalization. In the Recapitalization (i) all of the
then outstanding shares of preferred stock and common stock of Parent (other
than the shares of common stock retained by Vestar and management of the
Company) owned by the Existing Stockholders was converted into the right to
receive cash and (ii) the Existing Stockholders received the cash of the Company
as of the date of the closing of the Transactions. As part of the
Recapitalization, the Investor purchased $72.5 million (less the value of
options retained by management) of common stock of 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. 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 interest of 80.5%). Vestar 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 approximately 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 outstanding 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 the New 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 and borrowings under the Credit Agreement, to
finance the Recapitalization, to consummate 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. See "Ownership of Securities."
The Refinancing Transactions consisted of (i) the defeasance by the Company
of all of its outstanding Senior Notes, (ii) the exchange of all outstanding
shares of the Class A Preferred Stock for $34.7 million aggregate principal
amount of the Exchange Debentures, (iii) the defeasance by the Company of all of
the then outstanding Exchange Debentures and (iv) the retirement of the
Convertible Debentures.
As a result of the Recapitalization, the Investor owns 90.3% of the common
stock of Parent (80.5% on a fully diluted basis). A majority of the economic
interests of the Investor is owned by CCP, and a majority of the voting
interests of the Investor is owned by an entity controlled by Robert E. King, a
Director of the Company. However, pursuant to the Operating Agreement, the
Investor granted to CCP the right to elect a majority of the directors of the
Investor if certain triggering events occur and the Investor agreed not to take
certain actions in respect of the common stock of Parent held by the Investor
without the consent of CCP. See "Ownership of Securities."
In connection with the Recapitalization and the related refinancing
transactions, the Company entered into the Credit Agreement providing for the
$40 million Term Loan Facility and the $25 million Revolving Credit Facility,
which is available for the Company's working capital requirements. See
"Description of the Credit Agreement."
14
<PAGE>
CAPITALIZATION
The following table sets forth as of August 29, 1998 the capitalization of
the Company. This table should be read in conjunction with the information
contained in "Use of Proceeds," "Unaudited Pro Forma Consolidated Financial
Information" and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" as well as the Company's
consolidated financial statements and the notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
AUGUST 29, 1998
---------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Cash, cash equivalents and restricted cash....................................................... $ 8,624
---------
---------
Long-term debt and capital lease obligations:....................................................
Revolving Credit Facility(a)..................................................................... $ --
Capital lease obligations (excluding current portion) (b)........................................ 1,727
Term Loan Facility (excluding current portion)................................................... 39,000
Senior Notes..................................................................................... 145,000
---------
Total debt..................................................................................... 185,727
Series A Redeemable Preferred Stock.............................................................. 25,625
Stockholders' equity (deficit)................................................................... (105,701)
---------
Total capitalization........................................................................... $ 105,651
---------
---------
</TABLE>
- ------------------
(a) The Revolving Credit Facility provides for borrowings of up to
$25.0 million. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation" and "Description of the Credit
Agreement."
(b) Consists of capital lease obligations arising from computer hardware
acquired in connection with the implementation of ADMIN, excluding the
current portion of $857,000.
15
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth selected historical financial and other data
for Parent and the Company on a consolidated basis. The historical consolidated
financial statements of the Company and its predecessor (the "Predecessor")
presented in the following table for the fiscal years ended August 27, 1994,
August 26, 1995, August 31, 1996, August 30, 1997 and August 29, 1998 have been
audited. The consolidated financial statements for each of the fiscal years in
the three-year period ended August 29, 1998 are included elsewhere in this
Prospectus. Such consolidated financial statements have been audited by Deloitte
& Touche LLP, independent auditors. Fiscal 1996 was a 53 week year ending on
August 31, 1996. The following information should be read in conjunction with
"Unaudited Pro Forma Consolidated Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical consolidated financial statements and the notes thereto included
elsewhere in this Prospectus.
<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)
---------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary 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 (deficit).......................... (105,701) 3,374 4,787 9,175 23,658
OTHER DATA:
EBITDA (as defined)(e).................................. $ 32,533 $ 30,087 $ 27,334 $ 21,167 $ 27,334
Cash flows from operating activities.................... 7,224 14,886 15,208 17,140 3,124
Cash flows from investing activities.................... (11,005) (6,848) (6,045) (2,956) (5,097)
Cash flows from financing activities.................... (13,322) 3,142 (12,671) (9,348) (1,360)
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
Ratio of earnings to fixed charges(g) (g) 1.1x (g) (g) (g)
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(h).................... 65% 66% 64% 59% 59%
</TABLE>
(Footnotes on next page)
16
<PAGE>
(Footnotes from previous page)
- ------------------
(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) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as income before income taxes and extraordinary items, plus
fixed charges. Fixed charges consists of interest expense on all
indebtedness, amortization of deferred financing costs, and one-third of
rental expense on operating leases representing that portion of rental
expense that we deemed to be attributable to interest. For the historical 52
weeks ended August 29, 1998, the 53 weeks ended August 31, 1996 and the 52
weeks ended August 26, 1995 and August 27, 1994, the deficiency of earnings
to fixed charges was $8.1 million, $2.0 million, $20.1 million and $3.0
million, respectively. For the Pro Forma 52 Weeks ended August 29, 1998, the
deficiency of earnings to fixed charges was $13.8 million.
(h) 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.
17
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial statement has been
derived by the application of pro forma adjustments to the historical
consolidated financial statements included elsewhere in this Prospectus. The pro
forma data give effect to the Transactions as if they had been consummated on
September 1, 1997 for the fiscal year ended August 29, 1998. The adjustments are
described in the accompanying notes. The pro forma financial statement should
not be considered indicative of actual results that would have been achieved had
the Transactions been consummated on the date or for the periods indicated and
do not purport to indicate balance sheet data or results of operations as of any
future date or any future period. The pro forma financial statement should be
read in conjunction with the historical consolidated financial statements and
the notes thereto included elsewhere in this Prospectus.
The pro forma adjustments were applied to the historical consolidated
financial statements to reflect and account for the Transactions as a
recapitalization. Accordingly, the historical accounting basis of the assets and
liabilities herein have not been impacted by the transaction.
18
<PAGE>
LPA HOLDING CORP.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
52 WEEKS ENDED
AUGUST 29, 1998
--------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating revenues.......................................................... $314,933 $ -- $ 314,933
Operating expenses.......................................................... 306,900 (1,799)(a) 305,101
-------- ------- ---------
Operating income............................................................ 8,033 1,799 9,832
Interest income............................................................. (885) 721 (b) (164)
Minority interest in net income of subsidiary............................... 2,849 2,849
Interest expense............................................................ 14,126 6,846 (c) 20,972
-------- ------- ---------
Loss before income taxes and extraordinary item............................. (8,057) (5,768) (13,825)
Income tax expense (benefit)................................................ (254) (2,307)(d) (2,561)
-------- ------- ---------
Loss before extraordinary item.............................................. $ (7,803) (3,461) (11,264)
Extraordinary loss on retirement of debt, net of applicable
income taxes of $3,776.................................................... (5,525) (5,525)
-------- ------- ---------
Net loss.................................................................... $(13,328) (3,461) $ (16,789)
-------- ------- ---------
-------- ------- ---------
Ratio of earnings to fixed charges(e)....................................... (e)
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Statement of
Operations
19
<PAGE>
LPA HOLDING CORP.
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(a) The pro forma adjustments to operating expense reflect the following:
<TABLE>
<CAPTION>
52 WEEKS ENDED
AUGUST 29,
1998
--------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Seller's fees:
Management fees............................................................ $ 370
Board of Directors' fees and expenses...................................... 259
Expenses related to a special directors' conference.......................... 1,170
--------
Total adjustment........................................................... $ 1,799
--------
--------
</TABLE>
The above amounts represent non-recurring expenses the Company does not
anticipate incurring after the Transactions.
(b) To reflect the reduction of cash on the balance sheet.
(c) The pro forma adjustment to interest expense reflects the following:
<TABLE>
<CAPTION>
52 WEEKS ENDED
AUGUST 29,
1998
--------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Interest and fees on debt repaid in the Transactions......................... $ (5,819)
Interest expense on Revolving Credit Facility................................ 174
Interest expense on Term Loan Facility....................................... 2,505
Interest expense on Senior Notes............................................. 9,989
Amortization of deferred financing costs on historical debt and preferred
stock...................................................................... (586)
Amortization of deferred financing costs on new debt......................... 583
--------
Total adjustment........................................................... $ 6,846
--------
--------
Capital lease and miscellaneous interest expense, net of capitalized
interest................................................................... $ 99
--------
--------
</TABLE>
An increase or decrease of 0.125% in the assumed interest rate on the
Revolving Credit Facility and the Term Loan Facility would change the pro
forma interest expense by $51,000 for the fiscal year ended August 29, 1998.
(d) To reflect the tax effects of the pro forma adjustments at a 40% effective
income tax rate.
(e) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as income before income taxes and extraordinary items, plus
fixed charges. Fixed charges consists of interest expense on all
indebtedness, amortization of deferred financing costs, and one-third of
rental expense on operating leases representing that portion of rental
expense deemed by the Company to be attributable to interest. For the pro
forma 52 weeks ended August 29, 1998, the deficiency of earnings to fixed
charges was $13.8 million.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the
consolidated financial statements and the related notes thereto included
elsewhere in this Prospectus. The financial information contained in the
following discussion represents the results of operations of the Company for the
periods presented and is the same as the consolidated results of operations of
Parent for the same periods. The information presented herein refers to fiscal
1998, fiscal 1997 and fiscal 1996. Fiscal 1998 and fiscal 1997 were 52 week
fiscal years. Fiscal 1996 was a 53 week fiscal year with an additional week
included in the fourth quarter.
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......................................... $ 34,322 10.9% $ 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 fiscal 1997 were closed and one new Academy
was opened prior to the end of fiscal 1998. As a result, the Company operated
736 Academies at the end of fiscal year 1998, nine less than at the end of
fiscal 1997. The closures resulted principally from management decisions not to
renew the leases or contracts of certain Academies.
Operating revenue. During the 52 weeks ended August 29, 1998 as compared
to the prior fiscal year, operating revenue increased 4.0%, FTE attendance
declined 1.1% and Average Weekly FTE Tuition increased 5.2%. Excluding closed
Academies from both years, operating revenue increased 4.7%, FTE attendance
declined 0.4% and Average Weekly FTE Tuition increased 5.1%. The decline in FTE
attendance reflects, among other things, the Company's continuing focus on
preschool-aged children and a reduced emphasis on infant care. In addition, the
strong economy reportedly had the effect of increasing summer vacations, which
in turn could have negatively impacted Academy attendance. The increase in
Average Weekly FTE Tuition was principally due to selective price increases that
were put into place in the second quarter of fiscal 1998, based on geographic
market conditions and class capacity utilization.
Salaries, wages and benefits. Salaries, wages and benefits increased $7.3
million or 4.6% during the 52 weeks ended August 29, 1998 as compared to the
same period in the prior year. The increase was principally due to increased
average hourly wage rates as staff hours worked in fiscal 1998 declined slightly
from the prior year.
21
<PAGE>
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 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 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.
52 WEEKS ENDED AUGUST 30, 1997 COMPARED TO 52 WEEKS ENDED AUGUST 24, 1996
The Company's operating results for the comparative fiscal years were as
follows:
<TABLE>
<CAPTION>
52 WEEKS ENDED 52 WEEKS ENDED
------------------------ ------------------------
AUGUST 30, PERCENT OF AUGUST 24, PERCENT OF
1997 REVENUE 1996 REVENUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<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 expense................................ 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%
-------- ------ -------- ------
-------- ------ -------- ------
</TABLE>
22
<PAGE>
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.
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, food and other Academy supply costs.
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.
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.
23
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are from cash flow generated
by operations, borrowings under the Revolving Credit Facility and sale and
leaseback financing for newly constructed facilities. 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
Transactions. See Note 1 of the Notes to Consolidated Financial Statements.
In connection with the Recapitalization, Parent and the Company entered
into the Credit Agreement, consisting of the $40 million Term Loan Facility and
the $25 million Revolving Credit Facility. The Company borrowed the entire
$40 million available under the Term Loan Facility. In addition, the Company 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 Notes and the Equity Investment,
were used to consummate the Recapitalization and the Refinancing Transactions
and to pay the related fees and expenses related to the foregoing.
The Term Loan Facility is subject to mandatory prepayment in the event of
certain equity or debt issuances or asset sales by Parent, the Company or any of
its subsidiaries and in amounts equal to specified percentages of the Company's
excess cash flow. The Term Loan Facility will terminate May 11, 2005 and
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 seven years after the closing of the
Transactions. See "Description of the Credit Agreement."
New Academy Development and Financing. 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 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.
Capital Expenditures. 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 ADMIN. 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.
24
<PAGE>
The Company's ability to meet its debt and redeemable preferred stock
obligations is dependent on future earnings and cash flows. The 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 have a material impact on the Company's
operations.
A sustained recession with high unemployment could have a material adverse
effect on the Company's operations. The recession during 1990 and 1991 adversely
affected attendance at the Company's Academies.
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.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income".
The statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This Statement requires that
the Company (a) classify items of other comprehensive income by their nature in
a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. The
Statement is effective for the Company's financial statements for the fiscal
year ending August 28, 1999. The Company is prepared to comply with the
additional reporting requirements of this Statement and does not anticipate that
the
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implementation of this Statement will have a material impact on the Company's
consolidated financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". The Statement establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The
Statement is effective for the Company's financial statements for the fiscal
year ending August 28, 1999. The Company is prepared to comply with the
additional reporting requirements of this Statement and does not anticipate that
the implementation of this Statement will have a material impact on the
Company's consolidated financial statements.
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BUSINESS
GENERAL
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 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 residential Academies, 31 employer-based Academies and 20
Montessori schools, located in 35 states and the District of Columbia, and had
an enrollment of approximately 87,000 full and part-time children. The Company's
Operating Capacity as of August 29, 1998, was approximately 90,000 full-time
children. For the 52 weeks ended August 29, 1998, estimated FTE Utilization was
65%.
THE CHILD CARE INDUSTRY
Favorable Demographics and Social Trends. The U.S. child care industry
(including home-based care, employer on-site care, and care delivered by private
facilities, government-sponsored institutions, church-affiliated centers,
colleges and universities, group child care center chains and civic groups such
as the YMCA) has grown at a compound annual growth rate of 12.1% from $5.7
billion in revenues in 1982 to an estimated $31.6 billion in 1997, and is
expected to grow at a 7.1% compound annual growth rate from 1998 until 2003,
according to Marketdata Enterprises, Inc. This growth has been, and is expected
to continue to be, driven by several demographic and social trends, including:
(i) an increase in the number of births in the 1990s as compared generally to
the 1970s and 1980s, (ii) an increase in the percentage of mothers in the
workforce and (iii) a significant increase in the appreciation by parents of the
benefits of center-based preschool education and child care. According to the
Census Bureau, in 1989 and each year since, the annual number of births has
approximated 4.0 million per year and is expected to remain at that level
through 2010. Furthermore, the number of children under the age of five has
grown from approximately 16.1 million in 1975 to an estimated 20.2 million in
1995, according to the Census Bureau. These trends are complemented by the
continued increase in the number of mothers entering the work force. According
to the U.S. Bureau of Labor Statistics, the labor force participation rate of
mothers with children under the age of six relative to all mothers with children
under the age of six, has increased from approximately 39% in 1975 to an
estimated 62% in 1995. In addition, the percentage of mothers in the work force
that have children between the ages of five and 12, relative to all mothers of
children between the ages of five and 12, has risen from 53% in 1975 to 75% in
1995.
There has been a significant increase in the use of center-based child care
facilities by families with both working and non-working mothers. Center-based
care typically offers a more structured curriculum, better educational
materials, more experienced personnel and more children for social interaction
than alternative forms of child care. In 1993, according to the most recent data
from the Census Bureau, 30% of families with working mothers of preschool aged
children used center-based care as their primary form of non-parental care, up
from 6% in 1965. Furthermore, 22% of children under the age of six with mothers
not in the labor force were enrolled in center-based child care programs in
1995, according to the U.S. Department of Education.
Growing Awareness of the Importance of Early Childhood Development. The
demand for quality child care is increasing as scientific research highlights
the importance of education during a child's early developmental years. The
Families and Work Institute, an organization devoted to the study of neurology,
cognitive psychology and child development, has recently completed research the
results of which management believes demonstrate the importance of early
childhood experiences in a child's overall cognitive development.
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Recent essays and other scientific research into early childhood development
have drawn widespread media and political attention, increasing parents'
awareness and demand for quality educational facilities for their children.
Fragmented Industry. The U.S. child care industry is highly fragmented,
with the aggregate capacity of the top 50 for profit child care companies
serving approximately 1% of the potential child care market, or approximately
500,000 children out of an estimated 50 million children under the age of 12 in
the United States as of January 1, 1997, according to Child Care Information
Exchange. Based on a study sponsored by the National Association for the
Education of Young Children, management estimates that approximately 35% of all
child care centers are operated for profit, as independent businesses or as part
of a local or national chain. Non-profit centers, such as churches, employers,
government agencies and YMCAs, account for the remaining 65%. Of the
approximately 100,000 child care centers in the United States, only 4,400 are
operated by the top 50 for profit child care companies. Furthermore, including
La Petite, only ten companies have total capacity in excess of 10,000 children
and only eight companies have more than 100 centers. Although other national
child care chains operate in many of the Company's markets, in general, the
Company primarily competes with local operators that typically do not have the
substantial resources required to invest in the educational materials and
curricula and staff training necessary for the educational development of
children in their care.
COMPETITIVE STRENGTHS
Strong Market Position and Brand Identities. Based on the number of
centers operated, children served, operating revenue and operating income, La
Petite Academy is the second largest provider of for profit preschool education
and child care services in the United States, in an industry where the three
largest center-based providers represent approximately 55% of the top 50 for
profit center-based child care providers' total capacity. Operating since 1968,
the Company has built brand equity in the markets it serves through the
development of a network of Academies concentrated in clusters in
demographically desirable MSAs. The Company's Academy clusters maintain close
ties with local neighborhoods through public relations efforts, parent
newsletters and brochures and support of community activities. The Company
believes that it benefits significantly from word-of-mouth referrals from
parents, educators and other school administrators. The Company's advertising
reinforces its community-based reputation for quality service principally
through targeted direct mailings and radio air time. In September 1995, the
Company introduced the "Parent's Partner Plan," a program that, among other
things, provides parents with individualized feedback on their child's
development on at least a weekly basis. Management believes this program has
contributed to the increase in overall student retention and added new
enrollments at the Academies. The Company's high, customer-driven standards and
well-trained and caring staff strengthens its image as an innovative education
provider.
Focused Educational Curriculum. The Company's focus is on educating the
child rather than simply providing traditional child care services. The
Company's high quality proprietary Journey curriculum was originally developed
in 1991 by La Petite educators with the assistance of experts in early childhood
education with the intent of maximizing a child's cognitive development while
ensuring a positive experience for the child. The curriculum emphasizes
individuality and allows children to progress at their own pace, building skills
in a logical pattern using a "hands-on" approach. All programs and activities
are developmentally appropriate, promote a child's intellectual, physical,
emotional and social development and are enhanced by on-site efforts of the
Company's educational staff. The Company also operates Montessori schools, which
target education conscious parents under the name Montessori Unlimited. The
Montessori method is a classical approach that provides specific task-oriented
educational materials or "apparatus" presented in a sequence determined by each
child's natural capabilities. Each activity in the prepared environment of the
Montessori classroom has its roots in early development and serves as a
foundation for future, more complex developments.
Attractive Business Model. Improvements in profitability at the Academy
level have been achieved through a combination of (i) revenue enhancement and
cost management at the individual Academies and (ii) economies of scale and
synergies realized through the clustering of Academies in economically and
demographically attractive areas. The Company has increased estimated FTE
Utilization from 59% in fiscal 1994 to 65% in fiscal 1998. During the four
fiscal years ended August 1994, the Company opened 100 residential Academies
with an estimated Operating Capacity of 125 children and an average facility
size of 6,200 square feet. The average EBITDA for such Academies in fiscal 1998
was approximately $64,500. In addition, the Company's Montessori schools have
proved to be successful with higher student retention, tuition averaging
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approximately 20% more than at the Company's residential and employer-based
Academies and more favorable student-teacher ratios, resulting in increased
profitability. The Company has focused on providing its Academies with the
systems to improve capacity utilization and operational efficiency. In March
1998, the Company completed the installation in all of its residential Academies
of the first phase of a newly developed proprietary management information
system, ADMIN. The first phase of ADMIN is a unique point of sale system which
enables the Company to more effectively monitor attendance, increase revenues
and gather information throughout all of its markets. By eliminating clerical
errors and ensuring that all service delivery is accounted for, the
implementation of the ADMIN point of sale system has increased operating revenue
by more than 2% at the 246 Academies which have been operating on the system
since January 1, 1998. ADMIN currently handles the tuition billing process,
allowing Academy Directors to concentrate on communicating and interacting with
parents, supervising staff and spending time with children. In subsequent
phases, ADMIN will automate substantially all of the clerical functions at the
Academies. The Company's size and scope also allows it to cost-effectively
purchase supplies, conduct advertising and marketing outreach programs and train
employees.
Geographically Diversified Operations. The Company's operations are
geographically diversified, with 736 Academies located throughout 35 states and
the District of Columbia as of August 29, 1998. Although the highest number of
the Company's Academies are located in Texas, Florida, California, Georgia and
Virginia, these states account for less than half of the Company's Academies.
The geographical diversity of the Company's operations and profitability
mitigates the potential impact of regional economic downturns or adverse changes
in local regulations.
Experienced and Incentivized Management Team. The top four members of
senior management of the Company average approximately ten years of experience
with the Company. In addition, the Company's eight Area Vice Presidents and 80
Regional Directors average over 13 years and 11 years with La Petite,
respectively. Management has successfully reduced employee turnover, closed or
revitalized underperforming Academies, implemented operational data systems and
improved operating margins. On a pro forma basis, 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.
BUSINESS STRATEGY
Management believes the Company is well positioned for future growth as one
of the leading providers of quality educational care to preschool aged children.
