<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 6, 1998 Commission File No. 0-
LPA HOLDING CORP.
(exact name of registrant as specified in its charter)
SEE TABLE OF ADDITIONAL REGISTRANTS
Delaware 48-1144353
(state or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
8717 WEST 110TH STREET, SUITE 300
OVERLAND PARK, KANSAS 66210
(address of principal executive office and zip code)
(913) 345-1250
(registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------
As of July 18, 1998, LPA Holding Corp. had outstanding 560,026 shares of Class A
Common Stock (par value, $.01 per share) and 20,000 shares of Class B Common
Stock (par value, $.01 per share). As of July 18, 1998, each of the additional
registrants had the number of outstanding shares which is shown on the table
below.
<PAGE> 2
ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
Number of Shares
Jurisdiction of Commission IRS Employer of Common
Name Incorporation File Number Identification No. Stock Outstanding
- ---- --------------- ----------- ------------------ -----------------
<S> <C> <C> <C> <C>
La Petite Academy, Inc. Delaware 0- 43-1243221 100 shares of Common
Stock (par value, $.01 per
share)
LPA Services, Inc. Delaware 0- 74-2849053 1,000 shares of Common
Stock (par value, $.01 per
share)
</TABLE>
<PAGE> 3
LPA HOLDING CORP.
INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
PAGE
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED): ----
<S> <C>
Consolidated Balance Sheets 1-2
Consolidated Statements of Income 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 13
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5. OTHER INFORMATION 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15-16
SIGNATURES 17-19
</TABLE>
<PAGE> 4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
40 WEEKS ENDED JUNE 6, 1998
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS JUNE 6, 1998 AUGUST 30, 1997
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,906 $ 23,971
Restricted cash investments 960 2,312
Accounts and notes receivable, net 4,962 4,976
Prepaid food and supplies 5,681 5,954
Other prepaid expenses 4,420 3,645
Refundable income taxes 1,658 559
Current deferred income taxes 1,433 1,024
-------- --------
Total current assets 26,020 42,441
Property and equipment, at cost:
Land 7,301 6,927
Buildings and leasehold improvements 69,238 64,811
Equipment 26,557 22,529
Facilities under construction 1,716 317
-------- --------
104,812 94,584
Less accumulated depreciation 44,075 33,460
-------- --------
Net property and equipment 60,737 61,124
Other assets (Note 3) 65,690 64,187
Deferred income taxes 6,986 3,408
-------- --------
$159,433 $171,160
======== ========
</TABLE>
-1-
<PAGE> 5
LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
40 WEEKS ENDED JUNE 6, 1998
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY JUNE 6, 1998 AUGUST 30, 1997
<S> <C> <C>
Current liabilities:
Overdrafts due banks $ 5,888 $ 2,356
Accounts payable 6,051 6,224
Current reserve for closed academies 1,635 1,860
Current maturities of long-term debt and capital lease obligations 2,674 122
Accrued salaries, wages and other payroll costs 11,250 10,717
Accrued insurance liabilities 4,005 4,156
Accrued property and sales taxes 3,135 4,128
Accrued interest payable 1,418 719
Other current liabilities 2,995 4,761
--------- ---------
Total current liabilities 39,051 35,043
Long-term debt and capital lease obligations (Note 4) 185,796 85,903
Other long-term liabilities (Note 5) 12,869 14,319
Commitments and contingencies (Note 6)
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 June 6, 1998; 800,000 shares issued
and outstanding at aggregate liquidation preference as of August 30, 1997;
per share liquidation preference of $40.836, and no shares outstanding as of
June 6, 1998 32,521
Series A 12% redeemable preferred stock ($.01 par value per share); 30,000
shares authorized, issued and outstanding at aggregate liquidation
preference as of June 6, 1998 (per share liquidation preference of
$1,007.353) 24,619
Stockholders' equity (Note 1):
10% cumulative convertible preferred stock ($.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 June 6, 1998
10% nonconvertible preferred stock ($.01 par value per share); 150,000
shares authorized as of August 30, 1997, and no shares authorized as of June
6, 1998; 40,036 shares issued and outstanding as of August 30, 1997, and no
shares issued or outstanding as of June 6, 1998 1
Junior preferred stock ($.01 par value per share); 650,000 authorized as of
August 30, 1997, and no shares authorized as of June 6, 1998; 213,750 shares
issued and outstanding as of August 30, 1997, and no shares issued or