The Company's objective is to grow its higher margin businesses and continue to
be a leader in the markets in which it operates.
Emphasize Educational Curriculum. The Company's curriculum department
continually evaluates and improves the quality of its educational materials and
programs. The Company has invested significant resources in developing its
proprietary Journey curriculum, utilized at both its residential and
employer-based Academies, and intends to develop additional innovative
curriculum both internally and with the assistance of educational consultants.
The Company invested in additional staff training, classroom facilities and
educational materials to enhance the delivery of the Journey curriculum at
approximately one-third of the Company's residential Academies for the school
year beginning in the fall of 1998. The Company's Montessori schools are staffed
with certified Montessori lead teachers who follow traditional Montessori
methods that appeal to education conscious parents.
Capitalize on Reputation for Customer Driven Service. Management believes
that the Company's knowledge of parents' objectives and desires for their
children's education differentiates it from other child care providers. In order
to better understand customer needs, the Company conducts (i) focus groups with
parents, (ii) bi-annual and annual customer and employee satisfaction surveys
(conducted by the Company and third parties) and (iii) interviews with parents.
The Company's Parent's Partner Plan was designed in part to bridge the gap
between what parents look for on a tour of the facility and expect on a
day-to-day basis and the requirements of a professionally designed curriculum.
The program includes a video and a monthly newsletter that explain the
curriculum being provided to the children and guarantees the delivery of daily
or weekly (depending on the age of the child) individual progress reports. The
Company continually strives to improve its customer retention and increase
loyalty by interacting with parents on a daily basis and focusing on meeting
and, if possible, exceeding their expectations.
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Increase Academy Profitability. The Company plans to improve Academy
profitability by increasing capacity utilization and tuition rates, managing
costs and leveraging its existing and newly built Academies to achieve economies
of scale and synergies. The Company intends to continue to increase capacity
utilization by emphasizing local marketing programs and improving customer
retention and loyalty. The Company believes it is an industry leader in its
commitment to ongoing qualitative and quantitative research to determine
customer needs and expectations. Academy Directors use their understanding of
the markets in which they operate to cost effectively target parents through
customer referrals, the support of community activities and print media and spot
radio advertising. In addition, with the implementation of ADMIN, which provides
the Company with the information necessary to implement targeted pricing, the
Company has the ability to maximize revenue by charging its customers a premium
for services in high demand. The ability to control revenue and increase
operating efficiency at the point of sale through the implementation of ADMIN
also presents an opportunity for the Company to better allocate an Academy
Director's time. The Company achieves local economies of scale by employing a
cluster strategy of either building in markets where it has existing Academies
or entering new markets through the construction of a minimum number of
Academies.
Build Academies and Montessori Schools in Attractive Markets. The Company
intends to expand within existing markets and enter new markets with Academies
and Montessori schools concentrated in clusters. Over the last three years, the
Company has made significant investments in personnel and infrastructure to
facilitate the future growth of the Company. The Company currently expects to
open approximately 35 Academies in fiscal 1999 and 35 Academies in fiscal 2000.
The Company has targeted 48 MSAs that it believes have favorable characteristics
for development, as measured by household income and education levels,
population growth, existing competition, labor supply, appropriate real estate,
and marketing possibilities. The Company expects to build residential Academies
and Montessori schools primarily in higher-end neighborhoods, both of which are
anticipated to generate higher operating margins than the average existing
Academy. Because of the Montessori schools' success and popularity, management
intends to build new Montessori schools and convert certain existing Academies
to create new clusters of Montessori schools. Based upon significant input from
the Company's field personnel, visits to competitors and focus groups with
parents, the Company has recently designed a new prototype for its Academies.
New Academies will be approximately 9,500 square feet, built on sites of
approximately one acre, have an Operating Capacity of approximately 175 children
for residential Academies and 150 children for Montessori schools and
incorporate a closed classroom concept. The Company will continue to target
profitable opportunities for employer-based Academies and seek to leverage its
residential Academy network to meet the needs of its corporate customers.
Pursue Strategic Opportunities. In addition to accelerating new Academy
development, the Company may seek to acquire existing child care centers where
demographics and facility conditions complement its business strategy.
Management believes the Company's competitive position, economies of scale and
financial strength will enable it to capitalize on selective acquisition
opportunities in the fragmented child care industry. The Company may also engage
in cross-marketing opportunities with manufacturers and marketers of educational
products. These opportunities should enable La Petite to further its reputation
as an educator and carry the residual benefit of an additional revenue stream.
CURRICULUM
Residential and Employer-Based Academies. In 1991, the Company, with the
assistance of outside educational experts, designed and developed the Journey
curriculum to not only maximize a child's cognitive development but also to
provide a positive learning experience for the child. The Company believes the
Journey curriculum is unsurpassed by the educational materials of any of the
major child care providers or its other competitors, many of whom purchase
educational materials from third party vendors.
Journey is an integrated approach to learning, giving children
opportunities to learn through all of their senses while stimulating development
and learning in all areas. Children progress at their own pace, building skills
and abilities in a logical pattern. The Journey curriculum covers children of
all ages that La Petite Academy serves. Each level of the curriculum includes:
(i) a parent component; (ii) built-in teacher training; (iii) carefully selected
age appropriate materials, equipment and activities; and (iv) a well planned and
developed environment.
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For infants and toddlers, Journey provides activities for a variety of
developmental areas such as listening and talking, physical development,
creativity and learning from the world around them. As infants become toddlers,
more activities focus on nurturing their need for independence and practicing
small motor skills that help them to learn to feed themselves, walk and
communicate with others. Journey provides songs, fingerplay, art ideas,
storytelling tips, building activities and many activities to develop the bodies
of toddlers through climbing, pushing and pulling. These activities also build
the foundation for social skills such as how to get along with others and how to
share.
The Journey preschool program includes a balance of teacher-directed and
child-directed activities which address both the physical and intellectual
development of preschool children. Physical activities are designed to increase
physical and mental dexterity, specifically hand-eye and large and small muscle
coordination. Preschool children also engage in creative and expressive
activities such as painting, crafts and music. Intellectual activities are
designed to promote language development, pre-reading, writing and thinking
skills, imagination through role playing, pretending and problem solving. In
addition, Journey enables the children to experience the world around them
through geography, Spanish, mathematics and sensorial activities.
The Journey curriculum for SuperStars consists of providing (i) quiet,
private space for them to do homework, (ii) social interaction with children of
their own age, (iii) participation in enrichment programs such as arts and
crafts and fitness activities and (iv) transportation to and from their
elementary schools.
Montessori Schools. Montessori is a non-traditional method of education in
which children work and learn in a highly individualized environment. Montessori
materials, combined with the Company's certified Montessori instructors, create
a learning environment in which children become energized to explore,
investigate and learn. Children work in mixed age group classrooms with
attractive, state-of-the-art Montessori materials which have been designed to
stimulate each child's interest in reading, mathematics, geography and science.
In addition to the Montessori method, Montessori schools provide enrolled
children foreign language and computer learning.
ACADEMY NETWORK
The Company operates three types of child care centers: residential
Academies, employer-based Academies and Montessori schools. Academies generally
operate year round, five days a week and typically are open from 6:30 AM to 6:30
PM. A child may be enrolled in any of a variety of program schedules from a
full-time, five-day-per-week plan to as little as two or three half-days a week.
A child attending full-time typically spends approximately nine hours a day,
five days per week, at an Academy. The Company's SuperStars program for children
ages five to 12 provides extended child care before and after the elementary
school day and transportation to and from the elementary school.
Academy employees include Academy Directors, Assistant Directors (who are
generally teachers), full-time and part-time teachers, temporary and substitute
teachers, teachers' aides, and non-teaching staff. On average, there are 15 to
20 employees per Academy. Each Academy is managed by an Academy Director. An
Academy Director implements Company policies and procedures, but has the
autonomy to individualize local operations. Responsibilities of Academy
Directors include curriculum implementation, the establishment of daily, weekly
and monthly operating schedules, staffing, marketing to develop and increase
enrollment and control of operating expenses. Personnel involved in operations
as Academy Director and above are compensated in part on the basis of the
profitability and level of parent and employee satisfaction of each Academy for
which they have managerial responsibility.
Academy Directors are supervised by a Regional Director. The Company's
Regional Directors have an average of 11 years of experience with the Company,
typically are responsible for six to 12 Academies and report to one of eight
Area Vice Presidents. Regional Directors visit their Academies regularly and are
in frequent contact to help make decisions and improvements to program quality
and profitability. The eight Area Vice Presidents average in excess of 13 years
of experience with the Company.
Residential Academies. As of August 29, 1998, the Company operated 685
residential Academies in 33 states. Residential Academies are typically located
in residential, middle income neighborhoods, and are usually one-story,
air-conditioned buildings located on three-quarters of an acre to one acre of
land. A typical Academy
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also has an adjacent playground designed to accommodate the full age range of
children attending the school. The last 100 residential Academies built by the
Company have an estimated average Operating Capacity of 125 children and an
average facility size of 6,200 square feet. The Company continues to improve,
modernize and renovate existing residential Academies to improve efficiency and
operations, to better compete, to respond to the requests of parents and to
support the Journey curriculum.
Residential Academies generally have programs to care for children from
toddlers to 12 years old arranged in five age groups. In addition, approximately
half of the Academies offer child care for infants, as young as six weeks old.
Teacher-student ratios vary depending on state requirements but generally
decrease with the older child groups.
Employer-Based Academies. As of August 29, 1998, the Company operated 31
employer-based Academies, which are similar to residential Academies, but are
designed to offer businesses, including government employers and hospitals,
on-site employer-sponsored child care. To date, the Company's focus has been
principally on developing on-site centers, operating employers' on-site centers
through management contracts and providing consulting services for developing
and managing centers. At most of the Company's employer-based Academies, the
Company collects tuition from its students in the same way as at residential
Academies. At some of the employer-based Academies, the Company receives
additional payments or support services from the sponsoring employer. At other
employer-based Academies, the Company receives a fee in addition to tuition.
Montessori Schools. As of August 29, 1998, the Company operated 20
Montessori schools in Dallas, Houston, Atlanta and south Florida. Sixteen of the
Montessori schools were opened between 1983 and 1989. Two Montessori schools
were residential Academies that were recently converted to Montessori formats,
one in fiscal 1996 and one in early fiscal 1997. Montessori schools are
typically located in upper-middle income areas and feature brick facades and
closed classrooms. The Montessori schools typically have lower staff turnover,
and their lead teachers are certified Montessori instructors, many of whom are
certified through the Company's own training program. In addition, unlike
students at residential Academies, Montessori students are enrolled for an
entire school year, pay tuition monthly in advance and pay higher tuition rates.
NEW ACADEMY DEVELOPMENT
The Company intends to expand within existing markets and enter new markets
with Academies and Montessori schools concentrated in clusters. In its existing
markets, management believes it has developed an effective selection process to
identify attractive markets for prospective Academy sites. In evaluating the
suitability of a particular location, the Company concentrates on the
demographics of its target customer within a two mile radius for residential
Academies and a six mile radius for Montessori schools. The Company targets MSAs
with benchmark demographics which indicate parent education levels and family
incomes combined with high child population growth, and considers the labor
supply, cost of marketing and the likely speed and ease of development of
Academies in the area. The Company has targeted 48 MSAs that it believes have
favorable characteristics for Academy development.
Newly constructed Academies are generally able to open approximately 36
weeks after the real estate contract is signed. Because a location's early
performance is critical in establishing its ongoing reputation, the Academy
staff is supported with a variety of special programs to help achieve quick
enrollment gains and development of a positive reputation. These programs
include special compensation for the Academy Director who opens the new site and
investment in local marketing prior to the opening. Historically, new Academies
have been profitable within their second year of operation and reached maturity
within three years. Management believes that the new site selection and
development process, earlier selection and installment of the Academy Director
and staff, the increased marketing investment prior to opening, the new design
and the rapid access to attendance and tuition information provided by the ADMIN
system will reduce the time to maturity of Academies to two years.
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
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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 cost to open each of the prototype Academies is
estimated at approximately $1.0 million to $1.5 million, of which approximately
85% is typically financed through a sale and leaseback transaction.
TUITION
Academy tuition depends upon a number of factors including, but not limited
to, location of an Academy, age of the child, full or part-time attendance and
competition. The Company also provides various tuition discounts primarily
consisting of sibling, staff, Corporate Referral Program and Parent's Partner
Plan. The Company adjusts tuition for Academy programs by child age-group and
program schedule within each Academy on an annual basis each February. Parents
also pay an annual registration fee, which is reduced for families with more
than one child attending an Academy. Tuition and fees are payable weekly and in
advance for most residential and employer-based Academies and monthly and in
advance for Montessori schools. Management estimates that state governments pay
the tuition for approximately 5% to 10% of the children under the Company's
care.
MARKETING AND ADVERTISING
The Company's marketing program reflects its commitment to ongoing
qualitative and quantitative research to determine customer needs, expectations
and interpretation of service delivery. For example, the Company's research was
instrumental in the development of the Parent's Partner Plan, which was
introduced in 1995. The Parent's Partner Plan was designed in part to bridge the
gap between what parents look for on a tour of the facility and expect on a
day-to-day basis and the requirements of a professionally designed curriculum.
This program offers parents such features as flexible absence day options,
extended care during holidays and guaranteed parent communications. These
features provide tangible benefits to parents, can be universally delivered in a
multi-unit environment and were developed directly in response to needs
expressed by parents. Customer focus groups and research have also guided the
Company in developing and enhancing communications to current and potential
parent customers regarding its programs.
The Company believes that retention of current parents is critical in
building brand equity and generating favorable word-of-mouth promotion. The
Company's retention activities include "Gift of Time" (added free child care on
certain weekends and during the Christmas holidays), focused parent
communication (through videotapes, correspondence and face to face meetings) and
fall and spring preschool orientation meetings. The Company's marketing programs
include activities to attract new students to support fall enrollment programs.
The Company is also establishing programs to broaden parent loyalty beyond the
neighborhood Academy to the Company as a whole. These programs include personal
welcome calls, e-mail access and a toll-free number to call the Company.
The remainder of the marketing budget is used to fund activities designed
to increase enrollments, with over 50% of the budget supporting the Fall
enrollment period. Primary media vehicles are spot radio, which is centrally
negotiated and locally approved, direct mail and local print media. The Company
also has a web site that allows parents to find the closest La Petite Academy
and to learn more about the Journey curriculum. Finally, the Company's Corporate
Referral Program offers tuition discounts to employees of preferred corporate
clients such as AT&T, Federal Express and Wal-Mart. This program enables the
Company to market directly to employees who need preschool and child care
services.
INFORMATION SYSTEMS
The Company has recently completed in its residential Academies the
installation of the nationwide point of sale information phase of ADMIN. In
subsequent phases, ADMIN will automate substantially all of the clerical record
keeping functions at an Academy. ADMIN is a proprietary, state of the art,
decentralized, multimedia PC-based network that processes transactions, stores
data and produces reports locally. Remote host collection of
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data on a daily, weekly and as needed basis provides timely access to
information by senior management, Regional Directors and Area Vice Presidents.
The point of sale system has been operational in all residential Academies
since mid-March 1998 and employer-based Academies since July, and is being
expanded to the Company's Montessori schools. The system tracks attendance,
revenues, receivables and pricing information. Parents sign their children in
and out of an Academy using a ten key pad and PIN number, enabling the Academy
Director to have real time access to parent receivables and an Academy's
current, past and expected future enrollment by class, day and program.
Previously, these records were maintained manually by Academy Directors,
consuming eight to ten hours of their time each week, and were subject to
clerical error. The time savings enable Academy Directors to spend this time on
more valuable tasks such as communicating and interacting with parents and
staff.
ADMIN provides management weekly access to detailed, accurate information
on the Company's operations, facilitating rapid response to any Academy
requiring attention. In addition, the new attendance data by class by day will
enable future pricing decisions to better target those classes and programs with
the greatest demand, enabling the Company to further increase revenues without
impacting capacity utilization. By providing student turnover and tenure
information, the point of sale system will create a new capability for focusing
programs on customer satisfaction and retention.
Future phases of ADMIN will include labor (which encompasses payroll,
benefits and scheduling), marketing, training and the automation of a number of
manual tasks that are currently performed by the Academy Directors or their
staff. The investment requirement by these applications is expected to be
moderate because the major cost was for the hardware that has already been
installed.
COMPETITION
The United States preschool education and child care industry is highly
fragmented and competitive. The Company's competition consists principally of
local nursery schools and child care centers, some of which are non-profit
(including church-affiliated centers), providers of services that operate out of
their homes and other for profit companies which may operate a number of
centers. Local nursery schools and child care centers generally charge less for
their services than the Company charges. Many church-affiliated and other
non-profit child care centers have no or lower rental costs than the Company,
may receive donations or other funding to cover operating expenses and may
utilize volunteers for staffing. Consequently, tuition rates at these facilities
are commonly lower than the Company's rates. Additionally, fees for home-based
care are normally lower than fees for center-based care because providers of
home care are not always required to satisfy the same health, safety or
operational regulations as the Company's Academies. The Company's competition
also consists of other large, national, for profit child care companies that may
have more aggressive tuition discounting and other pricing policies than the
Company. 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.
GOVERNMENT REGULATION
Child care centers are subject to numerous state and local regulations and
licensing requirements, and the Company has policies and procedures in place in
order to comply with such regulations and requirements. Although state and local
regulations vary greatly from jurisdiction to jurisdiction, government agencies
generally review the ratio of staff to enrolled children, the safety, fitness
and adequacy of the buildings and equipment, the dietary program, the daily
curriculum, staff training, record keeping and compliance with health and safety
standards. In certain jurisdictions, new legislation or regulations have been
enacted or are being considered which establish requirements for employee
background checks or other clearance procedures for new employees of child care
centers. In most jurisdictions, governmental agencies conduct scheduled and
unscheduled inspections of child care centers, and licenses must be renewed
periodically. Failures by an Academy to comply with
34
<PAGE>
applicable regulations can subject it to state sanctions, which might include
the Academy being placed on probation or, in more serious cases, suspension or
revocation of the Academy's license to operate. Management believes the Company
is in compliance with all material regulations and licensing requirements
applicable to its businesses.
Certain tax incentives exist for child care programs. Section 21 of the
Code provides a federal income tax credit ranging from 20% to 30% of certain
child care expenses for "qualifying individuals" (as defined in the Code). The
fees paid to the Company for child care services by eligible taxpayers qualify
for the tax credit, subject to the limitations of Section 21 of the Code. In
addition to the federal tax credits, various state programs provide child care
assistance to low income families. Management estimates 5% to 10% of the
Company's operating revenue is generated from such state programs. Although
under new legislation, signed by President Clinton in August 1996, additional
funding for child care will be available for low income families as part of
welfare reform. 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. No assurance can be given that the Company will
benefit from any such additional funding.
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.
The Federal Americans With Disabilities Act (the "Disabilities Act")
prohibits discrimination on the basis of disability in public accommodations and
employment. The Disabilities Act became effective as to public accommodations in
January 1992 and as to employment in July 1992. Since effectiveness of the
Disabilities Act, the Company has not experienced any material adverse impact as
a result of the legislation.
In August and September of 1998, the National Highway Transportation Safety
Administration (NHTSA) issued 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.
TRADEMARKS
The Company has various registered trademarks covering the name La Petite
Academy, its logos, and a number of other names, slogans and designs, including,
but not limited to: La Petite Journey, Parent's Partner, SuperStars and
Montessori Unlimited. A federally registered trademark in the United States is
effective for ten years subject only to a required filing and the continued use
of the mark by the registrant. A federally registered trademark provides the
presumption of ownership of the mark by the registrant in connection with its
goods or services and constitutes constructive notice throughout the United
States of such ownership. In addition the Company has registered various
trademarks in Japan, Taiwan and the Peoples Republic of China. The Company
believes that its name and logos are important to its operations and intends to
continue to renew the trademark registrations thereof.
INSURANCE
The Company maintains insurance covering comprehensive general liability,
automotive liability, workers' compensation, property and casualty, crime and
directors and officers insurance. The policies provide for a variety of
coverages, are subject to various limits, and include substantial deductibles or
self-insured retention. There is no assurance that claims in excess of, or not
included within, the Company's coverage will not be asserted, the effect of
which could have an adverse effect on the Company.
35
<PAGE>
The Company has instituted a number of initiatives to improve risk
management and reduce insurance costs. In 1994, the Company switched to a
self-insured program for workers' compensation, automotive and general
liabilities up to certain retention levels. In 1995, the Company re-bid its
entire insurance program, thereby reducing premium costs and increasing
coverages. Also in 1995, the Company began a program of actively seeking to
close all old open liability and workers' compensation claims and aggressively
seeking to close new claims on a timely basis. All student accident and auto
claims are now managed and administered in-house by the Company's General
Counsel, which has reduced the frequency and severity of liability claims. As a
result of all of the aforementioned actions, insurance costs dropped from $7.5
million in fiscal 1996 to $5.5 million in fiscal 1998, representing a 26%
reduction.
EMPLOYEES
As of August 29, 1998, the Company employed 12,700 persons, including eight
Area Vice Presidents, 80 Regional Directors, 736 Academy Directors and 120
employees at corporate headquarters. Approximately 93% of these employees are
paid on an hourly basis; the remainder are salaried. Because of high employee
turnover rates in the child care industry in general, the Company focuses on and
emphasizes recruiting and retaining qualified personnel. Management believes
that the turnover of the Company's employees is in line with other companies in
the industry. The Company's employees are not represented by any organized labor
unions or employee organizations and management believes relations with
employees are good.
PROPERTIES
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 the Academy leases have 15-year
terms, some have 20-year terms, many have renewal options, and substantially all
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.
Because of the different licensing requirements and design features,
Academies vary in size and Licensed Capacity. Academies typically contain 5,400,
6,700 or 7,800 square feet and Licensed Capacity for the same size building
varies from state to state because of different licensing requirements.
The following table summarizes Academy openings and closings for the
indicated periods.