outstanding as of June 6, 1998 2
Class A common stock ($.01 par value per share); 1,500,000 shares authorized
and 852,160 shares issued and outstanding as of August 30, 1997; and 950,000
shares authorized and 560,026 shares issued and outstanding as of June 6,
1998 6 9
Class B common stock ($.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 June 6, 1998
Common stock warrants 5,645
Additional paid-in capital (65,536) 34,234
Accumulated deficit (43,017) (30,573)
Less cost of treasury shares (299)
--------- ---------
(102,902) 3,374
--------- ---------
$ 159,433 $ 171,160
========= =========
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE> 6
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF INCOME
40 WEEKS ENDED JUNE 6, 1998
(In thousands of dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12 WEEKS ENDED 40 WEEKS ENDED
---------------------------- ----------------------------
JUNE 6, 1998 JUNE 7, 1997 JUNE 6, 1998 JUNE 7, 1997
<S> <C> <C> <C> <C>
Operating revenue $ 77,166 $ 74,508 $ 243,867 $ 234,491
Operating expenses:
Salaries, wages and benefits 39,997 38,486 127,769 122,563
Facility lease expense 9,240 9,062 30,568 30,205
Depreciation 3,541 3,190 10,614 10,634
Amortization of goodwill and other
intangibles 428 516 1,632 1,720
Recapitalization costs (Note 1) 8,724 8,724
Other 16,700 16,834 58,633 57,133
--------- --------- --------- ---------
78,630 68,088 237,940 222,255
--------- --------- --------- ---------
Operating income (loss) (1,464) 6,420 5,927 12,236
--------- --------- --------- ---------
Interest expense 4,679 2,124 9,595 7,118
Minority interest in net income of subsidiary 671 868 2,849 2,802
Interest income (246) (193) (847) (686)
--------- --------- --------- ---------
Net interest costs 5,104 2,799 11,597 9,234
--------- --------- --------- ---------
Income (loss) before income taxes
and extraordinary item (6,568) 3,621 (5,670) 3,002
Provision (benefit) for income taxes (1,325) 2,027 510 3,078
--------- --------- --------- ---------
Income (loss) before extraordinary
item (5,243) 1,594 (6,180) (76)
--------- --------- --------- ---------
Extraordinary loss on retirement of
debt, net of applicable income taxes
of $3,702 (Note 7) 5,416 5,416
--------- --------- --------- ---------
Net income (loss) $ (10,659) $ 1,594 $ (11,596) $ (76)
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE> 7
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
40 WEEKS ENDED JUNE 6, 1998
(In thousands of dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES: JUNE 6, 1998 JUNE 7, 1997
<S> <C> <C>
Net income (loss) $ (11,596) $ (76)
Adjustments to reconcile net income (loss) to net cash from
operating activities
Noncash portion of extraordinary loss on retirement of debt 3,207
Depreciation and amortization 12,896 13,010
Deferred income taxes (3,987) (1,675)
Minority interest in net income of La Petite Academy, Inc. 2,849 2,802
Changes in assets and liabilities:
Account and notes receivable (37) (882)
Prepaid expenses and supplies (502) (3,755)
Accrued property and sales taxes (994) (737)
Accrued interest payable 700 2,172
Other changes in assets and liabilities, net (3,465) (2,701)
--------- ---------
Net cash from (used for) operating activities (929) 8,158
--------- ---------
CASH FLOWS USED FOR INVESTING ACTIVITIES
Capital expenditures (8,228) (4,244)
Proceeds from sale of assets 533 499
--------- ---------
Net cash used for investing activities (7,695) (3,745)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES (Note 1)
Repayment of long-term debt and capital lease obligations (120,814) (877)
Additions to long-term debt 185,000
Deferred financing costs (7,491)
Retirement of old equity (162,304)
Proceeds from issuance of common stock, net of expenses 62,285
Proceeds from issuance of preferred stock 30,000
Increase (reduction) in bank overdrafts 3,531 (1,694)
Decrease in restricted cash investments 1,352 7,125
--------- ---------
Net cash from (used for) financing activities (8,441) 4,554
--------- ---------
NET INCREASE (DECREASE ) IN CASH AND CASH
EQUIVALENTS (17,065) 8,967
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 23,971 12,791
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,906 $ 21,758
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 8,246 $ 4,291
Income taxes 2,100 4,645
Cash received during the period for:
Interest $ 958 $ 588
Income taxes 207 1,141
Non-cash investing and financing activities:
Capital lease obligations of $2,879 and $62 were incurred during
the 40 weeks ended June 6,1998 and June 7, 1997 respectively,
when the Company entered into leases for new computer equipment
See notes to consolidated financial statements.
</TABLE>
-4-
<PAGE> 8
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND MERGER
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.
-5-
<PAGE> 9
As a result of the Recapitalization, the authorized stock of Parent consists
of:
(i) 30,000 shares of Series A Redeemable Preferred Stock, $.01 par value,
(the Preferred Stock) all of which were issued and outstanding. The
carrying value of the Preferred Stock is being accreted to its
redemption value of $30.0 million on May 11, 2008. The Preferred Stock
is nonvoting 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 June 6, 1998
was $1,007.353. 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 June 6, 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
June 6, 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) As of June 6, 1998, there were outstanding warrants (the 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL REPORTING - The consolidated financial statements included
herein have been prepared by the Company, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate
to make the information presented not misleading. It is suggested that these
consolidated financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Annual Report of La Petite on Form 10-K for the fiscal year ended August 30,
1997.
The Company utilizes a 52-week fiscal year ending on the last Saturday in
August composed of 13 four-week periods. The first quarter contains four
such periods or 16 weeks and each remaining quarter contains 3 periods or 12
weeks.
The information included in these interim consolidated financial statements
reflect all normal recurring adjustments which are, in the opinion of
management, necessary to fairly state the Company's financial position and
the results of its operations for the periods presented.
-6-
<PAGE> 10
3. OTHER ASSETS
(in thousands of dollars)
<TABLE>
<CAPTION>
JUNE 6, AUGUST 30,
1998 1997
-------- ---------
<S> <C> <C>
Intangible assets:
Excess purchase price over net assets acquired $ 64,277 $ 64,277
Curriculum 1,497 1,497
Workforce 0 3,248
Accumulated amortization (11,249) (12,714)
-------- --------
54,525 56,308
Deferred financing costs 7,566 12,752
Accumulated amortization (137) (8,176)
Other assets 3,736 3,303
-------- --------
$ 65,690 $ 64,187
======== ========
</TABLE>
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
(in thousands of dollars)
<TABLE>
<CAPTION>
JUNE 6, AUGUST 30,
1998 1997
--------- ---------
<S> <C> <C>
Convertible Debentures, 6.5% payable through June 1, 2011(a) $ 850 $ 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 2,800 366
--------- ---------
188,650 86,216
Less unamortized discount (180) (191)
Less current maturities of long-term debt and capital lease
obligations (2,674) (122)
--------- ---------
$ 185,796 $ 85,903
========= =========
</TABLE>
(a) Subsequent to the end of the third quarter ended June 6, 1998,
the Convertible Debentures were called and retired at face value.
(b) The Senior Notes mature on May 15, 2008. Interest is payable
semi-annually on May 15 and November 15 of each year. Commencing May
15, 2003, the Senior Notes are redeemable at various redemption
prices at Parent and La Petite's option. The Senior Notes contain
certain covenants that, among other things, limit Parent and La
Petite's ability to incur additional debt, transfer or sell assets,
and pay cash dividends.