<TABLE>
<CAPTION>
FISCAL YEAR 1994 1995 1996 1997 1998
- ----------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Academies:
Open at Beginning of Period.................................................... 788 787 786 751 745
Opened During Period........................................................... 12 5 11 3 1
Closed During Period........................................................... (13) (6) (46) (9) (10)
---- ---- ---- ---- ----
Open at End of Period.......................................................... 787 786 751 745 736
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
36
<PAGE>
The residential and employer-based Academies and Montessori schools
operated by the Company as of August 29, 1998 were located as follows:
<TABLE>
<CAPTION>
EMPLOYER-
RESIDENTIAL BASED MONTESSORI
STATE ACADEMICS ACADEMICS SCHOOLS TOTAL
- ----- ----------- --------- ---------- -----
<S> <C> <C> <C> <C>
Alabama............................................................... 14 4 -- 18
Arizona............................................................... 23 1 -- 24
Arkansas.............................................................. 8 -- -- 8
California............................................................ 55 3 -- 58
Colorado.............................................................. 24 1 -- 25
Delaware.............................................................. 1 -- -- 1
Florida............................................................... 92 2 3 97
Georgia............................................................... 47 -- 6 53
Illinois.............................................................. 16 -- -- 16
Indiana............................................................... 15 2 -- 17
Iowa.................................................................. 9 -- -- 9
Kansas................................................................ 21 1 -- 22
Kentucky.............................................................. 4 -- -- 4
Louisiana............................................................. -- 1 -- 1
Maryland.............................................................. 12 3 -- 15
Minnesota............................................................. -- 1 -- 1
Mississippi........................................................... 3 -- -- 3
Missouri.............................................................. 29 1 -- 30
Nebraska.............................................................. 10 -- -- 10
Nevada................................................................ 9 -- -- 9
New Jersey............................................................ 2 -- -- 2
New Mexico............................................................ 4 -- -- 4
North Carolina........................................................ 30 -- -- 30
Ohio.................................................................. 16 1 -- 17
Oklahoma.............................................................. 22 2 -- 24
Oregon................................................................ 3 -- -- 3
Pennsylvania.......................................................... 3 3 -- 6
South Carolina........................................................ 24 1 -- 25
Tennessee............................................................. 25 1 -- 26
Texas................................................................. 106 -- 11 117
Utah.................................................................. 4 -- -- 4
Virginia.............................................................. 36 -- -- 36
Washington............................................................ 15 1 -- 16
Wisconsin............................................................. 2 -- -- 2
Wyoming............................................................... 1 -- -- 1
District of Columbia.................................................. -- 2 -- 2
--- --- -- ---
685 31 20 736
--- --- -- ---
--- --- -- ---
</TABLE>
LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and other
claims arising in the ordinary course of its business. The Company believes that
it is not presently a party to any litigation the outcome of which would have a
material adverse effect on its financial condition or results of operations. The
Company maintains insurance coverage against claims in an amount which it
believes to be adequate.
37
<PAGE>
MANAGEMENT
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.................................. 63 Director
Stephen P. Murray............................... 36 Director
Brian J. Richmand............................... 45 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 has been Chairman of the Board since May 1998, 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.
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.
38
<PAGE>
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 has been a Director of the Company since May 1998.
Mr. Murray has been a General Partner of CCP since June 1994. From November 1988
to June 1994, Mr. Murray was a Principal at CCP. Prior thereto, he was a Vice
President with the Middle-Market Lending Division of Manufacturers Hanover.
Mr. Murray has a B.A. from Boston College and an M.B.A. from Columbia Business
School. He is a director of The Vitamin Shoppe, Home Products, Inc., Futurecall
Telemarketing, American Floral Services, The Cornerstone Group, Medical Arts
Press and Regent Lighting Corporation.
Brian J. Richmand has been a Director of the Company since May 1998.
Mr. Richmand has been a General Partner of CCP since August 1993. From 1986 to
August 1993, Mr. Richmand was a partner with the law firm of Kirkland & Ellis.
He has a B.S. from The Wharton School of the University of Pennsylvania and a
J.D. from Stanford Law School. Mr. Richmand is a director of Transtar Metals,
LLC, Riverwood International Corp., Qualitech Steel Corporation and Western Pork
Production Corporation.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of the Company has an Audit Committee consisting of
James R. Kahl, Robert E. King and Stephen P. Murray, and a Compensation
Committee consisting of Stephen P. Murray, Brian J. Richmand and ex-officio
member James R. Kahl. The Audit Committee reviews the scope and results of
audits and internal accounting controls and all other tasks performed by the
independent public accountants of the Company. The Compensation Committee
determines compensation for executive officers of the Company and will
administer the New Option Plan.
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.
39
<PAGE>
The following table provides certain summary information concerning
compensation earned for fiscal 1998, fiscal 1997 and fiscal 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>
LONG-TERM
COMPENSATION
------------
NUMBER OF
SECURITIES
ANNUAL COMPENSATION UNDERLYING
--------------------- OPTION/SAR ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS COMPENSATION
- ---------------------------------------- ---- -------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
James R. Kahl
Chief Executive Officer and
President............................. 1998 $297,500 $ 143,000 21,780 $ 400,000(1)
1997 280,000 125,000 10,000 1,152,556(2)
1996 265,200 142,500
Rebecca L. Perry
Executive Vice President,
Operations............................ 1998 172,500 33,000 5,100 150,000(1)
1997 130,000 60,000 1,000
1996 110,000 40,900 5,000
David J. Anglewicz
Senior Vice President,
Facility Services..................... 1998 150,000 26,000 1,575 75,000(1)
1997 150,000 15,000
1996 142,000 35,000
Phillip M. Kane
Senior Vice President, Finance and
Chief Financial Officer............... 1998 170,000 31,000 5,100 150,000(1)
1997 160,000 28,000 1,000
1996 150,000 41,400 5,000
Mary Jean Wolf
Senior Vice President, Organization
Services.............................. 1998 150,000 28,000 3,750 10,000(1)
1997 8,654(3)
</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.
40
<PAGE>
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 10,295/0(2) $ 433,300/0
Chief Executive Officer and 1,127/16,898(3) 0/0
President........................ N/A(1) $3,137,000 0/3,755(4) 0/0
Rebecca L. Perry 0/0(2) 0/0
Executive Vice President, 225/3,375(3) 0/0
Operations....................... N/A(1) 678,000 0/1,500 (4) 0/0
David J. Anglewicz
Senior Vice President, 70/1,055(3) 0/0
Facility Services................ 0/450(4) 0/0
Phillip M. Kane 4,959/0(2) 208,300/0
Senior Vice President, Finance 225/3,375(3) 0/0
and Chief Financial Officer...... N/A(1) 868,100 0/1,500(4) 0/0
Mary Jean Wolf
Senior Vice President, 141/2,109(3) 0/0
Organizational 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 $133.83 per share. These options are
exercisable only in the event of a change in control or a registered public
offering of common stock, which provides certain minimum returns (as
defined) over the transaction price.
(5) The equity of the Company is not traded and there is no market for pricing
the value of the options. "In the Money" calculations are based on the
enterprise value from the May 11, 1998 Recapitalization adjusted for the new
debt, preferred stock, common shares issued and retired, warrants and
options and an adjustment for a control premium related to the
Recapitalization.
41
<PAGE>
OPTIONS/SAR GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE(3) AT ASSUMED
ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS/SARS EXERCISE OR OPTION TERM
OPTIONS/SARS GRANTED TO BASE PRICE EXPIRATION --------------------
NAME GRANTED EMPLOYEES ($/SHARE) DATE 5%($) 10%($)
- ---- ------------- ------------- ------------ ------------ ------- ---------
<S> <C> <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.
NEW OPTION PLAN
After consummation of the Transactions, the Parent adopted the New Option
Plan pursuant to which options with respect to 8.5% of the Parent's common
stock, on a fully diluted basis, are available for grant. The new options will
be allocated in amounts to be agreed upon between the Investor and the Parent.
Seventy-five percent of the new options will vest over four years and
twenty-five percent of the new options will vest if certain transactions are
consummated which generate certain minimum returns to the Investor. The exercise
price for the time vesting options will be 50% of the per share price paid by
the Investor for its common stock of the Parent
42
<PAGE>
and the exercise price for the remaining options will be 100% of the per share
price paid by the Investor for its common stock of the Parent. The new options
will expire 10 years from the date of grant.
CHANGE IN CONTROL SEVERANCE ARRANGEMENTS
Pursuant to the severance policy of the Company, in the event of a change
in control of the Company, certain employees will be entitled to severance
payments if they are terminated or constructively discharged within 12 months of
the change of control. The amounts of such severance payments are as
follows:(a) executive or senior level officers reporting to the Chief Executive
Officer and President: 12 months' salary,(b) other officers: 6 months' salary,
(c) other directors(not including board members) and managers: 3 months'
salary,(d) Regional Directors: 2 months' salary and (e) Academy Directors: 6
weeks' salary.
TRANSACTION BONUSES
In connection with the Recapitalization, the former controlling
stockholders of the Company paid transaction bonuses to certain employees of the
Company upon the close of the Transactions. The former controlling stockholders
paid transaction bonuses of $400,000, $150,000, $75,000, $150,000 and $10,000 to
James R. Kahl, Rebecca L. Perry, David J. Anglewicz, Phillip M. Kane and Mary
Jean Wolf, respectively.
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OWNERSHIP OF SECURITIES
All of the common stock of the Company is held by Parent. The Investor owns
approximately 90.3% of the outstanding common stock of Parent (approximately
80.5% on a fully diluted basis, including the warrants described below) and
Vestar and management of the Company (including James R. Kahl) own approximately
9.7% of the outstanding common stock of Parent (approximately 19.5% on a fully
diluted basis). In connection with the purchase of preferred stock of Parent,
the Investor received warrants to purchase up to 6.0% of Parent's outstanding
common stock on a fully diluted basis.
In connection with the Recapitalization, the Investor purchased redeemable
preferred stock of Parent (the "Preferred Stock") and warrants to purchase up to
6.0% of the Parent's common stock on a fully diluted basis for aggregate cash
consideration of $30.0 million, the proceeds of which were contributed by Parent
to the Company as common equity. The Preferred Stock is not redeemable at the
option of the holder prior to the maturity of the Notes and dividends are not
payable in cash prior to the seventh anniversary of the consummation of the
Transactions. Thereafter, dividends may be paid in cash by Parent subject to any
restrictions contained in the Company's indebtedness, including the Credit
Agreement and the Indenture.
Following the consummation of the Recapitalization, Parent and its
stockholders, including all holders of options and warrants, entered into a
stockholders' agreement (the "Stockholders' Agreement"). The Stockholders'
Agreement contains restrictions on the transferability of Parent's common stock,
subject to certain exceptions. The Stockholders' Agreement also contains
provisions regarding the designation of members of the Board of Directors and
other voting arrangements. The Stockholders' Agreement will terminate at such
time as the Parent consummates a qualified public offering.
The Stockholders' Agreement restricts transfers of common stock of Parent
by, among other things, (a) granting rights to all stockholders to tag along on
certain sales of stock by the Investor and management, (b) granting rights to
the Investor to force the other stockholders to sell their common stock on the
same terms as sales of common stock by the Investor and (c) granting preemptive
rights to all holders of 2% or more of the Parent's common stock in respect of
sales by other stockholders.
The Stockholders' Agreement provides that Parent's Board of Directors will
be comprised initially of five directors. The Investor is entitled to designate
four of the directors and James R. Kahl serves as the fifth director (so long as
he is employed by the Company). One of such directors, Robert E. King, is
entitled to three votes as a director.
The Stockholders' Agreement also contains covenants in respect of the
delivery of certain financial information to Parent's stockholders and granting
access to Parent's records to holders of more than 2% of the Parent's common
stock.
A majority of the economic interests of the Investor is owned by CCP and a
majority of the voting interests of the Investor is owned by an entity
controlled by Robert E. King, a Director of the Company. However, pursuant to
the Operating Agreement, the Investor has granted to CCP the right to elect a
majority of the directors of the Investor if certain triggering events occur and
the Investor agreed not to take certain actions in respect of the common stock
of Parent held by the Investor without the consent of CCP.
In connection with the Recapitalization, Parent and its stockholders
following consummation of the Recapitalization entered into a registration
rights agreement (the "Registration Rights Agreement"). The Registration Rights
Agreement grants stockholders demand and incidental registration rights with
respect to shares of capital stock held by them and contains customary terms and
provisions with respect to such registration rights.
All of the common stock of the Company is held by Parent. All the
outstanding shares of preferred stock is owned by the Investor, and
approximately 80.5% of the fully diluted common stock of Parent is owned by the
Investor. A majority of the voting interests of the Investor is owned by an
entity controlled by Robert E. King, a Director of the Company, and a majority
of the economic interests of the Investor is owned by CB Capital Investors, L.P.
("CBCI"), an affiliate of CCP. As a licensed small business investment company
(an "SBIC"), CBCI is subject to certain restrictions imposed upon SBICs by the
regulations established and enforced by the United States Small Business
Administration. Among these restrictions are certain limitations on the extent
to
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which an SBIC may exercise control over companies in which it invests. As a
result of these restrictions, unless certain events described in the Operating
Agreement occur, CBCI may not own or control a majority of the outstanding
voting stock of the Investor or designate a majority of the members of the Board
of Directors. Accordingly, while CBCI owns a majority of the economic interests
of the Investor, CBCI owns less than a majority of the Investor's voting stock.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Chase Securities Inc. ("CSI"), one of the Initial Purchasers, is an
affiliate of Chase (as defined), an agent and a lender to the Company under the
Credit Agreement. The Investor, an affiliate of CCP and CSI, owns approximately
90.3% of the outstanding common stock of the Parent (approximately 80.5% on a
fully diluted basis). The Investor owns $30 million of redeemable preferred
stock of Parent and warrants to purchase 6.0% of the common stock of Parent on a
fully diluted basis. Certain Partners of CCP are members of the Board of
Directors of the Company. See "Management." In addition, CSI, Chase and their
affiliates perform various investment banking and commercial banking services on
a regular basis for affiliates of the Company.
In connection with the Recapitalization, CBCI entered into an
indemnification agreement with Robert E. King, a director of the Company,
pursuant to which CBCI has agreed to indemnify Mr. King for any losses, damages
or liabilities and all expenses incurred or sustained by Mr. King in his
capacity as a manager, officer or director of the Investor or any of its
subsidiaries, including Parent and the Company.
NationsBanc Montgomery Securities LLC, one of the Initial Purchasers, is an
affiliate of NationsBank (as defined), an agent and a lender to the Company
under the Credit Agreement.
In connection with the Recapitalization, the Company paid transaction
bonuses to certain employees of the Company. See "Management--Transaction
Bonuses."
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DESCRIPTION OF THE CREDIT AGREEMENT
The following is a summary of the material terms of the Credit Agreement
among the Company, Parent, certain financial institutions party thereto,
NationsBank, N.A. ("NationsBank"), as administrative agent, and The Chase
Manhattan Bank ("Chase"), as syndication agent. The following summary is
qualified in its entirety by reference to the Credit Agreement, which is filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part.
THE FACILITIES
Structure. The Credit Agreement provides for (a) the Term Loan Facility in
an aggregate principal amount of $40 million and (b) the Revolving Credit
Facility providing for revolving loans to the Company, swingline loans to the
Company and the issuance of letters of credit for the account of the Company in
an aggregate principal amount (including swingline loans and the aggregate
stated amount of letters of credit) of $25 million.
Availability. Availability under the Credit Agreement is subject to various
conditions precedent typical of bank loans, and the commitment of Chase and
NationsBank to provide financing under the Credit Agreement is also subject to,
among other things, the absence of any event, condition or circumstance that has
had or is reasonably likely to have a material adverse effect on the business,
operations, properties, assets, liabilities or financial condition of Parent,
the Company and its subsidiaries, taken as a whole. The full amount of the Term
Loan Facility was drawn at the closing of the Transactions and amounts repaid or
prepaid will not be able to be reborrowed. Amounts under the Revolving Credit
Facility will be available on a revolving basis.
INTEREST
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 Chase's published prime rate,
a certificate of deposit rate plus 1% and the Federal Funds effective rate plus
1/2 of 1% ("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. Amounts outstanding
under the Credit Agreement not paid when due bear interest at a default rate
equal to 2.00% above the rates otherwise applicable to the loans under the
Credit Agreement.
FEES
The Company has agreed to pay certain fees with respect to the Credit
Agreement, including (i) fees on the unused commitments of the lenders equal to
1/2 of 1% on the undrawn portion of the commitments in respect of the Credit
Agreement (subject to a reduction based on the Company's financial performance);
(ii) letter of credit fees on the aggregate face amount of outstanding letters
of credit equal to the then applicable borrowing margin for LIBOR loans under
the Revolving Credit Facility and a 1/4 of 1% per annum issuing bank fee for the
letter of credit issuing bank; (iii) annual administration fees; and
(iv) agent, arrangement and other similar fees.
SECURITY; GUARANTEES
The obligations of the Company under the Credit Agreement are irrevocably
guaranteed, jointly and severally, by Parent and by each existing and
subsequently acquired or organized subsidiary of the Company. In addition, the
Credit Agreement and the guarantees thereunder are secured by substantially all
of the assets of the Parent, the Company and its domestic subsidiaries
(collectively, the "Collateral"), including but not limited to (i) a first
priority pledge of all the capital stock of the Company and of each existing and
subsequently acquired or organized subsidiary of the Company and (ii) a
perfected first priority security interest in, and mortgage on, substantially
all tangible and intangible assets of the Company and the guarantors (including,
but not limited to, accounts receivable, documents, inventory, equipment,
investment property, general intangibles, real property, cash and cash accounts
and proceeds of the foregoing, but excluding leasehold interests), in each case
subject to certain exceptions.
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COMMITMENT REDUCTIONS AND REPAYMENTS
The Credit Agreement will mature on May 11, 2005. The Term Loan Facility
amortizes in an amount equal to (a) $1.0 million in each of the first five years
of the Term Loan Facility, (b) $10.0 million in the sixth year thereof and
(c) $25.0 million in the seventh year thereof. In addition, the Term Loan
Facility is subject to mandatory prepayment and reductions in an amount equal to
(a) 100% of the net cash proceeds of certain equity issuances by Parent, the
Company or any of its subsidiaries, (b) 100% of the net cash proceeds of certain
debt issuances of Parent, the Company or any of its subsidiaries, (c) 75% of the
Company's excess cash flow (subject to a reduction to 50% based on the Company's
financial performance) and (d) 100% of the net cash proceeds of certain asset
sales or other dispositions of property by Parent, the Company or any of its
subsidiaries, in each case subject to certain exceptions.
AFFIRMATIVE, NEGATIVE AND FINANCIAL COVENANTS
The Credit Agreement contains a number of covenants that, among other
things, restrict the ability of Parent, the Company and its subsidiaries to
dispose of assets, incur additional indebtedness, incur or guarantee
obligations, prepay other indebtedness or amend other debt instruments, pay
dividends, create liens on assets, make investments, loans or advances, make
acquisitions, engage in mergers or consolidations, change the business conducted
by the Company and its subsidiaries, make capital expenditures, or engage in
certain transactions with affiliates and otherwise restrict certain corporate
activities. In addition, the Credit Agreement requires Parent to comply with
specified financial ratios and tests, including a maximum leverage ratio, a
fixed charge coverage ratio and a minimum EBITDA (to be defined in the Credit
Agreement) test. The Credit Agreement also contains provisions that will
prohibit any modifications of the Indenture in any manner adverse to the lenders
under the Credit Agreement and that limit the Company's ability to refinance or
otherwise prepay the Notes without the consent of such lenders.
EVENTS OF DEFAULT
The Credit Agreement contains customary events of default, including
non-payment of principal, interest or fees, violation of covenants, inaccuracy
of representations or warranties in any material respect, cross default to
certain other indebtedness, bankruptcy, ERISA events, material judgments and
liabilities, actual or asserted invalidity of any material security interest and
change of control.
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DESCRIPTION OF NOTES
GENERAL
The Old Notes and New Notes were issued under an Indenture (the
"Indenture") among the Company, Capital Corp., the Guarantors and PNC Bank,
National Association, as trustee (the "Trustee"). The terms of the New Notes are
identical in all respects to the Old Notes, except that the New Notes have been
registered under the Securities Act and, therefore, do not bear legends
restricting their transfer and do not contain provisions providing for the
payment of liquidated damages under certain circumstances relating to the
Registration Rights Agreement, which provisions terminated upon the consummation
of the Exchange Offer. The following summary of the material provisions of the
Indenture does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"), and to all of the provisions of the Indenture, including
the definitions of certain terms therein and those terms made a part of the
Indenture by reference to the Trust Indenture Act, as in effect on the date of
the Indenture. The definitions of certain capitalized terms used in the
following summary are set forth below under "Certain Definitions."
Principal of, premium, if any, and interest on the Notes is payable, and
the Notes may be exchanged or transferred, at the office or agency of the
Issuers in the Borough of Manhattan, The City of New York, except that, at the
option of the Issuers, payment of interest may be made by check mailed to the
registered holders of the Notes at their registered addresses.
The Notes are issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Issuers may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
The Indenture provides for the issuance of up to $100 million aggregate
principal amount of additional Notes having terms and conditions identical to
those of the Notes offered hereby (the "Additional Notes"), subject to
compliance with the covenants contained in the Indenture. Any Additional Notes
will be part of the same issue as the Notes offered hereby and will vote on all
matters with the Notes offered hereby. Unless the context otherwise requires,
for purposes of this "Description of Notes," references to the Notes include
Additional Notes.