-7-
<PAGE> 11
(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 $25.0 million. Borrowings under the Credit
Agreement are secured by substantially all of the assets of the
Parent, La Petite and its subsidiaries. Loans under the Credit
Agreement will bear an interest rate per annum equal to (at Parent
and La Petite's option): (i) a rate equal to an adjusted London
inter-bank offered rate (LIBOR) plus a percentage based on La
Petite's financial performance or (ii) a rate equal the higher of
Chase's prime rate, a certificate of deposit rate plus 1%, or the
Federal Funds rate plus 1/2 of 1% (ABR) plus in each case a
percentage based on La Petite's financial performance. Parent and La
Petite are required to pay fees of 0.5% per annum of the unused
portion of the Credit Agreement plus letter of credit fees, annual
administration fees, and agent arrangement fees. The Credit
Agreement will mature in May 2005. The term loan amortizes in an
amount equal to $1.0 million in each of the first five years, $10.0
million in the sixth year and $25.0 million in the seventh year.
5. OTHER LONG-TERM LIABILITIES
(in thousands of dollars)
<TABLE>
<CAPTION>
JUNE 6, AUGUST 30,
1998 1997
------- ----------
<S> <C> <C>
Unfavorable leases, net of accumulated amortization $ 5,133 $ 6,085
Non-current reserve for closed Academies 4,302 5,609
Long-term insurance liabilities 3,434 2,625
------- -------
$12,869 $14,319
======= =======
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
The Company has litigation pending which arose in the ordinary course of
business. Litigation is subject to many uncertainties and the outcome of the
individual matters is not presently determinable. It is management's opinion
that this litigation will not result in liabilities that would have a
material adverse effect on the Company's financial position or results of
operations.
7. EXTRAORDINARY LOSS
On May 11, 1998, the Company incurred a $5.4 million extraordinary loss
related (i) to the defeasance 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 defeasance 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.
******
-8-
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The Company's operating results for the comparative 12 and 40 weeks ended June
6, 1998 were as follows:
<TABLE>
<CAPTION>
12 WEEKS ENDED 40 WEEKS ENDED
------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
JUNE 6, PERCENT OF JUNE 7, PERCENT OF JUNE 6, PERCENT OF JUNE 7, PERCENT OF
1998 REVENUE 1997 REVENUE 1998 REVENUE 1997 REVENUE
------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue $ 77,166 100.0 $ 74,508 100.0 $243,867 100.0 $234,491 100.0
Operating expenses:
Salaries, wages and benefits 39,997 51.8 38,486 51.7 127,769 52.4 122,563 52.3
Facility lease expense 9,240 12.0 9,062 12.2 30,568 12.5 30,205 12.9
Depreciation 3,541 4.6 3,190 4.3 10,614 4.4 10,634 4.5
Amortization of goodwill and
other intangibles 428 0.6 516 0.7 1,632 0.7 1,720 0.7
Recapitalization costs 8,724 11.3 8,724 3.6
Other 16,700 21.6 16,834 22.6 58,633 24.0 57,133 24.4
-------- ----- -------- ----- -------- ----- -------- -----
Total operating expenses 78,630 101.9 68,088 91.4 237,940 97.6 222,255 94.8
-------- ----- -------- ----- -------- ----- -------- -----
Operating income (loss) $ (1,464) (1.9) $ 6,420 8.6 $ 5,927 2.4 $ 12,236 5.2
======== ===== ======== ===== ======== ===== ======== =====
EBIDTA $ 11,229 14.6 $ 10,126 13.6 $ 26,897 11.0 $ 24,590 10.5
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
The Company's operating results for the 12 and 40 weeks ended June 6, 1998 are
consistent and comparable with the 12 and 40 weeks ended June 7, 1997, except
for the Recapitalization Costs.
Historically, the Company's operating revenue has followed the seasonality of
the school year. The number of new children attending La Petite's educational
facilities (the Academies) is highest in September-October and January-February,
generally referred to as the Fall and Winter enrollment periods. Revenues tend
to decline during the calendar year-end holiday period and during the Summer. As
a result of this seasonality, results for one quarter are not necessarily
indicative of results for an entire year.
Six Academies in operation at the end of the third quarter of fiscal year 1997
were closed prior to the end of the second quarter of fiscal year 1998. Two new
Academies were opened during this same period. As a result, the Company operated
746 Academies at the end of the third quarter of fiscal year 1998, four less
than at the end of the same quarter of fiscal year 1997. The closures resulted
from management decisions to not renew the leases of certain Academies at lease
expiration.