TERMS OF THE NOTES
The Notes are unsecured senior obligations of the Issuers, limited to
$145 million aggregate principal amount, and mature on May 15, 2008. Each Note
bears interest at a rate of 10% per annum from May 11, 1998, or from the most
recent date to which interest has been paid or provided for, payable
semiannually to Holders of record at the close of business on the May 1 or
November 1 immediately preceding the interest payment date on May 15 and
November 15 of each year, commencing November 15, 1998. The Company will pay
interest on overdue principal at 1% per annum in excess of such rate, and it
will pay interest on overdue installments of interest at such higher rate to the
extent lawful.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Notes are not
redeemable at the option of the Company prior to May 15, 2003. From and after
May 15, 2003, the Notes will be redeemable at the option of the Company, in
whole or in part, on not less than 30 nor more than 60 days' prior notice, at
the following redemption prices (expressed as percentages of principal amount),
plus accrued and unpaid interest, if any, to the redemption date (subject to the
right of holders of record on the relevant record date to receive interest due
on the relevant interest payment date), if redeemed during the 12-month period
commencing on May 15 of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---- ----------------
<S> <C>
2003.................................................... 105.000%
2004.................................................... 103.333%
2005.................................................... 101.667%
2006 and thereafter..................................... 100.000%
</TABLE>
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In addition, at any time and from time to time prior to May 15, 2001, the
Issuers may redeem up to a maximum of 35% of the original aggregate principal
amount of the Notes (calculated giving effect to any issuance of Additional
Notes) with the proceeds of one or more Public Equity Offerings by the Company
or Parent following which there is a Public Market, at a redemption price equal
to 110% of the principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the redemption date (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date); provided, however, that after giving effect to any such
redemption, at least 65% of the original aggregate principal amount of the Notes
(calculated giving effect to any issuance of Additional Notes) remains
outstanding. Any such redemption shall be made within 60 days of such Public
Equity Offering upon not less than 30 nor more than 60 days' notice mailed to
each holder of Notes being redeemed and otherwise in accordance with the
procedures set forth in the Indenture.
SELECTION
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
will be redeemed in part. If any Note is to be redeemed in part only, the notice
of redemption relating to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
will cease to accrue on Notes or portions thereof called for redemption so long
as the Issuers have deposited with the Paying Agent funds sufficient to pay the
principal of, plus accrued and unpaid interest (if any) on, the Notes to be
redeemed.
RANKING
The indebtedness evidenced by the Notes is unsecured Senior Indebtedness of
the Issuers, ranks pari passu in right of payment with all existing and future
Senior Indebtedness of the Issuers and is senior in right of payment to all
existing and future Subordinated Obligations of the Issuers. The Notes are
effectively subordinated to any Secured Indebtedness of the Issuers and their
respective Subsidiaries to the extent of the value of the assets securing such
Indebtedness.
As of August 29, 1998, (i) the outstanding Senior Indebtedness of the
Company was $185.7 million, of which $40.7 million was Secured Indebtedness
(exclusive of unused commitments under the Credit Agreement), and (ii) the
Guarantor had no Senior Indebtedness outstanding (exclusive of guarantees of
Indebtedness under the Credit Agreement (all of which would have been Secured
Indebtedness) and the Guarantee). Although the Indenture will contain
limitations on the amount of additional Indebtedness which the Company may
Incur, under certain circumstances the amount of such Indebtedness could be
substantial and, in any case, such Indebtedness may be Senior Indebtedness and
may be Secured Indebtedness. See "--Certain Covenants--Limitation on
Indebtedness."
GUARANTEES
The Company's existing Subsidiary and certain future Subsidiaries of the
Company (as described below), as primary obligors and not merely as sureties,
jointly and severally irrevocably and unconditionally guarantee on an unsecured
senior basis the performance and full and punctual payment when due, whether at
Stated Maturity, by acceleration or otherwise, of all obligations of the Issuers
under the Indenture and the Notes, whether for payment of principal of, or
interest on, and liquidated damages in respect of, the Notes, expenses,
indemnification or otherwise (all such obligations guaranteed by such Guarantors
being herein called the "Guaranteed Obligations") by executing a Guarantee dated
on and as of the Closing Date (or the date a Subsidiary becomes a Restricted
Subsidiary). Such Guarantors agree to pay, in addition to the amount stated
above, any and all costs and expenses (including reasonable counsel fees and
expenses) incurred by the Trustee or the Holders in enforcing any rights under
any Guarantee. Each Guarantee will be limited in amount to an amount not to
exceed the maximum amount that can be guaranteed by the applicable Guarantor
without rendering the Guarantee, as it relates to such Guarantor, voidable under
applicable laws relating to fraudulent conveyance or fraudulent transfer or
similar laws affecting the rights of creditors generally. After the Closing
Date, the Company will cause each
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Restricted Subsidiary that Incurs Indebtedness to execute and deliver to the
Trustee a Guarantee pursuant to which such Restricted Subsidiary will guarantee
payment of the Notes. See "--Certain Covenants--Future Guarantors."
Each Guarantee is a continuing guarantee and shall (a) remain in full force
and effect until payment in full of all the Guaranteed Obligations, (b) be
binding upon each Guarantor and its successors and (c) inure to the benefit of,
and be enforceable by, the Trustee, the Holders and their successors,
transferees and assigns.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder will have the right to require the Issuers to repurchase
all or any part of such Holder's Notes at a purchase price in cash equal to 101%
of the principal amount thereof plus accrued and unpaid interest, if any, to the
date of repurchase (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date):
(i) prior to the earlier to occur of (A) the first public offering of
common stock of Parent or (B) the first public offering of common stock of
the Company, the Permitted Holders cease to be the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, of a majority in the aggregate of the total voting power of the
Voting Stock of the Company, whether as a result of issuance of securities
of Parent or the Company, any merger, consolidation, liquidation or
dissolution of Parent or the Company, any direct or indirect transfer of
securities by any Permitted Holder or otherwise (for purposes of this
clause (i) and clause (ii) below, the Permitted Holders shall be deemed to
beneficially own any Voting Stock of an entity (the "specified entity")
held by any other entity (the "parent entity") so long as the Permitted
Holders beneficially own (as so defined), directly or indirectly, in the
aggregate a majority of the voting power of the Voting Stock of the parent
entity);
(ii) (A) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act), other than one or more Permitted Holders, is or
becomes the beneficial owner (as defined in clause (i) above, except that
for purposes of this clause (ii) such person shall be deemed to have
"beneficial ownership" of all shares that any such person has the right to
acquire, whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of more than 35% of the total
voting power of the Voting Stock of the Company and (B) the Permitted
Holders "beneficially own" (as defined in clause (i) above), directly or
indirectly, in the aggregate a lesser percentage of the total voting power
of the Voting Stock of the Company than such other person and do not have
the right or ability by voting power, contract or otherwise to elect or
designate for election a majority of the Board of Directors (for the
purposes of this clause (ii), such other person shall be deemed to
beneficially own any Voting Stock of a specified entity held by a parent
entity, if such other person is the beneficial owner (as defined in this
clause (ii)), directly or indirectly, of more than 35% of the voting power
of the Voting Stock of such parent entity and the Permitted Holders
"beneficially own" (as defined in clause (i) above), directly or
indirectly, in the aggregate a lesser percentage of the voting power of the
Voting Stock of such parent entity and do not have the right or ability by
voting power, contract or otherwise to elect or designate for election a
majority of the board of directors of such parent entity);
(iii) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors of the
Company or Parent, as the case may be (together with any new directors
whose election by such Board of Directors or whose nomination for election
by the shareholders of the Company or Parent, as applicable, was approved
(x) in accordance with the Stockholders Agreement, (y) by the Permitted
Holders or (z) by a vote of 66 2/3% of the directors of the Company or
Parent, as applicable, then still in office who were either directors at
the beginning of such period or whose election or nomination for election
was previously so approved), cease for any reason to constitute a majority
of the Board of Directors of the Company or Parent, as applicable, then in
office;
(iv) the adoption of a plan relating to the liquidation or
dissolution of the Company or Parent; or
(v) the merger or consolidation of the Company or Parent with or into
another Person or the merger of another Person with or into the Company or
Parent, or the sale of all or substantially all the assets of the Company
or Parent to another Person (other than a Person that is controlled by the
Permitted Holders), and,
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in the case of any such merger or consolidation, the securities of the
Company or Parent, as the case may be, that are outstanding immediately
prior to such transaction and which represent 100% of the aggregate voting
power of the Voting Stock of the Company or Parent, as applicable, are
changed into or exchanged for cash, securities or property, unless pursuant
to such transaction such securities are changed into or exchanged for, in
addition to any other consideration, securities of the surviving Person or
transferee that represent, immediately after such transaction, at least a
majority of the aggregate voting power of the Voting Stock of the surviving
Person or transferee.
Within 30 days following any Change of Control, the Issuers shall mail a
notice to each Holder with a copy to the Trustee (the "Change of Control Offer")
stating: (1) that a Change of Control has occurred and that such Holder has the
right to require the Issuers to purchase such Holder's Notes at a purchase price
in cash equal to 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of repurchase (subject to the right of Holders of
record on the relevant record date to receive interest on the relevant interest
payment date); (2) the circumstances and relevant facts and financial
information regarding such Change of Control; (3) the repurchase date (which
shall be no earlier than 30 days nor later than 60 days from the date such
notice is mailed); and (4) the instructions determined by the Issuers,
consistent with this covenant, that a Holder must follow in order to have its
Notes purchased.
The Issuers will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
The Issuers will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of this covenant, the Issuers will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under this covenant by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Issuers and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company or Parent would decide to do so in the future. Subject to the
limitations discussed below, the Issuers could, in the future, enter into
certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect the Company's or Parent's capital structure or
credit ratings. Restrictions on the ability of the Issuers to incur additional
Indebtedness are contained in the covenant described under "--Certain
Covenants--Limitation on Indebtedness". Such restrictions can only be waived
with the consent of the Holders of a majority in principal amount of the Notes
then outstanding. Except for the limitations contained in such covenants,
however, the Indenture will not contain any covenants or provisions that may
afford holders of the Notes protection in the event of a highly leveraged
transaction.
The occurrence of certain of the events which would constitute a Change of
Control would constitute a default under the Credit Agreement. Future Senior
Indebtedness of the Company may contain prohibitions of certain events which
would constitute a Change of Control or require such Senior Indebtedness to be
repurchased upon a Change of Control. Moreover, the exercise by the Holders of
their right to require the Issuers to repurchase the Notes could cause a default
under such Senior Indebtedness, even if the Change of Control itself does not,
due to the financial effect of such repurchase on the Issuers. Finally, the
Issuers' ability to pay cash to the Holders upon a repurchase may be limited by
the Issuers' then existing financial resources. There can be no assurance that
sufficient funds will be available when necessary to make any required
repurchases. The provisions under the Indenture relative to the Issuers'
obligation to make an offer to repurchase the Notes as a result of a Change of
Control may be waived or modified with the written consent of the holders of a
majority in principal amount of the Notes.
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CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness. (a) The Indenture provides that the Company
will not, and will not permit any Restricted Subsidiary to, Incur, directly or
indirectly, any Indebtedness; provided, however, that the Company or any
Restricted Subsidiary may Incur Indebtedness if on the date of such Incurrence
and after giving effect thereto the Consolidated Coverage Ratio would be greater
than 2.00:1.00.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness:
(i) Bank Indebtedness Incurred pursuant to the Credit Agreement in
an aggregate principal amount not to exceed $65.0 million less the
aggregate amount of all prepayments of principal applied to permanently
reduce any such Indebtedness;
(ii) Indebtedness of the Company owed to, and held by, any Wholly
Owned Subsidiary or Indebtedness of a Restricted Subsidiary owed to, and
held by, the Company or any Wholly Owned Subsidiary; provided, however,
that (i) any subsequent issuance or transfer of any Capital Stock or any
other event that results in any such Wholly Owned Subsidiary ceasing to be
a Wholly Owned Subsidiary or any subsequent transfer of any such
Indebtedness (except to the Company or a Wholly Owned Subsidiary) shall be
deemed, in each case, to constitute the Incurrence of such Indebtedness by
the issuer thereof and (ii) if the Company is the obligor on such
Indebtedness, such Indebtedness is expressly subordinated to the prior
payment in full in cash of all obligations with respect to the Notes;
(iii) Indebtedness (A) represented by the Notes (not including any
Additional Notes) and the Guarantees, (B) outstanding on the Closing Date
(other than the Indebtedness described in clauses (i) and (ii) above),
(C) consisting of Refinancing Indebtedness Incurred in respect of any
Indebtedness described in this clause (iii) or clause (v) (including
Indebtedness Refinancing, Refinancing Indebtedness) or the foregoing
paragraph (a) or (D) consisting of guarantees of any Indebtedness permitted
under clauses (i) and (ii) of this paragraph (b);
(iv) Indebtedness (A) in respect of performance bonds, bankers'
acceptances, letters of credit and surety or appeal bonds provided by the
Company and the Restricted Subsidiaries in the ordinary course of their
business and (B) under Interest Rate Agreements entered into for bona fide
hedging purposes of the Company in the ordinary course of business;
provided, however, that such Interest Rate Agreements do not increase the
Indebtedness of the Company outstanding at any time other than as a result
of fluctuations in interest rates or by reason of fees, indemnities and
compensation payable thereunder;
(v) Purchase Money Indebtedness (including Capitalized Lease
Obligations) in an aggregate principal amount not in excess of $10.0
million at any time outstanding;
(vi) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within two Business Days of its incurrence;
(vii) Indebtedness arising from agreements of the Company or a
Restricted Subsidiary of the Company providing for indemnification,
adjustment of purchase price or similar obligations, in each case, incurred
or assumed in connection with the disposition of any business, assets or a
Subsidiary, other than guarantees of Indebtedness incurred by any Person
acquiring all or any portion of such business, assets or a Subsidiary for
the purpose of financing such acquisition; provided, however, that
(a) such Indebtedness is not reflected on the balance sheet of the Company
or any Restricted Subsidiary of the Company (provided that contingent
obligations referred to in a footnote to financial statements and not
otherwise reflected on the balance sheet will be deemed not to be reflected
on such balance sheet for purposes of this clause (a)) and (b) the maximum
assumable liability in respect of all such Indebtedness shall at no time
exceed the gross proceeds, including noncash proceeds (the fair market
value of such noncash proceeds being measured at the time it is received
and without giving effect to any subsequent changes in value), actually
received by the Company and its Restricted Subsidiaries in connection with
such disposition; or
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(viii) Indebtedness (other than Indebtedness permitted to be Incurred
pursuant to the foregoing paragraph (a) or any other clause of this
paragraph (b)) in an aggregate principal amount on the date of Incurrence
that, when added to all other Indebtedness Incurred pursuant to this clause
(viii) and then outstanding, shall not exceed $10.0 million.
(c) Notwithstanding the foregoing, the Company may not Incur any
Indebtedness pursuant to paragraph (b) above if the proceeds thereof are used,
directly or indirectly, to repay, prepay, redeem, defease, retire, refund or
refinance any Subordinated Obligations unless such Indebtedness will be
subordinated to the Notes to at least the same extent as such Subordinated
Obligations.
(d) Notwithstanding any other provision of this covenant, the maximum
amount of Indebtedness that the Company or any Restricted Subsidiary may Incur
pursuant to this covenant shall not be deemed to be exceeded solely as a result
of fluctuations in the exchange rates of currencies. For purposes of determining
the outstanding principal amount of any particular Indebtedness Incurred
pursuant to this covenant, (i) Indebtedness Incurred pursuant to the Credit
Agreement prior to or on the Closing Date shall be treated as Incurred pursuant
to clause (i) of paragraph (b) above, (ii) Indebtedness permitted by this
covenant need not be permitted solely by reference to one provision permitting
such Indebtedness but may be permitted in part by one such provision and in part
by one or more other provisions of this covenant permitting such Indebtedness
and (iii) in the event that Indebtedness meets the criteria of more than one of
the types of Indebtedness described in this covenant, the Company, in its sole
discretion, shall classify such Indebtedness and only be required to include the
amount of such Indebtedness in one of such clauses.
Limitation on Restricted Payments. (a) The Indenture provides that the
Company will not, and will not permit any Restricted Subsidiary, directly or
indirectly, to (i) declare or pay any dividend or make any distribution on or in
respect of its Capital Stock (including any payment in connection with any
merger or consolidation involving the Company) or similar payment to the direct
or indirect holders of its Capital Stock except dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock) and except
dividends or distributions payable to the Company or another Restricted
Subsidiary (and, if such Restricted Subsidiary has shareholders other than the
Company or other Restricted Subsidiaries, to its other shareholders on a pro
rata basis), (ii) purchase, redeem, retire or otherwise acquire for value any
Capital Stock of the Company or any Restricted Subsidiary held by Persons other
than the Company or another Restricted Subsidiary, (iii) purchase, repurchase,
redeem, defease or otherwise acquire or retire for value, prior to scheduled
maturity, scheduled repayment or scheduled sinking fund payment any Subordinated
Obligations (other than the purchase, repurchase or other acquisition of
Subordinated Obligations purchased in anticipation of satisfying a sinking fund
obligation, principal installment or final maturity, in each case due within one
year of the date of acquisition) or (iv) make any Investment (other than a
Permitted Investment) in any Person (any such dividend, distribution, purchase,
redemption, repurchase, defeasance, other acquisition, retirement or Investment
being herein referred to as a "Restricted Payment") if at the time the Company
or such Restricted Subsidiary makes such Restricted Payment: (1) a Default will
have occurred and be continuing (or would result therefrom); (2) the Company
could not Incur at least $1.00 of additional Indebtedness under paragraph
(a) of the covenant described under "--Limitation on Indebtedness"; or (3) the
aggregate amount of such Restricted Payment and all other Restricted Payments
(the amount so expended, if other than in cash, to be determined in good faith
by the Board of Directors, whose determination will be conclusive and evidenced
by a resolution of the Board of Directors) declared or made subsequent to the
Closing Date would exceed the sum of: (A) 50% of the Consolidated Net Income
accrued during the period (treated as one accounting period) from the beginning
of the fiscal quarter immediately following the fiscal quarter during which the
Closing Date occurs to the end of the most recent fiscal quarter ending at least
45 days prior to the date of such Restricted Payment (or, in case such
Consolidated Net Income will be a deficit, minus 100% of such deficit); (B) the
aggregate Net Cash Proceeds received by the Company from the issue or sale of
its Capital Stock (other than Disqualified Stock) subsequent to the Closing Date
(other than an issuance or sale to (x) a Subsidiary of the Company or (y) an
employee stock ownership plan or other trust established by the Company or any
of its Subsidiaries); (C) the amount by which Indebtedness of the Company or its
Restricted Subsidiaries is reduced on the Company's balance sheet upon the
conversion or exchange (other than by a Subsidiary of the Company) subsequent to
the Closing Date of any Indebtedness of the Company or its Restricted
Subsidiaries convertible or exchangeable for Capital Stock (other than
Disqualified Stock) of the Company (less the amount of any cash or the fair
market value of other property distributed by the
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Company or any Restricted Subsidiary upon such conversion or exchange);
(D) 100% of the aggregate amount of cash and marketable securities contributed
to the capital of the Company after the Closing Date; and (E) the amount equal
to the net reduction in Investments in Unrestricted Subsidiaries resulting from
(i) payments of dividends, repayments of the principal of loans or advances or
other transfers of assets to the Company or any Restricted Subsidiary from
Unrestricted Subsidiaries or (ii) the redesignation of Unrestricted Subsidiaries
as Restricted Subsidiaries (valued in each case as provided in the definition of
"Investment") not to exceed, in the case of any Unrestricted Subsidiary, the
amount of Investments previously made by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary, which amount was included in the
calculation of the amount of Restricted Payments.
(b) The provisions of the foregoing paragraph (a) will not prohibit:
(i) any Restricted Payment made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Capital Stock of the Company (other than
Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary
of the Company or an employee stock ownership plan or other trust established by
the Company or any of its Subsidiaries); provided, however, that (A) such
Restricted Payment will be excluded in the calculation of the amount of
Restricted Payments and (B) the Net Cash Proceeds from such sale applied in the
manner set forth in this clause (i) will be excluded from the calculation of
amounts under clause (3)(B) of paragraph (a) above; (ii) any purchase,
repurchase redemption, defeasance or other acquisition or retirement for value
of Subordinated Obligations of the Company made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Indebtedness of the Company
that is permitted to be Incurred pursuant to paragraph (b) of the covenant
described under "--Limitation on Indebtedness"; provided, however, that such
purchase, repurchase, redemption, defeasance or other acquisition or retirement
for value will be excluded in the calculation of the amount of Restricted
Payments; (iii) any purchase or redemption of Subordinated Obligations from Net
Available Cash to the extent permitted by the covenant described under
"--Limitation on Sales of Assets and Subsidiary Stock"; provided, however, that
such purchase or redemption will be excluded in the calculation of the amount of
Restricted Payments; (iv) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend would have
complied with this covenant; provided, however, that such dividend will be
included in the calculation of the amount of Restricted Payments; (v) the
repurchase or other acquisition of shares of, or options to purchase shares of,
common stock of the Company or any of its Subsidiaries from employees, former
employees, directors or former directors of the Company or any of its
Subsidiaries (or permitted transferees of such employees, former employees,
directors or former directors), pursuant to the terms of the agreements
(including employment agreements) or plans (or amendments thereto) approved by
the Board of Directors under which such individuals purchase or sell or are
granted the option to purchase or sell, shares of such common stock; provided,
however, that the aggregate amount of such repurchases shall not exceed $250,000
in any calendar year; provided further, however, that such repurchases and other
acquisitions shall be included in the calculation of the amount of Restricted
Payments; (vi) payment of dividends, other distributions or other amounts by the
Company for the purposes set forth in clauses (A) through (C) below; provided,
however, that such dividend, distribution or amount set forth in clause (C)
shall be included in the calculation of the amount of Restricted Payments for
the purposes of paragraph (a) above: (A) to Parent in amounts equal to the
amounts required for Parent to pay franchise taxes and other fees required to
maintain its corporate existence and provide for other operating costs of up to
$500,000 per fiscal year; (B) to Parent in amounts equal to amounts required for
Parent to pay Federal, state and local income taxes to the extent such income
taxes are attributable to the income of the Company and its Restricted
Subsidiaries (and, to the extent of amounts actually received from its
Unrestricted Subsidiaries, in amounts required to pay such taxes to the extent
attributable to the income of such Unrestricted Subsidiaries); (C) to Parent in
amounts equal to amounts expended by Parent to repurchase Capital Stock of
Parent owned by former employees of the Company or its Subsidiaries or their
assigns, estates and heirs; provided, however, that the aggregate amount paid,
loaned or advanced to Parent pursuant to this clause (C) shall not, in the
aggregate, exceed $1.5 million per fiscal year of the Company plus any unused
amounts from any immediately preceding fiscal year, up to a maximum aggregate
amount of $5.0 million during the term of the Indenture, plus any amounts
contributed by Parent to the Company as a result of resales of such repurchased
shares of Capital Stock; or (vii) the payment of dividends on the Company's
Common Stock, following the first public offering of the Company's Common Stock
after the Closing Date, of up to 6% per annum of the net proceeds received by
the Company in such public offering, other than public offerings with respect to
the
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Company's Common Stock registered on Form S-8, provided, however, that such
dividends will be included in the calculation of the amount of Restricted
Payments for purposes of paragraph (a) above.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Indenture provides that the Company will not, and will not
permit any Restricted Subsidiary to, create or otherwise cause or permit to
exist or become effective any consensual encumbrance or restriction on the
ability of any Restricted Subsidiary to (i) pay dividends or make any other
distributions on its Capital Stock or pay any Indebtedness or other obligations
owed to the Company, (ii) make any loans or advances to the Company or (iii)
transfer any of its property or assets to the Company, except: (1) any
encumbrance or restriction pursuant to applicable law or an agreement in effect
at or entered into on the Closing Date; (2) any encumbrance or restriction with
respect to a Restricted Subsidiary pursuant to an agreement relating to any
Indebtedness Incurred by such Restricted Subsidiary prior to the date on which
such Restricted Subsidiary was acquired by the Company (other than Indebtedness
Incurred as consideration in, in contemplation of, or to provide all or any
portion of the funds or credit support utilized to consummate the transaction or
series of related transactions pursuant to which such Restricted Subsidiary
became a Restricted Subsidiary or was otherwise acquired by the Company) and
outstanding on such date; (3) in the case of clause (iii), any encumbrance or
restriction (A) that restricts in a customary manner the subletting, assignment
or transfer of any property or asset that is subject to a lease, license or
similar contract, (B) that is or was created by virtue of any transfer of,
agreement to transfer, option or right with respect to, or Lien on, any property
or assets of the Company or any Restricted Subsidiary not otherwise prohibited
by the Indenture or (C) contained in security agreements securing Indebtedness
of a Restricted Subsidiary to the extent such encumbrance or restriction
restricts the transfer of the property subject to such security agreements; (4)
with respect to a Restricted Subsidiary, any restriction imposed pursuant to an
agreement entered into for the sale or disposition of all or substantially all
the Capital Stock or assets of such Restricted Subsidiary pending the closing of
such sale or disposition; (5) customary provisions in joint venture agreements
and other similar agreements entered into in the ordinary course of business; or
(6) an agreement governing Indebtedness incurred to Refinance the Indebtedness
issued, assumed or incurred pursuant to an agreement referred to in clauses (1)
through (5) above; provided, however, that the provisions relating to such
encumbrance or restriction contained in any agreement relating to such
Indebtedness are no less favorable to the Company in any material respect as
determined by the Board of Directors of the Company in their reasonable and good
faith judgment than the provisions relating to such encumbrance or restriction
contained in agreements relating to the Indebtedness being Refinanced.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Indenture
provides that the Company will not, and will not permit any Restricted
Subsidiary to, make any Asset Disposition unless (i) the Company or such
Restricted Subsidiary receives consideration (including by way of relief from,
or by any other Person assuming sole responsibility for, any liabilities,
contingent or otherwise) at the time of such Asset Disposition at least equal to
the fair market value of the shares and assets subject to such Asset
Disposition, (ii) at least 85% of the consideration thereof received by the
Company or such Restricted Subsidiary is in the form of cash, provided that with
respect to the sale or other disposition of an operational Academy, the Company
shall be deemed to be in compliance with this clause (ii) if the Consolidated
Coverage Ratio after giving effect to such sale or disposition and the
application of proceeds received therefrom is greater than or equal to the
Consolidated Coverage Ratio immediately prior to giving effect to such sale or
disposition and (iii) an amount equal to 100% of the Net Available Cash from
such Asset Disposition is applied by the Company (or such Restricted Subsidiary,
as the case may be) (A) first, to the extent the Company elects (or is required
by the terms of any Indebtedness) to prepay, repay, redeem or purchase
Indebtedness of the Company outstanding under the Credit Agreement within 18
months after the later of the date of such Asset Disposition or the receipt of
such Net Available Cash; (B) second, to the extent of the balance of Net
Available Cash after application in accordance with clause (A), to the extent
the Company or such Restricted Subsidiary elects, to reinvest in Additional
Assets (including by means of an Investment in Additional Assets by a Restricted
Subsidiary with Net Available Cash received by the Company or another Restricted
Subsidiary) within 18 months from the later of such Asset Disposition or the
receipt of such Net Available Cash; (C) third, to the extent of the balance of
such Net Available Cash after application in accordance with clauses (A) and
(B), to make an Offer (as defined below) to purchase Notes pursuant to and
subject to the conditions set forth in section (b) of this covenant; provided,
however, that if the Company elects (or is required by the terms of any other
Senior Indebtedness), such Offer may be made ratably to purchase the Notes and
other Senior Indebtedness of the Company, and (D) fourth, to the extent of the
balance
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of such Net Available Cash after application in accordance with clauses (A),
(B) and (C), to (x) acquire Additional Assets (other than Indebtedness and
Capital Stock) or (y) prepay, repay or purchase Indebtedness of the Company
(other than Indebtedness owed to an Affiliate of the Company and other than
Disqualified Stock of the Company) or Indebtedness of any Restricted Subsidiary
(other than Indebtedness owed to the Company or an Affiliate of the Company), in
each case described in this clause (D) within 18 months from the receipt of such
Net Available Cash or, if the Company has made an Offer pursuant to clause (C),
six months from the date such Offer is consummated; provided, however, that in
connection with any prepayment, repayment or purchase of Indebtedness pursuant
to clause (A), (C) or (D) above, the Company or such Restricted Subsidiary will
retire such Indebtedness and will cause the related loan commitment (if any) to
be permanently reduced in an amount equal to the principal amount so prepaid,
repaid or purchased. Notwithstanding the foregoing provisions of this covenant,
the Company and the Restricted Subsidiaries will not be required to apply any
Net Available Cash in accordance with this covenant except to the extent that
the aggregate Net Available Cash from all Asset Dispositions that is not applied
in accordance with this covenant exceeds $10 million.
For the purposes of clause (ii) of the preceding paragraph, the following
are deemed to be cash: (x) the assumption of Indebtedness of the Company (other
than Disqualified Stock of the Company) or any Restricted Subsidiary and the
release of the Company or such Restricted Subsidiary from all liability on such
Indebtedness in connection with such Asset Disposition and (y) securities
received by the Company or any Restricted Subsidiary from the transferee that
are promptly converted by the Company or such Restricted Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of
Notes (and other Senior Indebtedness) pursuant to clause (a)(iii)(C) of this
covenant, the Company will be required to purchase Notes (and other Senior
Indebtedness) tendered pursuant to an offer by the Company for the Notes (and
other Senior Indebtedness) (the "Offer") at a purchase price of 100% of their
principal amount plus accrued and unpaid interest, if any, to the date of
purchase in accordance with the procedures (including prorationing in the event
of oversubscription) set forth in the Indenture. If the aggregate purchase price
of Notes (and other Senior Indebtedness) tendered pursuant to the Offer is less
than the Net Available Cash allotted to the purchase of the Notes (and other
Senior Indebtedness), the Company will apply the remaining Net Available Cash in
accordance with clause (a)(iii)(D) of this covenant. The Company will not be
required to make an Offer for Notes (and other Senior Indebtedness) pursuant to
this covenant if the Net Available Cash available therefor (after application of
the proceeds as provided in clauses (A) and (B) of this covenant section
(a)(iii)) is less than $10 million for any particular Asset Disposition (which
lesser amount will be carried forward for purposes of determining whether an
Offer is required with respect to the Net Available Cash from any subsequent
Asset Disposition).
(c) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this covenant by virtue thereof.
Limitation on Transactions with Affiliates. (a) The Indenture provides
that the Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into or conduct any transaction (including the
purchase, sale, lease or exchange of any property or the rendering of any
service) with any Affiliate of the Company (an "Affiliate Transaction") (i) on
terms that are less favorable to the Company or such Restricted Subsidiary, as
the case may be, than those that could be obtained at the time of such
transaction in arm's-length dealings with a Person who is not such an Affiliate,
(ii) if such Affiliate Transaction involves an aggregate amount in excess of
$1.0 million, such terms (1) are set forth in writing and (2) have been approved
by a majority of the members of the Board of Directors having no personal stake
in such Affiliate Transaction and (iii) if such Affiliate Transaction involves
an amount in excess of $5.0 million, such terms have also been determined by a
nationally recognized appraisal or investment banking firm to be fair, from a
financial standpoint, to the Company and its Restricted Subsidiaries.
(b) The provisions of the foregoing paragraph (a) will not prohibit (i) any
Restricted Payment permitted to be paid pursuant to the covenant described under
"Limitation on Restricted Payments", (ii) any issuance of securities, or other
payments, awards or grants in cash, securities or otherwise pursuant to, or the
funding of, employment arrangements, stock options and stock ownership plans
approved by the Board of Directors, (iii) the
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grant of stock options or similar rights to employees and directors of the
Company pursuant to plans approved by the Board of Directors, (iv) loans or
advances to employees in the ordinary course of business in accordance with past
practices of the Company, but in any event not to exceed $1.0 million in the
aggregate outstanding at any one time, (v) any transaction between the Company
and a Wholly Owned Subsidiary or between Wholly Owned Subsidiaries,
(vi) reasonable fees and compensation paid to, and indemnity provided on behalf
of, officers, directors, employees, consultants or agents of the Company or any
Restricted Subsidiary of the Company as determined in good faith by the
Company's Board of Directors; (vii) any transactions undertaken pursuant to any
contractual obligations in existence on the Closing Date (as in effect on the
Closing Date); (viii) the provision by Persons who may be deemed Affiliates of
the Company of investment banking, commercial banking, trust lending or
financing, investment, underwriting, placement agent, financial advisory or
similar services to the Company or its Subsidiaries; (ix) transactions with
customers, clients, suppliers or purchasers or sellers of goods or services, in
each case in the ordinary course of business and otherwise in compliance with
the terms of the Indenture, which are fair to the Company or its Restricted
Subsidiaries in the reasonable determination of the Board of Directors of the
Company or the senior management thereof or are on terms no less favorable to
the Company or such Restricted Subsidiary, as the case may be, than those that
could be obtained at the time of such transaction in arm's-length dealings with
a Person who is not an Affiliate; and (x) any contribution to the capital of the
Company by Parent or any purchase of common stock of the Company by Parent.
Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries. The Indenture provides that the Company will not sell or
otherwise dispose of any shares of Capital Stock of a Restricted Subsidiary, and
will not permit any Restricted Subsidiary, directly or indirectly, to issue or
sell or otherwise dispose of any shares of its Capital Stock except: (i) to the
Company or a Wholly Owned Subsidiary; (ii) if, immediately after giving effect
to such issuance, sale or other disposition, neither the Company nor any of its
Subsidiaries own any Capital Stock of such Restricted Subsidiary or (iii) if,
immediately after giving effect to such issuance or sale, such Restricted
Subsidiary would no longer constitute a Restricted Subsidiary and any Investment
in such Person remaining after giving effect thereto would have been permitted
to be made under the covenant described under "--Limitation on Restricted
Payments" if made on the date of such issuance, sale or other disposition. The
proceeds of any sale of such Capital Stock permitted hereby will be treated as
Net Available Cash from an Asset Disposition and must be applied in accordance
with the terms of the covenant described under "--Limitation on Sales of Assets
and Subsidiary Stock."
Limitation on Liens. The Indenture provides that the Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, Incur or
permit to exist any Lien of any nature whatsoever on any of its property or
assets (including Capital Stock of a Restricted Subsidiary), whether owned at
the Closing Date or thereafter acquired, other than Permitted Liens, without
effectively providing that the Notes shall be secured equally and ratably with
(or prior to) the obligations so secured for so long as such obligations are so
secured.
Future Guarantors. The Indenture provides that the Company will cause each
Domestic Subsidiary to become a Guarantor, and, if applicable, execute and
deliver to the Trustee a supplemental indenture in the form set forth in the
Indenture pursuant to which such Restricted Subsidiary will guarantee payment of
the Notes. Each Guarantee will be limited to an amount not to exceed the maximum
amount that can be guaranteed by that Restricted Subsidiary without rendering
the Guarantee, as it relates to such Restricted Subsidiary, voidable under
applicable law relating to fraudulent conveyance or fraudulent transfer or
similar laws affecting the rights of creditors generally.
Reports. The Indenture provides that, notwithstanding that the Company may
not be subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, the Company will file with the Commission and provide the Trustee
and Noteholders and prospective Noteholders (upon request) within 15 days after
it files them with the Commission copies of its annual report and the
information, documents and other reports that are specified in Sections 13 and
15(d) of the Exchange Act. In addition, following a Public Equity Offering, the
Company shall furnish to the Trustee and the Noteholders, promptly upon their
becoming available, copies of the annual report to shareholders and any other
information provided by the Company or Parent to its public shareholders
generally. The Company also will comply with the other provisions of Section
314(a) of the TIA.
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MERGER AND CONSOLIDATION
The Indenture provides that neither the Company nor Parent will consolidate
with or merge with or into, or convey, transfer or lease all or substantially
all its assets to, any Person, unless: (i) the resulting, surviving or
transferee Person (the "Successor Company") will be a corporation organized and
existing under the laws of the United States of America, any State thereof or
the District of Columbia and the Successor Company (if not the Company or
Parent) will expressly assume, by a supplemental indenture executed and
delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of the Company under the Notes and the Indenture; (ii) immediately
after giving effect to such transaction (and treating any Indebtedness which
becomes an obligation of the Successor Company or any Restricted Subsidiary as a
result of such transaction as having been Incurred by the Successor Company or
such Restricted Subsidiary at the time of such transaction), no Default will
have occurred and be continuing; and (iii) immediately after giving effect to
such transaction, the Successor Company would be able to Incur an additional
$1.00 of Indebtedness under paragraph (a) of the covenant described under
"--Certain Covenants--Limitation on Indebtedness."
In the event of any transaction (other than a lease) described in, and
complying with, the immediately preceding paragraph in which the Company or
Parent, as applicable, is not the surviving Person and the surviving Person
assumes all the obligations of the Company or Parent, as applicable, under the
Notes and the Indenture pursuant to a supplemental indenture, such surviving
Person shall succeed to, and be substituted for, and may exercise every right
and power of, the Company or Parent, as applicable, and the Company or Parent,
as applicable, will be discharged from its obligations under the Indenture and
the Notes; provided that solely for the purpose of calculating amounts described
in clause (3) under "--Limitation on Restricted Payments," any such surviving
Person shall only be deemed to have succeeded to, and be substituted for, the
Company or Parent, as applicable, with respect to the period subsequent to the
effective time of such transaction, and the Company or Parent, as applicable,
(before giving effect to such transaction) shall be deemed to be the "Company"
or "Parent," as applicable for such purposes for all prior periods.
Parent will not and the Company will not permit any Guarantor to
consolidate with or merge with or into, or convey, transfer or lease, in one
transaction or series of transactions, all or substantially all of its assets to
any Person unless: (i) the resulting, surviving or transferee Person (if not
such Guarantor) shall be a Person organized and existing under the laws of the
jurisdiction under which such Guarantor was organized or under the laws of the
United States of America, or any State hereof or the District of Columbia, and
such Person shall expressly assume, by an amendment to the Indenture, in a form
acceptable to the Trustee, all the obligations of such Guarantor under its
Guarantee; (ii) immediately after giving effect to such transaction or
transactions on a pro forma basis (and treating any Indebtedness which becomes
an obligation of the resulting, surviving or transferee Person as a result of
such transaction as having been issued by such Person at the time of such
transaction), no Default shall have occurred and be continuing; and (iii) the
Issuers deliver to the Trustee an Officers' Certificate and an Opinion of
Counsel, each stating that such consolidation, merger or transfer and such
amendment to the Indenture, if any, complies with the Indenture.
Notwithstanding the foregoing, (a) any Restricted Subsidiary may
consolidate with, merge into or transfer all or part of its properties and
assets to the Company and (b) the Company may merge with an Affiliate
incorporated solely for the purpose of reincorporating the Company in another
jurisdiction to realize tax or other benefits.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in any
payment of interest on any Note when due and payable, and the default continues
for 30 days, (ii) a default in the payment of principal of any Note when due and
payable at its Stated Maturity, upon required redemption or repurchase, upon
acceleration or otherwise, (iii) the failure by Parent or the Company to comply
with its obligations under the covenant described under "--Merger and
Consolidation," (iv) the failure by the Company or Parent to comply for 30 days
after notice with any of its obligations under the covenants described under
"--Change of Control" or "--Certain Covenants" (in each case, other than a
failure to purchase Notes), (v) the failure by the Company or Parent to comply
for 60 days after notice with its other agreements contained in the Notes or the
Indenture, (vi) the failure by the Company, Parent or any Significant Subsidiary
to pay any Indebtedness within any applicable grace period after final maturity
or the acceleration of any such Indebtedness by the holders thereof because of a
default if the
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total amount of such Indebtedness unpaid or accelerated exceeds $10.0 million
(the "cross acceleration provision") and such failure continues for 10 days
after receipt of the notice specified in the Indenture, (vii) certain events of
bankruptcy, insolvency or reorganization of the Company, Parent or a Significant
Subsidiary (the "bankruptcy provisions"), (viii) the rendering of any judgment
or decree for the payment of money in excess of $10.0 million at the time it is
entered against the Company, Parent or a Significant Subsidiary and is not
discharged, waived or stayed if (A) an enforcement proceeding thereon is
commenced by any creditor or (B) such judgment or decree remains outstanding for
a period of 60 days following such judgment and is not discharged, waived or
stayed (the "judgment default provision") or (ix) any Guarantee ceases to be in
full force and effect (except as contemplated by the terms thereof) or any
Guarantor or Person acting by or on behalf of such Guarantor denies or
disaffirms such Guarantor's obligations under the Indenture or any Guarantee and
such Default continues for 10 days after receipt of the notice specified in the
Indenture.
The foregoing will constitute Events of Default whatever the reason for any
such Event of Default and whether it is voluntary or involuntary or is effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body.
However, a default under clause (iv), (v) or (viii) above will not
constitute an Event of Default until the Trustee or the Holders of at least 25%
in principal amount of the outstanding Notes notify the Issuers of the default
and the Issuers do not cure such default within the time specified in clause
(iv), (v) or (viii) above after receipt of such notice.
If an Event of Default (other than an Event of Default relating to certain
events of bankruptcy, insolvency or reorganization of the Issuers) occurs and is
continuing, the Trustee or the Holders of at least 25% in principal amount of
the outstanding Notes by notice to the Issuers may declare the principal of, and
accrued but unpaid interest on, all the Notes to be due and payable. Upon such a
declaration, such principal and interest will be due and payable immediately. If
an Event of Default relating to certain events of bankruptcy, insolvency or
reorganization of the Issuers occurs, the principal of, and interest on, all the
Notes will become immediately due and payable without any declaration or other
act on the part of the Trustee or any Holders. Under certain circumstances, the
Holders of a majority in principal amount of the outstanding Notes may rescind
any such acceleration with respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
have offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the Notes unless (i) such Holder has
previously given the Trustee notice that an Event of Default is continuing, (ii)
Holders of at least 25% in principal amount of the outstanding Notes have
requested the Trustee in writing to pursue the remedy, (iii) such Holders have
offered the Trustee reasonable security or indemnity against any loss, liability
or expense, (iv) the Trustee has not complied with such request within 60 days
after the receipt of the request and the offer of security or indemnity and (v)
the Holders of a majority in principal amount of the outstanding Notes have not
given the Trustee a direction inconsistent with such request within such 60-day
period. Subject to certain restrictions, the Holders of a majority in principal
amount of the outstanding Notes will be given the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee or of exercising any trust or power conferred on the Trustee. The
Trustee, however, may refuse to follow any direction that conflicts with law or
the Indenture or that the Trustee determines is unduly prejudicial to the rights
of any other Holder or that would involve the Trustee in personal liability.
Prior to taking any action under the Indenture, the Trustee will be entitled to
indemnification satisfactory to it in its sole discretion against all losses and
expenses caused by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the Default
within the earlier of 90 days after it occurs or 30 days after it is known to a
Trust Officer or written notice of it is received by the Trustee. Except in the
case of a Default in the payment of principal of, premium (if any) or interest
on any Note (including payments pursuant to the redemption provisions of such
Note), the Trustee may withhold notice if and so long as a committee of its
Trust Officers in good faith determines that withholding notice is in the
interests of the Noteholders. In addition, the Issuers will be required to
deliver to the Trustee, within 120 days after the end of each fiscal year, a
certificate
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indicating whether the signers thereof know of any Default that occurred during
the previous year. The Issuers will also be required to deliver to the Trustee,
within 30 days after the occurrence thereof, written notice of any event which
would constitute certain Events of Default, the status of any such event and the
action the Issuers is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture or the Notes may be amended
with the written consent of the Holders of a majority in principal amount of the
Notes then outstanding, and any past default or compliance with any provisions
may be waived with the consent of the Holders of a majority in principal amount
of the Notes then outstanding. However, without the consent of each Holder of an
outstanding Note affected, no amendment may, among other things, (i) reduce the
amount of Notes whose Holders must consent to an amendment, (ii) reduce the rate
of or extend the time for payment of interest or any liquidated damages on any
Note, (iii) reduce the principal of, or extend the Stated Maturity of, any Note,
(iv) reduce the premium payable upon the redemption of any Note or change the
time at which any Note may be redeemed as described under "--Optional
Redemption," (v) make any Note payable in money other than that stated in the
Note, (vi) impair the right of any Holder to receive payment of principal of,
and interest or any liquidated damages on, such Holder's Notes on or after the
due dates therefor or to institute suit for the enforcement of any payment on or
with respect to such Holder's Notes, (vii) make any change in the amendment
provisions which require each Holder's consent or in the waiver provisions or
(viii) modify the Guarantees in any manner adverse to the Holders.