Operating revenue increased 3.6% during the 12 weeks and 4.0% during the 40
weeks ended June 6, 1998. Excluding closed Academies from both years, operating
revenue increased 4.1% during the 12 weeks and 4.8% during the 40 weeks, full
time equivalent (FTE) attendance decreased 0.6% during the 12 weeks and grew
0.3% during the 40 weeks and average weekly FTE tuition increased 4.7% during
the 12 weeks and 4.4% during the 40 weeks. The increase in average weekly FTE
tuition was principally due to selective price increases which were put into
place in the second quarter of fiscal year 1998, based on geographic market
conditions and class capacity utilization.
-9-
<PAGE> 13
Salaries, wages, and benefits increased $1.5 million or 3.9% during the 12 weeks
and $5.2 million or 4.2% during the 40 weeks ended June 6, 1998 as compared to
the same periods of fiscal year 1997. The increase was principally due to
increased average hourly wage rates as staff hours worked were relatively
stable. As a percentage of revenue, labor costs were 52.4% for the 40 weeks
ended June 6, 1998 as compared to 52.3% during the same period of fiscal year
1997.
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 40 weeks ended June 6, 1998 as
compared to the same period of fiscal year 1997. Recapitalization Costs consist
principally of transaction bonuses and related taxes of $1.5 million and
payments for the cancellation of options of $7.2 million.
Interest expense for the 40 weeks ended June 6, 1998 increased $2.4 million from
the same period of fiscal year 1997. The increase was mainly due to $1.6 million
in fees for bridge loan commitments related to the new debt offerings and
increased interest payments related to the 10% Senior Notes and term loan under
the Credit Agreement (see Notes to the Consolidated Financial Statements).
After adding back to pre-tax income the permanent differences, the effective
income tax rate for the 12 and 40 weeks ended June 6, 1998 was approximately 25%
and 59% as compared to approximately 41% and 40% for the 12 and 40 weeks ended
June 7, 1997.
On May 11, 1998, the Company incurred a $5.4 million extraordinary loss related
(i) to the defeasance 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
defeasance 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.
As a result of the foregoing, the Company incurred an operating loss of $1.5
million for the 12 weeks ended June 6, 1998, as compared to operating income of
$6.4 million during the same period of fiscal year 1997. Operating income for
the 40 weeks ended June 6, 1998 was $5.9 million as compared to operating income
of $12.2 million during the same period of fiscal year 1997. Earnings before
recapitalization costs, extraordinary items, interest, taxes, depreciation and
amortization (EBITDA) was $11.2 million for the 12 weeks ended June 6, 1998 as
compared to $10.1 million for the same period of fiscal year 1997, an increase
of 10.9%. EBITDA for the 40 weeks ended June 6, 1998, was $26.9 million as
compared to $24.6 million for the same period of fiscal year 1997, an increase
of 9.4%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are from cash flow generated by
operations, borrowings under the revolving credit facility under the Credit
Agreement, and sale and leaseback financing for newly constructed Academies. The
Company's principal uses of liquidity are to meet its debt service requirements,
finance its capital expenditures and provide working capital.
The Company incurred substantial indebtedness in connection with the
Recapitalization. See Note 1 of the Notes to Consolidated Financial Statements.
-10-
<PAGE> 14
In connection with the Recapitalization, Parent and La Petite entered into the
Credit Agreement, consisting of the $40 million Term Loan Facility and the $25
million Revolving Credit Facility. Parent and La Petite borrowed the entire $40
million available under the Term Loan Facility of the Recapitalization. In
addition, La Petite has outstanding letters of credit in an aggregate amount
equal to $3.4 million and $21.6 million remains available for working capital
purposes under the Revolving Credit Facility. The borrowings under the Credit
Agreement, together with the proceeds from the sale of the Senior Notes and the
Equity Investment, were used to consummate the Recapitalization and to pay the
related fees and expenses.