Without the consent of any Holder, the Issuers and Trustee may amend the
Indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation of the obligations of the Issuers
under the Indenture, to provide for uncertificated Notes in addition to, or in
place of, certificated Notes (provided that the uncertificated Notes are issued
in registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated Notes are described in Section 163(f)(2)(B) of the
Code), to add additional Guarantees with respect to the Notes, to secure the
Notes, to add to the covenants of the Issuers for the benefit of the Noteholders
or to surrender any right or power conferred upon the Issuers, to make any
change that does not adversely affect the rights of any Holder, subject to the
provisions of the Indenture, to provide for the issuance of the Exchange Notes,
Private Exchange Notes or Additional Notes or to comply with any requirement of
the Commission in connection with the qualification of the Indenture under the
TIA.
The consent of the Noteholders will not be necessary under the Indenture to
approve the particular form of any proposed amendment. It will be sufficient if
such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Issuers will
be required to mail to Noteholders a notice briefly describing such amendment.
However, the failure to give such notice to all Noteholders, or any defect
therein, will not impair or affect the validity of the amendment.
TRANSFER AND EXCHANGE
A Noteholder may transfer or exchange Notes in accordance with the
Indenture. Upon any transfer or exchange, the registrar and the Trustee may
require a Noteholder, among other things, to furnish appropriate endorsements
and transfer documents, and the Issuers may require a Noteholder to pay any
taxes required by law or permitted by the Indenture. The Issuers are not
required to transfer or exchange any Note selected for redemption or to transfer
or exchange any Note for a period of 15 days prior to a selection of Notes to be
redeemed. The Notes will be issued in registered form and the registered holder
of a Note will be treated as the owner of such Note for all purposes.
DEFEASANCE
The Issuers at any time may terminate all their obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Issuers at any time may terminate their obligations under the
covenants described under "--Certain Covenants," the operation of the cross
acceleration provision, the bankruptcy provisions with respect to Significant
Subsidiaries and the judgment default provision described
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under "--Defaults" and the limitations contained in clause (iii) under the first
paragraph of "--Merger and Consolidation" ("covenant defeasance"). In the event
that the Issuers exercise their legal defeasance option or its covenant
defeasance option, each Guarantor will be released from all of its obligations
with respect to its Guarantee.
The Issuers may exercise their legal defeasance option notwithstanding
their prior exercise of their covenant defeasance option. If the Issuers
exercise their legal defeasance option, payment of the Notes may not be
accelerated because of an Event of Default with respect thereto. If the Issuers
exercise their covenant defeasance option, payment of the Notes may not be
accelerated because of an Event of Default specified in clause (iv), (vi), (vii)
(with respect only to Significant Subsidiaries), (viii) (with respect only to
Significant Subsidiaries) or (ix) under "--Defaults" or because of the failure
of the Company or Parent to comply with clause (iii) under the first paragraph
of "--Merger and Consolidation."
In order to exercise either defeasance option, the Issuers must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium (if any) and
interest on the Notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the Trustee of an
Opinion of Counsel to the effect that holders of the Notes will not recognize
income, gain or loss for Federal income tax purposes as a result of such deposit
and defeasance and will be subject to Federal income tax on the same amounts and
in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable Federal income tax law).
CONCERNING THE TRUSTEE
PNC Bank, National Association is the Trustee under the Indenture and has
been appointed by the Issuers as Registrar and Paying Agent with regard to the
Notes.
GOVERNING LAW
The Indenture provides that it and the Notes are governed by, and are to be
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) to be used by the Company or a Restricted
Subsidiary in a Related Business; (ii) the Capital Stock of a Person that
becomes a Restricted Subsidiary as a result of the acquisition of such Capital
Stock by the Company or another Restricted Subsidiary; or (iii) Capital Stock
constituting a minority interest in any Person that at such time is a Restricted
Subsidiary; provided, however, that any such Restricted Subsidiary described in
clause (ii) or (iii) above is primarily engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Disposition" means any sale, lease, sale-leaseback transaction,
transfer or other disposition (or series of related sales, leases, transfers or
dispositions) by the Company or any Restricted Subsidiary, including any
disposition by means of a merger, consolidation or similar transaction (each
referred to for the purposes of this definition as a "disposition"), of (i) any
shares of Capital Stock of a Restricted Subsidiary (other than directors'
qualifying shares or shares required by applicable law to be held by a Person
other than the Company or a Restricted Subsidiary), (ii) all or substantially
all the assets of any division or line of business of the Company or any
Restricted Subsidiary or (iii) any other assets of the Company or any Restricted
Subsidiary other than property or equipment that has become worn out, obsolete,
damaged or otherwise unsuitable for use in connection with the business of the
Company or any Restricted Subsidiary, as the case may be (other than, in the
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case of (i), (ii) and (iii) above, (w) a disposition by a Restricted Subsidiary
to the Company or by the Company or a Restricted Subsidiary to a Wholly Owned
Subsidiary, (x) for purposes of the provisions described under "--Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock" only, a
disposition subject to the covenant described under "--Certain
Covenants--Limitation on Restricted Payments," (y) the sale, lease, transfer or
other disposition of all or substantially all the assets of the Company as
permitted by the covenant described under "Merger and Consolidation" and (x) a
disposition of assets with a fair market value of less than $100,000).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Bank Indebtedness" means any and all amounts payable under or in respect
of the Credit Agreement and any Refinancing Indebtedness with respect thereto,
as amended from time to time, including principal, premium (if any), interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company whether or not a claim
for post-filing interest is allowed in such proceedings), fees, charges,
expenses, reimbursement obligations, guarantees and all other amounts payable
thereunder or in respect thereof.
"Board of Directors" means the Board of Directors of the Company or Parent,
as applicable, or any committee thereof duly authorized to act on behalf of such
Board of Directors.
"Business Day" means each day which is not a Legal Holiday.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of, or
interests in (however designated), equity of such Person, including any
Preferred Stock, but excluding any debt securities convertible into such equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be prepaid by the lessee without payment of a
penalty.
"CCP" means Chase Capital Partners and its Affiliates.
"Closing Date" means the date of the Indenture.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters for which financial statements are available to
(ii) Consolidated Interest Expense for such four fiscal quarters; provided,
however, that (A) if the Company or any Restricted Subsidiary has Incurred any
Indebtedness since the beginning of such period that remains outstanding on such
date of determination or if the transaction giving rise to the need to calculate
the Consolidated Coverage Ratio is an Incurrence of Indebtedness, EBITDA and
Consolidated Interest Expense for such period shall be calculated after giving
effect on a pro forma basis to such Indebtedness as if such Indebtedness had
been Incurred on the first day of such period and the discharge of any other
Indebtedness repaid, repurchased, defeased or otherwise discharged with the
proceeds of such new Indebtedness as if such discharge had occurred on the first
day of such period, (B) if the Company or any Restricted Subsidiary has repaid,
repurchased, defeased or otherwise discharged any Indebtedness since the
beginning of such period or if any Indebtedness is to be repaid, repurchased,
defeased or otherwise discharged (in each case other than Indebtedness Incurred
under any revolving credit facility unless such Indebtedness has been
permanently repaid and has not been replaced) on the date of the transaction
giving rise to the need to calculate the Consolidated Coverage Ratio, EBITDA and
Consolidated Interest Expense for such period shall be calculated on a pro forma
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basis as if such discharge had occurred on the first day of such period and as
if the Company or such Restricted Subsidiary has not earned the interest income
actually earned during such period in respect of cash or Temporary Cash
Investments used to repay, repurchase, defease or otherwise discharge such
Indebtedness, (C) if since the beginning of such period the Company or any
Restricted Subsidiary shall have made any Asset Disposition, the EBITDA for such
period shall be reduced by an amount equal to the EBITDA (if positive) directly
attributable to the assets that are the subject of such Asset Disposition for
such period or increased by an amount equal to the EBITDA (if negative) directly
attributable thereto for such period and Consolidated Interest Expense for such
period shall be reduced by an amount equal to the Consolidated Interest Expense
directly attributable to any Indebtedness of the Company or any Restricted
Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to
the Company and its continuing Restricted Subsidiaries in connection with such
Asset Disposition for such period (or, if the Capital Stock of any Restricted
Subsidiary is sold, the Consolidated Interest Expense for such period directly
attributable to the Indebtedness of such Restricted Subsidiary to the extent the
Company and its continuing Restricted Subsidiaries are no longer liable for such
Indebtedness after such sale), (D) if since the beginning of such period the
Company or any Restricted Subsidiary (by merger or otherwise) shall have made an
Investment in any Restricted Subsidiary (or any Person that becomes a Restricted
Subsidiary) or an acquisition of assets, including any acquisition of assets
occurring in connection with a transaction causing a calculation to be made
hereunder, which constitutes all or substantially all of an operating unit of a
business, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto (including the Incurrence of
any Indebtedness) as if such Investment or acquisition occurred on the first day
of such period and (E) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such period) shall
have made any Asset Disposition or any Investment or acquisition of assets that
would have required an adjustment pursuant to clause (C) or (D) above if made by
the Company or a Restricted Subsidiary during such period, EBITDA and
Consolidated Interest Expense for such period shall be calculated after giving
pro forma effect thereto as if such Asset Disposition, Investment or acquisition
of assets occurred on the first day of such period. For purposes of this
definition, whenever pro forma effect is to be given to an acquisition of
assets, the amount of income or earnings relating thereto, including related
cost savings measures, and the amount of Consolidated Interest Expense
associated with any Indebtedness Incurred in connection therewith, the pro forma
calculations shall be determined in good faith by a responsible financial or
accounting Officer of the Company. If any Indebtedness bears a floating rate of
interest and is being given pro forma effect, the interest expense on such
Indebtedness shall be calculated as if the rate in effect on the date of
determination had been the applicable rate for the entire period (taking into
account any Interest Rate Agreement applicable to such Indebtedness if such
Interest Rate Agreement has a remaining term as at the date of determination in
excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its Consolidated Restricted Subsidiaries, plus, to
the extent Incurred by the Company and its Subsidiaries in such period but not
included in such interest expense, (i) interest expense attributable to
Capitalized Lease Obligations, (ii) amortization of debt discount and debt
issuance cost, (iii) capitalized interest, (iv) non-cash interest expense, (v)
commissions, discounts and other fees and charges attributable to letters of
credit and bankers' acceptance financing, (vi) interest accruing on any
Indebtedness of any other Person to the extent such Indebtedness is guaranteed
by the Company or any Restricted Subsidiary, (vii) net costs associated with
Hedging Obligations (including amortization of fees), (viii) dividends in
respect of (A) all Preferred Stock of the Company and any of the Subsidiaries of
the Company and (B) Disqualified Stock of the Company, in each of (A) and
(B) to the extent held by Persons other than the Company or a Wholly Owned
Subsidiary, (ix) interest Incurred in connection with investments in
discontinued operations and (x) the cash contributions to any employee stock
ownership plan or similar trust to the extent such contributions are used by
such plan or trust to pay interest or fees to any Person (other than the
Company) in connection with Indebtedness Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income of the
Company and its Consolidated Subsidiaries for such period; provided, however,
that there shall not be included in such Consolidated Net Income: (i) any net
income of any Person (other than the Company) if such Person is not a Restricted
Subsidiary, except that (A) subject to the limitations contained in clause (iv)
below, the Company's equity in the net income of any such Person for such period
shall be included in such Consolidated Net Income up to the aggregate amount of
cash actually distributed by such Person during such period to the Company or a
Restricted Subsidiary as a dividend or other distribution (subject, in the case
of a dividend or other distribution made to a Restricted
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Subsidiary, to the limitations contained in clause (iii) below) and (B) the
Company's equity in a net loss of any such Person for such period shall be
included in determining such Consolidated Net Income; (ii) any net income (or
loss) of any person acquired by the Company or a Subsidiary in a pooling of
interests transaction for any period prior to the date of such acquisition;
(iii) any net income (or loss) of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the payment of
dividends or the making of distributions by such Restricted Subsidiary, directly
or indirectly, to the Company, except that (A) subject to the limitations
contained in clause (iv) below, the Company's equity in the net income of any
such Restricted Subsidiary for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually distributed
by such Restricted Subsidiary during such period to the Company or another
Restricted Subsidiary as a dividend or other distribution (subject, in the case
of a dividend or other distribution made to another Restricted Subsidiary, to
the limitation contained in this clause) and (B) the Company's equity in a net
loss of any such Restricted Subsidiary for such period shall be included in
determining such Consolidated Net Income; (iv) any gain or loss realized upon
the sale or other disposition of any asset of the Company or its Consolidated
Subsidiaries that is not sold or otherwise disposed of in the ordinary course of
business and any gain or loss realized upon the sale or other disposition of any
Capital Stock of any Person; (v) any extraordinary gain or loss; (vi) the
cumulative effect of a change in accounting principles; (vii) any bonuses paid
to members of the Management Group in connection with the Transactions; and
(viii) any expenses relating to cash payments made in respect of the termination
of outstanding options in connection with the Transactions. Notwithstanding the
foregoing, for the purpose of the covenant described under "--Certain
Covenants--Limitation on Restricted Payments" only, there shall be excluded from
Consolidated Net Income any dividends, repayments of loans or advances or other
transfers of assets from Unrestricted Subsidiaries to the Company or a
Restricted Subsidiary to the extent such dividends, repayments or transfers
increase the amount of Restricted Payments permitted under such covenant
pursuant to clause (a)(3)(D) thereof.
"Consolidation" means the consolidation of the accounts of each of the
Restricted Subsidiaries with those of the Company in accordance with GAAP
consistently applied; provided, however, that "Consolidation" will not include
consolidation of the accounts of any Unrestricted Subsidiary, but the interest
of the Company or any Restricted Subsidiary in an Unrestricted Subsidiary will
be accounted for as an investment. The term "Consolidated" has a correlative
meaning.
"Credit Agreement" means the credit agreement dated as of May 11, 1998, as
amended, waived or otherwise modified from time to time (except to the extent
that any such amendment, waiver or other modification thereto would be
prohibited by the terms of the Indenture, unless otherwise agreed to by the
Holders of at least a majority in aggregate principal amount of Notes at the
time outstanding), among the Company, the Parent, the financial institutions
signatory thereto, NationsBank, N.A., as Administrative Agent, and The Chase
Manhattan Bank, as Syndication Agent.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable or exercisable) or upon the happening of any
event (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in whole or in part, in each case on or prior to the first anniversary of the
Stated Maturity of the Notes; provided, however, that any Capital Stock that
would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require such Person to repurchase or redeem such
Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the first anniversary of the Stated Maturity of the Notes
shall not constitute Disqualified Stock if the "asset sale" or "change of
control" provisions applicable to such Capital Stock are not more favorable to
the holders of such Capital Stock than the provisions of the covenants described
under "--Change of Control" and "--Certain Covenants--Limitation on Sale of
Assets and Subsidiary Stock."
"Domestic Subsidiary" means any direct or indirect Subsidiary of the
Company that is organized and existing under the laws of the United States, any
state thereof or the District of Columbia.
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"EBITDA" for any period means the Consolidated Net Income for such period,
plus the following to the extent deducted in calculating such Consolidated Net
Income: (i) income tax expense of the Company and its Consolidated Restricted
Subsidiaries, (ii) Consolidated Interest Expense, (iii) depreciation expense of
the Company and its Consolidated Restricted Subsidiaries, (iv) amortization
expense of the Company and its Consolidated Restricted Subsidiaries (excluding
amortization expense attributable to a prepaid cash item that was paid in a
prior period) and (v) all non-cash charges associated with the granting of New
Options during such period. Notwithstanding the foregoing, the provision for
taxes based on the income or profits of, and the depreciation and amortization
and non-cash charges of, a Restricted Subsidiary of the Company shall be added
to Consolidated Net Income to compute EBITDA only to the extent (and in the same
proportion) that the net income of such Restricted Subsidiary was included in
calculating Consolidated Net Income and only if a corresponding amount would be
permitted at the date of determination to be dividended to the Company by such
Restricted Subsidiary without prior approval (that has not been obtained),
pursuant to the terms of its charter and all agreements, instruments, judgments,
decrees, orders, statutes, rules and governmental regulations applicable to such
Restricted Subsidiary or its stockholders.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Foreign Subsidiary" means any Subsidiary of the Company that is not a
Domestic Subsidiary.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including those set forth in
(i) the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) such other
statements by such other entity as approved by a significant segment of the
accounting profession and (iv) the rules and regulations of the Commission
governing the inclusion of financial statements (including pro forma financial
statements) in periodic reports required to be filed pursuant to Section 13 of
the Exchange Act, including opinions and pronouncements in staff accounting
bulletins and similar written statements from the accounting staff of the
Commission. All ratios and computations based on GAAP contained in the Indenture
shall be computed in conformity with GAAP.
"guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness or other obligation of such other Person
(whether arising by virtue of partnership arrangements, or by agreement to
keep-well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise) or (ii) entered into
for purposes of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); provided, however, that the term
"guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "guarantee" used as a verb has a
corresponding meaning.
"Guarantee" means each guarantee of the obligations with respect to the
Notes issued by a Subsidiary of the Company pursuant to the terms of the
Indenture.
"Guarantor" means any Person that has issued a Guarantee.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the registrar's books.
"Incur" means issue, assume, guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Person at the time it becomes a Subsidiary. The term "Incurrence" when used as a
noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall be deemed the Incurrence
of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of indebtedness of such Person for borrowed money; (ii) the principal
of and premium (if any) in respect of obligations of such Person evidenced by
bonds, debentures, notes
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or other similar instruments; (iii) all obligations of such Person in respect of
letters of credit or other similar instruments (including reimbursement
obligations with respect thereto); (iv) all obligations of such Person to pay
the deferred and unpaid purchase price of property or services (except Trade
Payables), which purchase price is due more than six months after the date of
placing such property in service or taking delivery and title thereto or the
completion of such services; (v) all Capitalized Lease Obligations of such
Person; (vi) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock or, with
respect to any Subsidiary of such Person, any Preferred Stock (but excluding, in
each case, any accrued dividends); (vii) all Indebtedness of other Persons
secured by a Lien on any asset of such Person, whether or not such Indebtedness
is assumed by such Person; provided, however, that the amount of Indebtedness of
such Person shall be the lesser of (A) the fair market value of such asset at
such date of determination and (B) the amount of such Indebtedness of such other
Persons or (viii) to the extent not otherwise included in this definition,
Hedging Obligations of such Person; all obligations of the type referred to in
clauses (i) through (ii) of other Persons and all dividends of other Persons for
the payment of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise, including by means
of any guarantee. The amount of Indebtedness of any Person at any date shall be
the outstanding balance at such date of all unconditional obligations as
described above and the maximum liability, upon the occurrence of the
contingency giving rise to the obligation, of any contingent obligations at such
date.
"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the lender) or other
extension of credit (including by way of guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary" and the covenant described under "--Certain
Covenants--Limitation on Restricted Payments", (i) "Investment" shall include
the portion (proportionate to the Company's equity interest in such Subsidiary)
of the fair market value of the net assets of any Subsidiary of the Company at
the time that such Subsidiary is designated an Unrestricted Subsidiary;
provided, however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary in an amount (if positive) equal to
(x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time of such redesignation; and (ii) any property transferred
to or from an Unrestricted Subsidiary shall be valued at its fair market value
at the time of such transfer, in each case as determined in good faith by the
Board of Directors.
"King Investor" means an entity a majority of the economic interests of
which are owned by CCP and a majority of the voting interests of which are owned
by (i) Robert E. King, his descendants or, in the event of the death or
incompetence of any of the foregoing individuals, such Person's estate,
executor, administrator, committee or other personal representative or (ii) any
other Person approved by CCP.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Management Group" means the group consisting of the directors and
executive officers of the Company.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise and proceeds from the
sale or other disposition of any securities received as consideration, but only
as and when received, but excluding any other consideration received in the form
of assumption by the acquiring Person of Indebtedness or other obligations
relating to the properties or assets that are the subject of such Asset
Disposition or received in any other non-cash form) therefrom, in each case net
of (i) all legal, title and recording tax expenses, commissions and other fees
and expenses incurred, and all Federal, state, provincial, foreign and
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local taxes required to be paid or accrued as a liability under GAAP, as a
consequence of such Asset Disposition, (ii) all payments made on any
Indebtedness which is secured by any assets subject to such Asset Disposition,
in accordance with the terms of any Lien upon or other security agreement of any
kind with respect to such assets, or which must by its terms, or in order to
obtain a necessary consent to such Asset Disposition, or by applicable law be
repaid out of the proceeds from such Asset Disposition, (iii) all distributions
and other payments required to be made to minority interest holders in
Subsidiaries or joint ventures as a result of such Asset Disposition and (iv)
appropriate amounts to be provided by the seller as a reserve, in accordance
with GAAP, against any liabilities associated with the property or other assets
disposed of in such Asset Disposition and retained by the Company or any
Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"New Options" means the options granted to certain members of management
pursuant to the New Option Plan.
"New Option Plan" means the New Option Plan adopted by the Parent as part
of the Recapitalization.
"Officer" means the Chairman of the Board, the Chief Executive Officer, the
Chief Financial Officer, the President, any Vice President, the Treasurer or the
Secretary of the Company or Parent.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Parent" means LPA Holding Corp., a Delaware corporation.