The Term Loan Facility is subject to mandatory prepayment in the event of
certain equity or debt issuances or asset sales by the Company or any of its
subsidiaries and in amounts equal to specified percentages of the Company's
excess cash flow. The Term Loan Facility will terminate on May 11, 2005. The
term loan amortizes in an amount equal to $1.0 million in each of the first five
years, $10.0 million in the sixth year and $25.0 million in the seventh year.
The Revolving Credit Facility will terminate on the same date.
The Company currently has four 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 fixed cash return on its capitalized cost over the term of
the lease. In addition, many of the Company's leases provide for either
contingent rentals if the Academy's operating revenue exceeds certain levels or
a fixed percentage increase every five years. Although the Company expects sale
and leaseback transactions to continue to finance its expansion, no assurance
can be given that such funding will always be available.
Total capital expenditures for fiscal 1995, 1996, 1997 and for the 40 weeks
ended June 6, 1998 were $9.1 million, $8.6 million, $7.7 million and $8.2
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
1995, 1996, 1997 and for the 40 weeks ended June 6, 1998 were $4.8 million, $6.7
million, $7.2 million and $5.6 million, respectively. Maintenance capital
expenditures for the 40 weeks ended June 6, 1998 included $0.7 million for the
installation of a national Academy Document and Management Information Network
(ADMIN) personal computer system. For fiscal 1998, the Company expects total
maintenance capital expenditures to be approximately $9.5 million. 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 1995, 1996, 1997 and for the 40 weeks ended June 6, 1998 were
$10.0 million, $9.4 million, $9.2 million and $7.4 million, respectively. Over
the past three fiscal years, total expenditures for the maintenance and upkeep
of the Company's Academies have averaged approximately $21,000 per Academy each
year.
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.
-11-
<PAGE> 15
MANAGEMENT INFORMATION SYSTEMS AND THE YEAR 2000
The arrival of the year 2000 is not expected to have any significant impact on
the Company's computerized information systems and the cost of compliance is
expected to be minimal. 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 expected to be installed during
calendar 1998 as part of the annual licensing fees. In the event that the
licensor is unable to deliver such upgrades, other comparable software packages
at comparable costs, which are year 2000 compliant, are currently available in
the market.
-12-
<PAGE> 16
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS.
The Company has litigation pending which arose in the ordinary course of
business. In management's opinion, none of such litigation in which the Company
is currently involved will result in liabilities that will have a material
adverse effect on its financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On May 1, 1998, La Petite issued $35.4 million aggregate principal amount of its
12.125% Subordinated Exchange Debentures due 2003 (the Exchange Debentures) in
exchange for all outstanding shares of its Class A Cumulative Redeemable
Exchangeable Preferred Stock (the Preferred Stock), at the exchange rate of
$1.00 principal amount of the Exchange Debentures for each $1.00 of liquidation
preference of the Preferred Stock. The issuance of the Exchange Debentures in
exchange for the Preferred Stock was not registered under the Securities Act of
1933, as amended (the Securities Act), in reliance on the exemption provided by
Section 3(9) thereunder for transactions involving an exchange of securities by
the issuer with its existing security holders.
On May 11, 1998, Parent issued to Investor (i) 503,985 shares of Class A Common
Stock, par value $.01 per share, for an aggregate cash consideration of $67.4
million, (ii) 20,000 shares of Class B Common Stock, par value $.01 per share,
for an aggregate cash consideration of $2.7 million, and (iii) 30,000 shares of
Series A Redeemable Preferred Stock, par value $.01 per share, and warrants to
purchase up to 6.0% of Parent's common stock on a fully diluted basis, for an
aggregate cash consideration of $30.0 million. The warrants entitle Investor to
purchase Parent, in whole or in part and at any time on or before May 11, 2008,
42,180 shares of Class A Common Stock at a purchase price of $.01 per share, by
delivering a written notice of Investor's election to exercise the warrants and
payment of the exercise price. The issuance of these shares and warrants was not
registered under the Securities Act in reliance on the exemption provided by
Section 4(2) thereunder for transactions not involving a public offering. These
shares and warrants were sold only to Investment, an "accredited investor"
pursuant to Rule 506 under the Securities Act.