"Permitted Holders" means CCP, the Management Group, the King Investor and
any Person acting in the capacity of an underwriter in connection with a public
or private offering of the Company's or Parent's Capital Stock.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) the Company, a Restricted Subsidiary or a Person that will,
upon the making of such Investment, become a Restricted Subsidiary; provided,
however, that the primary business of such Restricted Subsidiary is a Related
Business; (ii) another Person if as a result of such Investment such other
Person is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is a Related Business;
(iii) Temporary Cash Investments; (iv) receivables owing to the Company or any
Restricted Subsidiary, if created or acquired in the ordinary course of business
and payable or dischargeable in accordance with customary trade terms; provided,
however, that such trade terms may include such concessionary trade terms as the
Company or any such Restricted Subsidiary deems reasonable under the
circumstances; (v) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
for accounting purposes and that are made in the ordinary course of business;
(vi) loans or advances to employees made in the ordinary course of business
consistent with past practices of the Company or such Restricted Subsidiary and
not exceeding $1.0 million in the aggregate outstanding at any one time; (vii)
stock, obligations or securities received in settlement of debts created in the
ordinary course of business and owing to the Company or any Restricted
Subsidiary or in satisfaction of judgments, (viii) any Person to the extent such
Investment represents the non-cash portion of the consideration received for an
Asset Disposition that was made pursuant to and in compliance with the covenant
described under "--Certain Covenants--Limitation on Sale of Assets and
Subsidiary Stock"; (ix) Interest Rate Agreements entered into in the ordinary
course of the Company's or its Restricted Subsidiaries' businesses and otherwise
in compliance with the Indenture; (x) additional Investments (including joint
ventures) in an amount that, when added to all other Investments made pursuant
to this clause (x), does not exceed 10% of the Total Assets as of the end of the
most recent fiscal quarter preceding the date of such Investment for which
financial statements are available; (xi) Investments in securities of trade
debtors of customers received pursuant to any plan of reorganization or similar
arrangement upon the bankruptcy or insolvency of such trade debtors or
customers; (xii) Investments made by the Company or its Restricted Subsidiaries
as a result of consideration received in
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connection with an Asset Disposition made in compliance with the covenant
described under "Limitation on Sales of Assets and Subsidiary Stock"; and
(xiii) Investments of a Person or any of its Subsidiaries existing at the time
such Person becomes a Restricted Subsidiary of the Company or at the time such
Person merges or consolidates with the Company or any of its Restricted
Subsidiaries, in either case in compliance with the Indenture; provided that
such Investments were not made by such Person in connection with, or in
anticipation or contemplation of, such Person becoming a Restricted Subsidiary
of the Company or such merger or consolidation.
"Permitted Liens" means, with respect to any Person:
(a) Liens imposed by law for taxes or other governmental charges that are
not yet due or are being contested in good faith by appropriate proceedings;
(b) carriers', warehousemen's, mechanics', materialmen's, repairmen's and
other like Liens imposed by law, arising in the ordinary course of business and
securing obligations that are not overdue by more than 60 days or are being
contested in good faith by appropriate proceedings;
(c) pledges and deposits made in the ordinary course of business in
compliance with workers' compensation, unemployment insurance and other social
security laws or regulations;
(d) deposits to secure the performance of bids, trade contracts, leases,
statutory obligations, surety and appeal bonds, performance bonds and other
obligations of a like nature (other than for the payment of Indebtedness), in
each case in the ordinary course of business;
(e) judgment liens in respect of judgments that do not constitute an Event
of Default under "--Events of Default";
(f) easements, zoning restrictions, rights-of-way and similar encumbrances
on real property imposed by law or arising in the ordinary course of business
that do not secure any monetary obligations and do not materially detract from
the value of the affected property or interfere with the ordinary conduct of
business of such Person;
(g) any interest of a landlord in or to property of the tenant imposed by
law, arising in the ordinary course of business and securing lease obligations
that are not overdue by more than 60 days or are being contested in good faith
by appropriate proceedings, or any possessory rights of a lessee to the leased
property under the provisions of any lease permitted by the terms of the
Indenture;
(h) Liens of a collection bank arising in the ordinary course of business
under Section 4-208 of the Uniform Commercial Code in effect in the relevant
jurisdiction;
(i) Liens to secure Indebtedness permitted pursuant to clause (b)(i) of the
covenant described under "--Certain Covenants--Limitation on Indebtedness";
(j) Liens existing on the Closing Date provided, that (i) except as
permitted under subclause (D) of clause (l) of this definition such Lien shall
not apply to any other property or asset of such Person except assets financed
solely by the same financing source that provided the Indebtedness secured by
such Lien, and (ii) such Lien shall secure only those obligations that it
secures on the Closing Date and extensions, renewals and replacements thereof
that do not increase the outstanding principal amount thereof;
(k) any Lien existing on any property or asset prior to the acquisition
thereof by such Person or existing on any property or asset of another Person
that becomes a Subsidiary after the date hereof prior to the time such other
Person becomes a Subsidiary, provided that (A) such Lien is not created in
contemplation of or in connection with such acquisition or such other Person
becoming a Subsidiary, as the case may be, (B) such Lien shall not apply to any
other property or assets of such Person except assets financed solely by the
same financing source in existence on the date of such acquisition that provided
the Indebtedness secured by such Lien and (C) except as permitted under
subclause (D) of clause (l) of this definition such Lien shall secure only those
obligations that it secures on the date of such acquisition or the date such
other Person becomes a Subsidiary, as the case may be, and extensions, renewals
and replacements thereof that do not increase the outstanding principal amount
thereof;
(l) Liens on fixed or capital assets acquired, constructed or improved by
such Person and extensions, renewals and replacements thereof that do not
increase the outstanding principal amount of the Indebtedness secured thereby,
provided that (A) such security interests secure Indebtedness permitted under
"--Limitation on
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Indebtedness," (B) such security interests and the Indebtedness secured thereby
are incurred prior to or within 12 months after such acquisition or the
completion of such construction or improvement, (C) the Indebtedness secured
thereby does not exceed 100% of the cost of acquiring, constructing or improving
such fixed or capital assets and other fixed or capital assets financed solely
by the same financing source and (D) such security interests shall not apply to
any other property or assets of such Person except assets financed solely by the
same financing source;
(m) licenses of intellectual property rights granted in the ordinary course
of business and not interfering in any material respect with the conduct of the
business;
(n) Liens securing Indebtedness or other obligations of a Restricted
Subsidiary owing to the Company or a Restricted Subsidiary;
(o) Liens securing Hedging Obligations so long as the related Indebtedness
is secured by a Lien on the same property securing such Hedging Obligation;
(p) Liens securing the Notes pursuant to the covenants described under
"--Certain Covenants--Limitation on Liens";
(q) Liens securing Refinancing Indebtedness of any Indebtedness secured by
any Lien referred to in clauses (j), (k) and (l); and
(r) Liens (other than those permitted by paragraphs (a) through (r) above)
securing liabilities permitted under the Indenture in an aggregate amount not
exceeding $1.0 million at any time outstanding.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock," as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) that is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over shares
of Capital Stock of any other class of such Person.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Public Equity Offering" means an underwritten primary public offering of
common stock of the Company or Parent pursuant to an effective registration
statement under the Securities Act.
"Public Market" means any time after (i) a Public Equity Offering has been
consummated and (ii) at least 15% of the total issued and outstanding common
stock of the Company or Parent (as applicable) has been distributed by means of
an effective registration statement under the Securities Act.
"Purchase Money Indebtedness" means Indebtedness of the Company or any
Subsidiary Incurred to finance the acquisition, construction or improvement of
any fixed or capital assets, including Capital Lease Obligations and any
Indebtedness assumed in connection with the acquisition of any such assets or
secured by a Lien on any such assets prior to the acquisition thereof, and
extensions, renewals and replacements of any such Indebtedness that do not
increase the outstanding principal amount thereof or result in an earlier
maturity date or decreased weighted average life thereof, provided that such
Indebtedness is incurred prior to or within 12 months after such acquisition or
the completion of such construction or improvement.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness in whole or in
part. "Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend (including pursuant to any defeasance
or discharge mechanism) any Indebtedness of the Company or any Restricted
Subsidiary existing on the Closing Date or Incurred in compliance with the
Indenture (including Indebtedness of the Company that Refinances Refinancing
Indebtedness; provided, however, that (i) the Refinancing Indebtedness has a
Stated Maturity no earlier than the Stated Maturity of the Indebtedness being
Refinanced, (ii) the Refinancing Indebtedness has an Average Life at the time
such Refinancing Indebtedness is
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Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced, (iii) such Refinancing Indebtedness is Incurred in an
aggregate principal amount (or if issued with original issue discount, an
aggregate issue price) that is equal to or less than the aggregate principal
amount (or if issued with original issue discount, the aggregate accreted value)
then outstanding of the Indebtedness being Refinanced (plus the amount of any
premium required to be paid under the terms of the instrument governing such
Indebtedness and plus the amount of reasonable expenses incurred by the Company
in connection with such Refinancing) and (iv) if the Indebtedness being
Refinanced is subordinated in right of payment to the Notes, such Refinancing
Indebtedness is subordinated in right of payment to the Notes at least to the
same extent as the Indebtedness being Refinanced; provided further, however,
that Refinancing Indebtedness shall not include (x) Indebtedness of a Restricted
Subsidiary that Refinances Indebtedness of the Company or (y) Indebtedness of
the Company or a Restricted Subsidiary that Refinances Indebtedness of an
Unrestricted Subsidiary.
"Related Business" means any business related, ancillary or complementary
(as determined in good faith by the Board of Directors of the Company) to the
businesses of the Company and the Restricted Subsidiaries on the Closing Date.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien. "Secured Indebtedness" of a Guarantor has a correlative meaning.
"Senior Indebtedness" of the Company means the principal of, premium (if
any) and accrued and unpaid interest (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization of the Company,
regardless of whether or not a claim for post-filing interest is allowed in such
proceedings) on, and fees and other amounts owing in respect of, Bank
Indebtedness and all other Indebtedness of the Company, whether outstanding on
the Closing Date or thereafter incurred, unless in the instrument creating or
evidencing the same or pursuant to which the same is outstanding it is provided
that such obligations are subordinated in right of payment to the Notes. "Senior
Indebtedness" of Parent or any Guarantor has a correlative meaning.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the Commission.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Closing Date or thereafter Incurred) that is subordinate or
junior in right of payment to the Notes pursuant to a written agreement.
"Subordinated Obligation" of Parent or a Guarantor has a correlative meaning.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and one
or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such
Person.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within one year of the date of acquisition thereof
issued by a bank or trust company that is organized under the laws of the United
States of America, any state thereof or any foreign country recognized by the
United States of America having capital, surplus and undivided profits
aggregating in excess of $250,000,000 (or the foreign currency equivalent
thereof) and whose long-term debt is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act), (iii) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clause (i) above entered into with a bank meeting the
qualifications described in clause
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(ii) above, (iv) investments in commercial paper, maturing not more than one
year after the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of the
United States of America or any foreign country recognized by the United States
of America with a rating at the time as of which any investment therein is made
of "P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or
higher) according to Standard and Poor's Ratings Service, a division of The
McGraw-Hill Companies, Inc. ("S&P"), (v) investments in securities with
maturities of six months or less from the date of acquisition issued or fully
guaranteed by any state, commonwealth or territory of the United States of
America, or by any political subdivision or taxing authority thereof, and rated
at least "A" by S&P or "A" by Moody's Investors Service, Inc. and
(vi) investments in money market funds that invest substantially all their
assets in securities of the types described in clauses (i) through (v) above.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Section
77aaa-77bbbb) as in effect on the date of the Indenture.
"Total Assets" means the total consolidated assets of the Company and its
Restricted Subsidiaries as shown on the most recent balance sheet of the
Company.
"Trade Payables" means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
"Trustee" means the party named as such in the Indenture until a successor
replaces it and, thereafter, means the successor.
"Trust Officer" means the Chairman of the Board, the President or any other
officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any other Subsidiary of the Company that
is not a Subsidiary of the Subsidiary to be so designated; provided, however,
that either (A) the Subsidiary to be so designated has total Consolidated assets
of $1,000 or less or (B) if such Subsidiary has Consolidated assets greater than
$1,000, then such designation would be permitted under the covenant entitled
"Limitation on Restricted Payments". The Board of Directors may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that
immediately after giving effect to such designation (x) the Company could Incur
$1.00 of additional Indebtedness under paragraph (a) of the covenant entitled
"Limitation on Indebtedness" and (y) no Default shall have occurred and be
continuing. Any such designation of a Subsidiary as a Restricted Subsidiary or
Unrestricted Subsidiary by the Board of Directors shall be evidenced to the
Trustee by promptly filing with the Trustee a copy of the resolution of the
Board of Directors giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary of the Company all
the Capital Stock of which (other than directors' qualifying shares) is owned by
the Company or another Wholly Owned Subsidiary.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain United States federal income tax
considerations to U.S. Holders and Non-U.S. Holders (as defined herein) relating
to the purchase, ownership and disposition of the Notes, but does not purport to
be a complete analysis of all the potential tax considerations relating thereto.
The terms "U.S. Holder" and "Non-U.S. Holder" refer, respectively, to persons
that are or are not classified as United States persons. As used herein, the
term "United States person" means a holder which will hold Notes as "capital
assets" (within the meaning of Section 1221 of the Code) and which is (i) a
citizen or resident of the United States, (ii) a corporation or other entity
taxable as a corporation created in, or organized under the laws of, the United
States or any political subdivision thereof, (iii) an estate the income of which
is subject to U.S. federal income taxation regardless of its source or (iv) a
trust (a) the administration over which a United States court can exercise
primary supervision and (b) all of the substantial decisions of which one or
more United States persons have the authority to control. Notwithstanding the
preceding sentence, to the extent provided in Treasury Regulations, certain
trusts in existence on August 20, 1996, and treated as United States persons
prior to such date, that elect to continue to be treated as United States
persons will also be a U.S. Holder. This summary does not address tax
considerations applicable to investors that may be subject to special tax rules,
such as banks, tax-exempt organizations, insurance companies, dealers in
securities or currencies, or persons that will hold Notes as a position in a
hedging transaction, "straddle" or "conversion transaction" for tax purposes.
This summary discusses the material federal income tax considerations applicable
to the Initial Purchasers of the Notes which purchase the Notes at par and those
applicable to subsequent purchasers of the Notes. This summary does not consider
the effect of any applicable foreign, state, local or other tax laws. This
summary is based on the Code, existing, temporary, and proposed Treasury
Regulations, laws, rulings and decisions now in effect, all of which are subject
to change. Any such changes may be applied retroactively in a manner that could
adversely affect a holder of the Notes.
THE FOLLOWING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, INVESTORS
CONSIDERING THE PURCHASE OF NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME AND ESTATE TAX
LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING
UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION OR UNDER ANY
APPLICABLE TAX TREATY.
U.S. HOLDERS
Payment of Interest. Interest on a Note generally will be includable in
the income of a holder as ordinary interest income at the time such interest is
received or accrued, in accordance with such holder's method of accounting for
United States federal income tax purposes. The Company expects that the Notes
will not be considered to be issued with original issue discount for U.S.
federal income tax purposes.
Market Discount on Resale of Notes. A holder of a Note should be aware
that the purchase or resale of a Note may be affected by the "market discount"
provisions of the Code. The market discount rules generally provide that if a
holder of a Note purchases the Note at a market discount (i.e., a discount other
than at original issue), any gain recognized upon the disposition of the Note by
the holder will be taxable as ordinary income, rather than as capital gain, to
the extent such gain does not exceed the accrued market discount on such Note at
the time of such disposition. "Market discount" generally means the excess, if
any, of a Note's stated redemption price at maturity over the price paid by the
holder therefor, unless a de minimis exception applies. A holder who acquires a
Note at a market discount also may be required to defer the deduction of a
portion of the amount of interest that the holder paid or accrued during the
taxable year on indebtedness incurred or maintained to purchase or carry such
Note, if any.
Any principal payment on a Note acquired by a holder at a market discount
will be included in gross income as ordinary income to the extent that it does
not exceed the accrued market discount at the time of such payment. The amount
of the accrued market discount for purposes of determining the tax treatment of
subsequent payments on, or dispositions of, a Note is to be reduced by the
amounts so treated as ordinary income.
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<PAGE>
A holder of a Note acquired at a market discount may elect to include
market discount in gross income, for U.S. federal income tax purposes, as such
market discount accrues, either on a straight-line basis or on a constant
interest rate basis. This current inclusion election, once made, applies to all
market discount obligations acquired on or after the first day of the first
taxable year to which the election applies, and may not be revoked without the
consent of the Internal Revenue Service ("IRS"). If a holder of a Note makes
such an election, the foregoing rules regarding the recognition of ordinary
income on sales and other dispositions and the receipt of principal payments
with respect to such Note, and regarding the deferral of interest deductions on
indebtedness incurred or maintained to purchase or carry such Note, will not
apply.
Notes Purchased at a Premium. In general, if a holder purchases a Note for
an amount in excess of its stated redemption price at maturity, the holder may
elect to treat such excess as "amortizable bond premium," in which case the
amount required to be included in the holder's income each year with respect to
interest on the Note will be reduced by the amount of amortizable bond premium
allocable (based on the Note's yield to maturity) to such year. Any such
election would apply to all bonds (other than bonds the interest on which is
excludable from gross income) held by the holder at the beginning of the first
taxable year to which the election applies or which thereafter are acquired by
the holder, and such election is irrevocable without the consent of the IRS.
Sale, Exchange or Retirement of the Notes. Upon the sale, exchange or
redemption of a Note, a holder generally will recognize capital gain or loss
equal to the difference between (i) the amount of cash proceeds and the fair
market value of any property received on the sale, exchange or redemption
(except to the extent such amount is attributable to either liquidated damages,
discussed below, or accrued interest income not previously included in income
which is taxable as ordinary income) and (ii) such holder's adjusted tax basis
in the Note. A holder's adjusted tax basis in a Note generally will equal the
purchase price of the Note to such holder. Such capital gain or loss will be
short-term or long-term if the holder is a corporation, or short-term, mid-term,
or long-term if the holder is not a corporation, depending in each case on the
holder's holding period in the Note at the time of sale, exchange or redemption.
Exchange of Notes for Exchange Notes. The exchange of Notes for Exchange
Notes pursuant to the Exchange Offer should not be considered a taxable exchange
for U.S. federal income tax purposes because the Exchange Notes should not
constitute a material modification of the terms of the Notes. Accordingly, such
exchange should have no U.S. federal income tax consequences to holders of
Notes, and a holder's adjusted basis and holding period in an Exchange Note will
be the same as such holder's adjusted tax basis and holding period in the Note
exchanged therefor.
Notwithstanding the foregoing, the IRS might attempt to treat the Exchange
Offer as an "exchange" for federal income tax purposes. In such event the
Exchange Offer could be treated as a taxable transaction, in which case a holder
would be required to recognize gain or loss equal to the difference, if any,
between such holder's adjusted tax basis in the Notes and the issue price of the
Exchange Notes.
Liquidated Damages. The Company believes that liquidated damages, if any,
described above under "Exchange and Registration Rights Agreement" will be
taxable to the holder as ordinary income in accordance with the holder's method
of accounting for federal income tax purposes. The IRS may take a different
position, however, which could affect the timing of a holder's income with
respect to liquidated damages, if any.
NON-U.S. HOLDERS
Payments of Interest. A Non-U.S. Holder will not be subject to United
States federal income tax by withholding or otherwise on payments of interest on
a Note (provided that the beneficial owner of the Note fulfills the statement
requirements set forth in applicable Treasury regulations) unless (A) such
Non-U.S. Holder (i) actually or constructively owns 10% or more of the total
combined voting power of all classes of stock of the Company entitled to vote,
(ii) is a controlled foreign corporation related, directly or indirectly, to the
Company through stock ownership, or (iii) is a bank receiving interest described
in Section 881(c)(3)(A) of the Code or (B) such interest is effectively
connected with the conduct of a trade or business by the Non-U.S. Holder in the
United States.
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<PAGE>
Gain on Disposition of the Notes. A Non-U.S. Holder will not be subject to
United States federal income tax by withholding or otherwise on any gain
realized upon the disposition of a Note unless (i) in the case of a Non-U.S.
Holder who is an individual, such Non-U.S. Holder is present in the United
States for a period or periods aggregating 183 days or more during the taxable
year of the disposition and certain other requirements are met or (ii) the gain
is effectively connected with the conduct of a trade or business by the Non-U.S.
Holder in the United States.
Effectively Connected Income. To the extent that interest income or gain
on the disposition of a Note is effectively connected with the conduct of a
trade or business of the Non-U.S. Holder in the United States, such income will
be subject to United States federal income tax on a net income basis in the same
manner as if such holder were a United States person. Additionally, in the case
of a Non-U.S. Holder which is a corporation, such effectively connected income
may be subject to the United States branch profits tax at the rate of 30%.
Treaties. A tax treaty between the United States and a country in which a
Non-U.S. Holder is a resident may alter the tax consequences described above.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to payments of
principal, premium, if any, and interest on a Note and payments of the proceeds
of the sale of a Note to certain noncorporate holders, and a 31% backup
withholding tax may apply to such payments if the holder (i) fails to furnish or
certify its correct taxpayer identification number to the payor in the manner
required, (ii) is notified by the IRS that it has failed to report payments of
interest and dividends properly or (iii) under certain circumstances, fails to
certify that it has not been notified by the IRS that it is subject to backup
withholding for failure to report interest and dividend payments. Any amounts
withheld under the backup withholding rules from a payment to a holder will be
allowed as a credit against such holder's United States federal income tax and
may entitle the holder to a refund, provided that the required minimum
information is furnished to the IRS.
Generally, such information reporting and backup withholding may apply to
payments of principal, interest and premium (if any) to Non-U.S. Holders which
are not "Exempt Recipients" and which fail to provide certain information as may
be required by United States law and applicable regulations. The payment of the
proceeds of the disposition of Notes to or through the United States office of a
broker will be subject to information reporting and backup withholding at a rate
of 31% unless the owner certifies its status as a Non-U.S. Holder under
penalties of perjury or otherwise establishes an exemption.
Holders should consult their tax advisors regarding the application of
information reporting and backup withholding in their particular situation and
the availability of an exemption therefrom, and the procedures for obtaining any
such exemption.
The United States Department of the Treasury recently promulgated final
regulations regarding the information reporting and backup reporting rules
discussed above. In general, the final regulations do not significantly alter
the substantive information reporting and backup withholding requirements but
rather unify current certification procedures and forms and clarify reliance
standards. In addition, the final regulations permit the shifting of primary
responsibility for withholding to certain financial intermediaries acting on
behalf of beneficial owners. The final regulations are generally effective for
payments made on or after January 1, 2000, subject to certain transition rules.
Prospective purchasers of the Notes should consult their own tax advisors
concerning the effect of such regulations on their particular situations.
74
<PAGE>
BOOK-ENTRY; DELIVERY AND FORM
The New Notes are represented by one or more permanent global certificates
in definitive, fully registered form (the "Global Notes"). The Global Notes are
deposited with, or on behalf of, The Depository Trust Company ("DTC") and
registered in the name of a nominee of DTC.