On May 11, 1998, Parent and La Petite issued $145 million aggregate principal
amount of their 10.0% Senior Notes due 2008 (the Old Notes). The issuance of the
Old Notes was not registered under the Securities Act in reliance on the
exemption provided by Section 4(2) thereunder for transactions not involving a
public offering. The Old Notes were sold only to "qualified institutional
buyers" pursuant to Rule 144A under the Securities Act. Pursuant to a
registration statement (file number 333-56239, with respect to La Petite;
333-56239-01, with respect to Parent; and 333-56239-02, with respect to
Services) (the Registration Statement) declared effective on June 26, 1998,
Parent and La Petite offered (the Exchange Offer) their 10% Series B Senior
Notes due 2008 (the New Notes) in exchange for the Old Notes, at the exchange
rate of $1,000 principal amount of the Old Notes for $1,000 principal amount of
the New Notes. The Exchange Offer commenced on June 30, 1998 and will terminate
on July 30, 1998, unless extended, upon the exchange of all of the New Notes for
the Old Notes. The Registration Statement also covered the issuance of
guarantees issued by LPA Services, Inc. of its obligations under the New Notes.
Such guarantees were issued for no additional consideration. The amount of New
Notes registered, the aggregate price of the offering amount registered, the
amount sold and the aggregate offering price of the amount sold were as follows:
<TABLE>
<CAPTION>
Aggregate Price Aggregate Offering
New Notes of Offering Amount Price of
Registered Amount Registered Sold Amount Sold
---------- ----------------- ---- -----------
<S> <C> <C>
$145,000,000 $145,000,000 [Exchange Offer not yet completed]
</TABLE>
-13-
<PAGE> 17
The amount of expenses incurred by the Company in respect of the Exchange Offer
was approximately $200,000 (used for legal, accounting and printing expenses),
and none of such amounts were direct or indirect payments to directors,
officers, general partners of the Company or their associates or to persons
owning 10% or more of any class of equity securities of the Company or to
affiliates of the Company. The Company did not receive any proceeds from the
Offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A Special Meeting of the Stockholders of Parent was held on May 5, 1998. The
stockholders of Parent approved the merger of a wholly-owned subsidiary of
Investor with and into Parent (see Note 1 to the Consolidated Financial
Statements.) The following shares were represented at the meeting, all of which
were voted in favor of the merger: 680,000 shares of Class A Common Stock;
80,000 shares of 10% Cumulative Convertible Preferred Stock; and 213,750 shares
of 10% Junior Preferred Stock..
ITEM 5. OTHER INFORMATION.
None.
-14-
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits as follows:
Exhibit
Number Description
------ -----------
* 3.1 Amended and Restated Certificate of Incorporation of LPA
Holding Corp.
* 3.2 Certificate of Designations, Preferences and Rights of Series
A Redeemable Preferred Stock of LPA Holding Corp.
* 3.3 Bylaws of LPA Holding Corp.
* 3.4 Amended and Restated Certificate of Incorporation of La Petite
Academy, Inc.
* 3.5 Bylaws of La Petite Academy, Inc.
* 4.1 Indenture among LPA Holding Corp., La Petite Academy, Inc.,
LPA Services, Inc. and PNC Bank, National Association dated
as of May 11, 1998
* 10.1 Purchase Agreement among Vestar/LPA Investment Corp., La
Petite Academy, Inc., LPA Services, Inc., Chase Securities
Inc. and NationsBanc Montgomery Securities LLC dated May 6,
1998
* 10.2 Exchange and Registration Rights Agreement among La Petite
Academy, Inc., LPA Holding Corp., LPA Services, Inc., 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
* 10.4 Stockholders Agreement among LPA Holding Corp., Vestar/LPT
Limited Partnership, LPA Investment LLC and the management
stockholders dated as of May 11, 1998
* 10.5 1998 Stock Option Plan and Stock Option Agreement for LPA
Holding Corp. dated as of May 18, 1998
* 10.6 Preferred Stock Registration Rights Agreement between LPA
Holding Corp. and LPA Investment LLC dated May 11, 1998
* 10.7 Registration Rights Agreement among LPA Holding Corp.,
Vestar/LPT Limited Partnership, the stockholders listed
therein and LPA Investment LLC, dated May 11, 1998
* 10.8 Employment Agreement among LPA Holding Corp., La Petite
Academy, Inc. and James R. Kahl
* 10.9 Employment Agreement among LPA Holding Corp., La Petite
Academy, Inc. and Rebecca Perry
* 10.10 Employment Agreement among LPA Holding Corp., La Petite
Academy, Inc. and Phillip Kane
* 10.11 Credit Agreement dated as of May 11, 1998 among La Petite
Academy, Inc., LPA Holding Corp., Nationsbank, N.A., and The
Chase Manhattan Bank
* 10.12 Pledge Agreement among La Petite Academy, Inc., LPA Holding
Corp., Subsidiary Pledgors and Nationsbank, N.A. dated as of
May 11, 1998
* 10.13 Security Agreement among La Petite Academy, Inc., LPA Holding
Corp., Subsidiary Guarantors and Nationsbank, N.A. dated as
of May 11, 1998
* 10.14 Parent Guarantee Agreement among LPA Holding Corp. and
Nationsbank, N.A. dated as of May 11, 1998
* 10.15 Subsidiary Guarantee Agreement among Subsidiary Guarantor of
La Petite Academy, Inc., LPA Services, Inc. and Nationsbank,
N.A. dated as of May 11, 1998
* 10.16 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
* 23.1 Consent of O'Sullivan Graev & Karabell, LLP
* 23.2 Consent of Deloitte & Touche LLP
27.1 Financial Date Schedule
Above * items are incorporated by reference to Form S-4 filed by
Parent, La Petite and Services with the Securities and Exchange
Commission on June 5, 1998 (File Numbers 333-56239; -01; -02,
respectively)
-15-
<PAGE> 19
b. Reports on Form 8-K:
Item 5 reporting (i) the March 19, 1998 announcement by Vestar Capital
Partners that it had entered into an Agreement and Plan of Merger with an
affiliate of Chase Capital Partners, and (ii) the March 27, 1998
announcement by the Company that on May 1, 1998 it would issue its Exchange
Debentures in exchange for all outstanding Preferred Stock.
-16-
<PAGE> 20
SIGNATURE
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LPA HOLDING CORP.
Dated July 18, 1998 /s/ James R. Kahl
-----------------------------------
By: James R. Kahl
President, Chief Executive Officer
and duly authorized representative
of the registrant
-17-
<PAGE> 21
SIGNATURE
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LA PETITE ACADEMY, INC.
Dated July 18, 1998 /s/ Phillip M. Kane
-----------------------------------
By: Phillip M. Kane
Senior Vice President, Chief
Financial Officer and duly
authorized representative of the
registrant
-18-
<PAGE> 22
SIGNATURE
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LPA SERVICES, INC.
Dated July 18, 1998 /s/ Phillip M. Kane
-----------------------------------
By: Phillip M. Kane
Vice President of Finance, Chief
Financial Officer and duly
authorized representative of the
registrant
-19-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 6, 1998, AND THE CONSOLIDATED STATEMENT OF
INCOME FOR THE 40 WEEKS ENDED JUNE 6, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 10-MOS
<FISCAL-YEAR-END> AUG-29-1998
<PERIOD-END> JUN-6-1998
<CASH> 6,906
<SECURITIES> 0
<RECEIVABLES> 4,962
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,020
<PP&E> 104,812
<DEPRECIATION> 44,075
<TOTAL-ASSETS> 159,433
<CURRENT-LIABILITIES> 39,051
<BONDS> 185,796
24,619
0
<COMMON> 6
<OTHER-SE> (102,908)
<TOTAL-LIABILITY-AND-EQUITY> 159,433
<SALES> 0
<TOTAL-REVENUES> 243,867
<CGS> 0
<TOTAL-COSTS> 237,940
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,595
<INCOME-PRETAX> (5,670)
<INCOME-TAX> 510
<INCOME-CONTINUING> (6,180)
<DISCONTINUED> 0
<EXTRAORDINARY> (5,416)
<CHANGES> 0
<NET-INCOME> (11,596)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