THE GLOBAL NOTES
Pursuant to procedures established by DTC (i) upon the issuance of the
Global Notes, DTC or its custodian credited, on its internal system, the
principal amount of New Notes of the individual beneficial interests represented
by the Global Notes to the respective accounts of persons who have accounts with
DTC and (ii) ownership of beneficial interests in the Global Notes will be shown
on, and the transfer of such ownership will be effected only through, records
maintained by DTC or its nominee (with respect to interests of Participants (as
defined herein)) and the records of Participants (with respect to interests of
persons other than Participants). Ownership of beneficial interests in the
Global Notes will be limited to persons who have accounts with DTC
("Participants") or persons who hold interests through Participants. Interests
in the Global Notes may be held directly through DTC, by Participants, or
indirectly through organizations which are Participants.
So long as DTC, or its nominee, is the registered owner or holder of the
Global Notes, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by such Global Notes for all
purposes under the Indenture. No beneficial owner of an interest in the Global
Notes will be able to transfer that interest except in accordance with DTC's
procedures, in addition to those provided for under the Indenture.
Payments of the principal of, premium, if any, and interest on the Global
Notes will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. None of the Issuers, the Trustee or any paying agent will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interest.
The Issuers expect that DTC or its nominee, upon receipt of any payment of
principal premium, if any payment of principal, premium, if any, or interest in
respect of the Global Notes, will credit Participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of the Global Notes as shown on the records of DTC or its nominee. The
Issuers also expect that payments by Participants to owners of beneficial
interests in the Global Notes held through such Participants will be governed by
standing instructions and customary practice, as is now the case with securities
held for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such Participants.
Transfers between Participants will be effected in the ordinary way in
accordance with DTC rules and will be settled in clearinghouse funds. If a
Holder requires physical delivery of a Certificated Note (as defined below) for
any reason, including to sell New Notes to persons in states which require
physical delivery of the New Notes, or to pledge such securities, such Holder
must transfer its interest in a Global Note in accordance with the normal
procedures of DTC and with the procedures set fourth in the Indenture.
DTC has advised the Issuers that it will take any action permitted to be
taken by a Holder of Notes (including the presentation of Exchange Notes for
exchange) only at the direction of one or more Participants to whose account the
DTC interests in the Global Notes are credited and only in respect of such
portion of the aggregate principal amount of Notes as to which such Participant
or Participants has or have given such direction. However, if there is an Event
of Default under the Indenture, DTC will exchange the Global Notes in whole for
Certificated Notes, which it will distribute to the Participants.,
DTC has advised the Issuers as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for Participants and facilitate the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes in accounts of its Participants, thereby eliminating the need for
physical movement of certificates. Participants include securities
75
<PAGE>
brokers and dealers, banks, trust companies and clearing corporations and
certain other organizations. Indirect access to the DTC System is available to
others such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants').
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Notes among Participants, it is under no
obligation to perform such procedures, and such procedures may be discontinued
at any time. Neither the Issuers nor the Trustee will have any responsibility
for the performance by DTC or the Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations.
CERTIFICATED NOTES
If (i) the Issuers notify the Trustee in writing that DTC is no longer
willing or able to act as a depositary or DTC ceases to be registered as a
clearing agency under the Exchange Act and a successor depositary is not
appointed within 90 days of such notice or cessation, (ii) the Issuers, at their
option, notify the Trustee in writing that they elect to cause the issuance of
Notes in definitive form under the Indenture or (iii) upon the occurrence of
certain other events as provided in the Indenture, then, upon surrender by DTC
of the Global Notes, Certificated Notes will be issued to each person that DTC
identifies as the beneficial owner of the Notes represented by the Global Notes.
Upon any such issuance, the Trustee is required to register such Certificated
Notes in the name of such person or persons (or the nominee of any thereof) and
cause the same to be delivered thereto.
None of the Issuers or the Trustee shall be liable for any delay by DTC or
any Participant or Indirect Participant in identifying the beneficial owners of
the related Notes and each such person may conclusively rely on, and shall be
protected in relying on, instructions from DTC for all purposes (including with
respect to the registration and delivery, and the respective principal amounts,
of the Notes to be issued).
76
<PAGE>
PLAN OF DISTRIBUTION
This Prospectus may be used by CSI in connection with offers and sales
related to market-making transactions in the Notes. CSI may act as principal or
agent in such transactions. Such sales will be made at prices related to
prevailing market prices at the time of sale. The Company will not receive any
of the proceeds of such sales. CSI has no obligation to make a market in the
Notes and may discontinue its market-making activities at any time without
notice, at its sole discretion. The Company has agreed to indemnify CSI against
certain liabilities, including liabilities under the Securities Act of 1933, and
to contribute to payments which CSI might be required to make in respect
thereof.
For a description of certain relationships between the Company and CSI and
its affiliates, see "Certain Relationships and Related Transactions" and
"Ownership of Securities".
LEGAL MATTERS
The validity of the Notes offered hereby was passed upon by O'Sullivan
Graev & Karabell, LLP, New York, New York.
EXPERTS
The consolidated financial statements of the Parent and the Company as of
August 29, 1998 and August 30, 1997 and for each of the years ended August 29,
1998, August 30, 1997 and August 31, 1996 included in this Prospectus, the
related financial statement schedules included elsewhere in the Registration
Statement, and the financial statements from which the "Selected Financial Data"
included in this Prospectus have been derived, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein and
elsewhere in the Registration Statement. Such financial statements, financial
statement schedules, and "Selected Financial Data" have been included in the
Registration Statement in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
AVAILABLE INFORMATION
We filed with the Commission a Registration Statement on Form S-4 (together
with all amendments, exhibits, schedules and supplements thereto, the
"Registration Statement") under the Securities Act with respect to the New
Notes. This Prospectus does not contain all of the information set forth in the
Registration Statement, certain portions of which have been omitted pursuant to
the rules and regulations promulgated by the Commission. Statements made in this
Prospectus as to the contents of any contract, agreement or other document are
not necessarily complete. With respect to each such contract, agreement or other
document filed or incorporated by reference as an exhibit to the Registration
Statement, reference is made to such exhibit for a more complete description of
the matter involved, and each such statement is qualified in its entirety by
such reference.
The Registration Statement may be inspected by anyone without charge at the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of such material may also be obtained at the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees. Such
materials can also be inspected on the Internet at http://www.sec.gov.
We are subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). In accordance
therewith, we file reports and other information with the Commission. Such
materials filed by us with the Commission may be inspected, and copies thereof
obtained, at the places, and in the manner, set forth above.
In the event that we cease to be subject to the informational reporting
requirements of the Exchange Act, we have agreed that, so long as the Notes
remain outstanding, we will file with the Commission and distribute to holders
of the Notes copies of the financial information that would have been contained
in annual reports and
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quarterly reports, including management's discussion and analysis of financial
condition and results of operations, that we would have been required to file
with the Commission pursuant to the Exchange Act. Such financial information
will include annual reports containing consolidated financial statements and
notes, together with an opinion expressed by an independent public accounting
firm, as well as quarterly reports containing unaudited condensed consolidated
financial statements for the first three quarters of each fiscal year. We will
also make such reports available to prospective purchasers of the Notes,
securities analysts and broker-dealers upon their request. In addition, we have
agreed that for so long as any of the Old Notes remain outstanding we will make
available to any prospective purchaser of the Old Notes or beneficial owner of
the Old Notes in connection with any sale the information required by
Rule 144A(d)(4) under the Securities Act, until such time as we have either
exchanged the Old Notes for securities identical in all material respects which
have been registered under the Securities Act or until such time as the holders
thereof have disposed of such Old Notes pursuant to an effective registration
statement filed by us.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets as of August 29, 1998 and August 30, 1997...................................... F-3
Consolidated Statements of Operations for the fiscal years ended August 29, 1998, August 30, 1997 and
August 31, 1996.......................................................................................... F-4
Consolidated Statements of Stockholders' Equity for the fiscal years ended August 29, 1998, August 30, 1997
and August 31, 1996...................................................................................... F-5
Consolidated Statements of Cash Flows for the fiscal years ended August 29, 1998, August 30, 1997 and
August 31, 1996.......................................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
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. 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.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
October 5, 1998
F-2
<PAGE>
LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 30,
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash 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 equipment, 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 and amortization............................................ 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
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
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 $40.836 as of August 30, 1997 and no shares outstanding as of
August 28, 1998.......................................................................... 32,521
Series A 12% redeemable preferred stock ($.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 $1,036.558).................................... 25,625
Stockholders' equity:
10% cumulative convertible preferred stock ($.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 ($.01 par value per share); 1,500,000 shares authorized and 852,160
shares issued and outstanding as of August 30, 1997; and 950,000 shares authorized and
560,026 shares issued and outstanding as of August 29, 1998.............................. 6 9
Class B common stock ($.01 par value per share); 350,000 shares authorized and none issued
and outstanding as of August 30, 1997; and 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 statements.
F-3
<PAGE>
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(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 2)............................. 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 10,256
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 extraordinary
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.
F-4
<PAGE>
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------
NUMBER PREFERRED PAID-IN ACCUMULATED TREASURY
OF SHARES AMOUNT STOCK WARRANTS CAPITAL DEFICIT STOCK
--------- ------ --------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, August 26, 1995.................. 852,160 $ 9 $ 3 $ $ 32,099 $ (22,850) $ (86)
Dividends on preferred stock............ 1,006 (1,006)
Repurchase of common stock.............. (17)
Net loss................................ (4,371)
--------- ---- --- ------ -------- --------- ------
Balance, August 31, 1996.................. 852,160 9 3 33,105 (28,227) (103)
Dividends on preferred stock............ 1,129 (1,129)
Repurchase of common stock.............. (196)
Net loss................................ (1,217)
--------- ---- --- ------ -------- --------- ------
Balance, August 30, 1997.................. 852,160 9 3 34,234 (30,573) (299)
10% Cumulative Non Convertible Preferred
Dividend............................. 848 (848)
Issuance of common stock................ 523,985 5 70,120
Repurchase of common stock.............. (41)
Redemption of preferred stocks.......... (3) (59,271)
Redemption of common stock.............. (769,859) (8) (45,931) (57,092)
Issuance of warrants.................... 5,645
Equity issuance costs................... (7,901)
Cancellation of treasury stock.......... (26,260) (340) 340
Preferred stock dividend (Note 7)....... (1,270)
Net loss................................ (13,328)
--------- ---- --- ------ -------- --------- ------
Balance, August 29, 1998.................. 580,026 $ 6 $ $5,645 $ 0 $(111,352) $
--------- ---- --- ------ -------- --------- ------
--------- ---- --- ------ -------- --------- ------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance, August 26, 1995.................. $ 9,175
Dividends on preferred stock............ 0
Repurchase of common stock.............. (17)
Net loss................................ (4,371)
---------
Balance, August 31, 1996.................. 4,787
Dividends on preferred stock............ 0
Repurchase of common stock.............. (196)
Net loss................................ (1,217)
---------
Balance, August 30, 1997.................. 3,374
10% Cumulative Non Convertible Preferred
Dividend.............................
Issuance of common stock................ 70,125
Repurchase of common stock.............. (41)
Redemption of preferred stocks.......... (59,274)
Redemption of common stock.............. (103,031)
Issuance of warrants.................... 5,645
Equity issuance costs................... (7,901)
Cancellation of treasury stock..........
Preferred stock dividend (Note 7)....... (1,270)
Net loss................................ (13,328)
---------
Balance, August 29, 1998.................. $(105,701)
---------
---------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 53 WEEKS
ENDED ENDED ENDED
AUGUST 29, 1998 AUGUST 30, 1997 AUGUST 31, 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:
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.
F-6
<PAGE>
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 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.
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.
F-7
<PAGE>
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
F-8
<PAGE>
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Other Assets
Other assets include the fair value of identifiable intangible assets
acquired in connection with the acquisition of La Petite and are being amortized
over periods ranging from two to 10 years on the straight-line method.
Cash Equivalents
The Company's cash equivalents consist of commercial paper and money market
funds with original maturities of three months or less.
Income Taxes
The Company 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.
F-9
<PAGE>
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. OTHER ASSETS
<TABLE>
<CAPTION>
AUGUST 29, 1998 AUGUST 30, 1997
--------------- ---------------
(IN THOUSANDS OF DOLLARS)
----------------------------------
<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>
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
<TABLE>
<CAPTION>
AUGUST 29, 1998 AUGUST 30, 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 15, 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 Petites
option. The Senior Notes contain certain covenants that, among other things,
limit Parent and La Petites 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 Petites option): (i) a rate equal to an adjusted London
inter-bank offered rate (LIBOR) plus a percentage based on La Petites
financial performance or (ii) a rate equal to the higher of Chases 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 Petites 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.
F-10
<PAGE>
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS--(CONTINUED)
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):
<TABLE>
<S> <C>
1999.......................................................... $ 2,121
2000.......................................................... 2,170
2001.......................................................... 1,557
2002.......................................................... 1,000
2003 and thereafter........................................... $181,000
--------
$187,848
--------
--------
</TABLE>
4. OTHER LONG-TERM LIABILITIES
<TABLE>
<CAPTION>
AUGUST 29, 1998 AUGUST 30, 1997
--------------- ---------------
(IN THOUSANDS OF DOLLARS)
----------------------------------
<S> <C> <C>
Unfavorable leases, 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 52 WEEKS 53 WEEKS
ENDED ENDED 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)
------- ------- -------
4,798 (224) (225)
------- ------- -------
Total................................................... $ (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.
F-11
<PAGE>
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES--(CONTINUED)
Deferred income taxes result from differences between the financial
reporting and tax basis of the Companys 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.
F-12
<PAGE>
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LEASES--(CONTINUED)
Aggregate minimum future rentals payable under facility leases as of
August 29, 1998 were:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING: (IN THOUSANDS OF DOLLARS)
-------------------------
<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>
7. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
As a result of the Recapitalization, the authorized stock of Parent, as of
August 29, 1998, consists of:
<TABLE>
<C> <S>
(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.
</TABLE>
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.
F-13
<PAGE>
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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).
F-14
<PAGE>
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. STOCK BASED COMPENSATION--(CONTINUED)
Stock option transactions during the past three years have been as follows:
<TABLE>
<CAPTION>
STOCK OPTIONS ISSUED 1998 PLANS
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.
F-15
<PAGE>
[BACK COVER]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
provides for the indemnification of officers and directors under certain
circumstances against expenses incurred in successfully defending against a
claim and authorizes Delaware corporations to indemnify their officers and
directors under certain circumstances against expenses and liabilities incurred
in legal proceedings involving such persons because of their being or having
been an officer or director. Pursuant to Section 102(b)(7) of the General
Corporation Law of the State of Delaware, the Certificate of Incorporation of
the Company and Parent provide that the directors of the Company and Parent,
individually or collectively, shall not be held personally liable to the Company
or Parent (as the case may be) or their respective stockholders for monetary
damages for breaches of fiduciary duty as directors, except that any director
shall remain liable (1) for any breach of the director's fiduciary duty of
loyalty to the Company or Parent (as the case may be) or their respective
stockholders, (2) for acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of law, (3) for liability under
Section 174 of the General Corporation Law of the State of Delaware or (4) for
any transaction from which the director derived an improper personal benefit.
The by-laws of the Company and Parent provide for indemnification of their
respective officers and directors to the full extent authorized by law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- -----------
<S> <C>
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
5.1 -- Opinion of O'Sullivan, Graev & Karabell, LLP
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., Chase 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
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
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- -----------
<S> <C>
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
12.1 -- Statement re: computation of ratios
21.1 -- Subsidiaries of Registrant
23.1 -- Consent of O'Sullivan Graev & Karabell, LLP (included in Exhibit 5.1)
*23.2 -- Consent of Deloitte & Touche LLP
24.1 -- Powers of Attorney (included on the signature page)
25.1 -- Statement of Eligibility and Qualifications under the Trust Indenture Act of 1939 of PNC Bank,
National Association as Trustee
**27.1 -- Financial Data Schedule
</TABLE>
- ------------------
* Filed herewith.
** Incorporated by reference to the Exhibits of LPA Holding Corp.'s Form 10-K,
Commission File No. 333-56239-01, filed with the Securities and Exchange
Commission on November 24, 1998.
(b) Financial Statement Schedules:
Schedule I--Condensed Financial Information of Registration
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are not required under the related
instructions, are inapplicable or not material, or the information called for
thereby is otherwise included in the financial statements and therefore have
been omitted.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrants hereby undertake:
1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a) (3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement.
II-2
<PAGE>
Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrants pursuant to the DGCL, the Act, the
Certificate of Incorporation and Bylaws of the Company or Parent, or otherwise,
the registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrants of expenses incurred or paid by a director, officer or
controlling person of any registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling, person
in connection with the securities being registered, the registrants will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(d) The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS POST EFFECTIVE AMENDMENT NO. 1 TO THE REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW YORK ON THIS 11TH DAY OF
DECEMBER, 1998.
LA PETITE ACADEMY, INC.
By: /s/ JAMES R. KAHL
----------------------------------
Name: James R. Kahl
Title: President and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS POST
EFFECTIVE AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED ON THIS
11TH DAY OF DECEMBER, 1998 BY THE FOLLOWING PERSONS IN THE CAPACITY INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ JAMES R. KAHL Chairman of the Board of Directors, President, Chief Executive
- ------------------------------------------ Officer and Director (principal executive officer)
James R. Kahl
* Senior Vice President, Finance and Chief Financial Officer
- ------------------------------------------ (principal financial officer and principal accounting officer)
Phillip M. Kane
* Director
- ------------------------------------------
Mitchell J. Blutt, M.D.
* Director
- ------------------------------------------
Robert E. King
* Director
- ------------------------------------------
Stephen P. Murray
* Director
- ------------------------------------------
Brian J. Richmand
</TABLE>
*By: /s/JAMES R. KAHL
-------------------------------------
James R. Kahl, Attorney-in-Fact
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS POST EFFECTIVE AMENDMENT NO. 1 TO THE REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW YORK ON THIS 11TH DAY OF
DECEMBER, 1998.
LPA HOLDING CORP.
By: /s/ JAMES R. KAHL
----------------------------------
Name: James R. Kahl
Title: President and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS POST
EFFECTIVE AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED ON THIS
11TH DAY OF DECEMBER, 1998 BY THE FOLLOWING PERSONS IN THE CAPACITY INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ JAMES R. KAHL President, Chief Executive Officer, Chief Financial Officer and
- ------------------------------------------ Director (principal executive officer, principal financial officer
James R. Kahl and principal accounting officer)
* Director
- ------------------------------------------
Mitchell J. Blutt, M.D.
* Director
- ------------------------------------------
Robert E. King
* Director
- ------------------------------------------
Stephen P. Murray
* Director
- ------------------------------------------
Brian J. Richmand
</TABLE>
*By: /s/ JAMES R. KAHL
--------------------------------------
James R. Kahl, Attorney-in-Fact
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS POST EFFECTIVE AMENDMENT NO. 1 TO THE REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW YORK ON THIS 11TH DAY OF
DECEMBER, 1998.
LPA SERVICES, INC
By: /s/ JAMES R. KAHL
----------------------------------
Name: James R. Kahl
Title: President and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS POST
EFFECTIVE AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED ON THIS
11TH DAY OF DECEMBER, 1998 BY THE FOLLOWING PERSONS IN THE CAPACITY INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ JAMES R. KAHL President, Chief Executive Officer and Director (principal
- ------------------------------------------ executive officer)
James R. Kahl
* Vice President of Finance, Chief Financial Officer and Director
- ------------------------------------------ (principal financial officer and principal accounting officer)
Phillip M. Kane
* Secretary and Director
- ------------------------------------------
Peggy A. Ford
</TABLE>
*By: /s/ JAMES R. KAHL
--------------------------------------
James R. Kahl, Attorney-in-Fact
II-6
<PAGE>
LPA HOLDING CORP.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
BALANCE SHEETS AUGUST 29, 1998 AUGUST 30, 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 $1,036.558)................ 25,625
Stockholders' equity:
10% cumulative preferred stock ($.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 ($.01 par value per share); 150,000 shares
authorized as of August 30, 1997, and no shares authorized as of August 29,
1998; 40,036 shares issued and outstanding as of August 30, 1997, and no
shares issued or outstanding as of August 29, 1998...........................
Junior preferred stock ($.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 ($.01 par value per share); 1,500,000 shares authorized and
852,160 shares issued and outstanding as of August 30, 1997; and 950,000
shares authorized and 560,026 shares issued and outstanding as of August 29,
1998......................................................................... 6 9
Class B common stock ($.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) 3,373
--------- ---------
$ (9,862) $ 3,465
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements.
S-1
<PAGE>
LPA HOLDING CORP.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 53 WEEKS
ENDED ENDED ENDED
AUGUST 29, AUGUST 30, AUGUST 31,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS
Minority interest in net income of subsidiary.................................... $ 2,849 $ 3,693 $ 3,561
-------- -------- --------
Loss before equity in net income 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.
S-2
<PAGE>
LPA HOLDING CORP.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 53 WEEKS
ENDED ENDED ENDED
AUGUST 29, AUGUST 30, AUGUST 31,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
STATEMENTS OF CASH FLOWS
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.
S-3
<PAGE>
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
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
AUGUST 31, COSTS AND CHARGED TO AUGUST 31,
DESCRIPTION 1996 EXPENSES RESERVE 1996
- ----------- -------- -------- ------ --------
<S> <C> <C> <C> <C>
Reserve for Closed Academies........................ $ 10,893 $ $3,424 $ 7,469
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
AUGUST 26, COSTS AND CHARGED TO AUGUST 26,
DESCRIPTION 1995 EXPENSES RESERVE 1995
- ----------- -------- -------- ------ --------
<S> <C> <C> <C> <C>
Reserve for Closed Academies........................ $ 13,711 $ $2,818 $ 10,893
</TABLE>
S-4
<PAGE>
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...................... $ 82 $1,717 $1,604 $196
<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
<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...................... $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.
S-5
<PAGE>
INDEPENDENT AUDITORS' CONSENT
To Stockholders and the Board of Directors of
LPA Holding Corp.
Overland Park, Kansas
We consent to the use in this Post-Effective Amendment No. 1 to Registration
Statement No. 333-56239 of LPA Holding Corp. and Subsidiary of our report dated
October 5, 1998, appearing in the Prospectus, which is a part of such
Registration Statement, and to the references to us under the headings "Selected
Financial Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
Decvember 8, 1998
