<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 March 13, 1999 Commission File No. 333-56239-01
LPA HOLDING CORP.
(exact name of registrant as specified in its charter)
SEE TABLE OF ADDITIONAL REGISTRANTS
Delaware 48-1144353
(state or other jurisdiction of (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 April 9, 1999, LPA Holding Corp. had outstanding 560,026 shares of Class A
Common Stock (par value, $.01 per share) and 20,000 shares of Class B Common
Stock (par value, $.01 per share). As of April 9, 1999, 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 333-56239 43-1243221 1,000 shares of Common
Stock (par value, $.01 per share)
LPA Services, Inc. Delaware 333-56239-02 74-2849053 1,000 shares of Common
Stock (par value, $.01 per share)
</TABLE>
2
<PAGE> 3
LPA HOLDING CORP.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
PAGE
----
<S> <C>
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED):
Consolidated Balance Sheets 4-5
Consolidated Statements of Income 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13-14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 5. OTHER INFORMATION 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16-18
</TABLE>
3
<PAGE> 4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
28 WEEKS ENDED MARCH 13, 1999
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS March 13, August 29,
1999 1998
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,469 $ 6,868
Restricted cash investments 1,956 1,756
Accounts and notes receivable, net 6,091 7,002
Prepaid supplies 6,799 5,987
Other prepaid expenses 3,153 2,259
Refundable income taxes 1,776
Current deferred income taxes 489 1,124
-------- --------
Total current assets 21,957 26,772
Property and equipment, at cost:
Land 6,120 6,120
Buildings and leasehold improvements 74,252 71,754
Equipment 19,476 18,695
Land and facilities under construction 10,823 2,264
-------- --------
110,671 98,833
Less accumulated depreciation 44,686 37,839
-------- --------
Net property and equipment 65,985 60,994
Other assets (Note 3) 62,481 64,919
Deferred income taxes 8,877 8,106
-------- --------
$159,300 $160,791
======== ========
</TABLE>
4
<PAGE> 5
LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
28 WEEKS ENDED MARCH 13, 1999
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) (CONTINUED)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY March 13, August 29,
1999 1998
<S> <C> <C>
Current liabilities:
Overdrafts due banks $ 4,278 $ 2,890
Accounts payable 5,910 7,447
Current reserve for closed academies 1,557 1,595
Current maturities of long-term debt and capital lease obligations 7,121 2,121
Accrued salaries, wages and other payroll costs 11,754 10,937
Accrued insurance liabilities 3,946 4,043
Accrued property and sales taxes 2,864 4,103
Accrued interest payable 5,108 4,771
Other current liabilities 2,443 5,572
--------- ---------
Total current liabilities 44,981 43,479
Long-term debt and capital lease obligations (Note 4) 184,639 185,727
Other long-term liabilities (Note 5) 11,194 11,661
Series A 12% redeemable preferred stock ($.01 par value per share);
30,000 shares authorized, issued and outstanding at aggregate 27,934 25,625
liquidation preference of $1,036.558 as of August 29, 1998, and
$1,103.388 as of March 13, 1999
Stockholders' equity:
Class A common stock ($.01 par value per share); 950,000 shares 6 6
authorized and 560,026 shares issued and outstanding as of August 29,
1998 and March 13, 1999
Class B common stock ($.01 par value per share); 20,000 shares
authorized, issued and outstanding as of August 29, 1998 and March
13, 1999
Common stock warrants 5,645 5,645
Accumulated deficit (115,099) (111,352)
--------- ---------
Total stockholders' equity: (109,448) (105,701)
--------- ---------
$ 159,300 $ 160,791
========= =========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF INCOME
28 WEEKS ENDED MARCH 13, 1999
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
12 Weeks Ended 28 Weeks Ended
--------------------- -----------------------
March 13, March 14, March 13, March 14,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Operating revenue $ 74,230 $ 70,811 $ 173,019 $ 166,701
Operating expenses:
Salaries, wages and benefits 39,731 37,384 92,131 87,772
Facility lease expense 9,358 9,129 21,677 21,328
Depreciation 2,756 3,073 6,949 7,073
Amortization of goodwill and other
intangibles 252 516 588 1,204
Other 17,355 17,325 43,112 41,933
--------- --------- --------- ---------
69,452 67,427 164,457 159,310
--------- --------- --------- ---------
Operating income 4,778 3,384 8,562 7,391
--------- --------- --------- ---------
Interest expense 4,329 2,068 10,260 4,917
Minority interest in net income of
subsidiary 2,178
Interest income 5 (266) (124) (601)
--------- --------- --------- ---------
Net interest costs 4,334 1,802 10,136 6,494
--------- --------- --------- ---------
Income (loss) before income taxes 444 1,582 (1,574) 897
Provision (benefit) for income taxes 355 846 (136) 1,835
--------- --------- --------- ---------
Net income (loss) $ 89 736 $ (1,438) (938)
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
28 WEEKS ENDED MARCH 13, 1999
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
28 Weeks Ended
------------------------------------
March 13, 1999 March 14, 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,438) $ (938)
Adjustments to reconcile net loss to net cash from
operating activities
Depreciation and amortization 7,990 8,731
Deferred income taxes (136) (1,387)
Minority interest in net income of La Petite Academy, Inc. 2,178
Changes in assets and liabilities:
Accounts and notes receivable 811 373
Prepaid expenses and supplies (1,702) 488
Accrued property and sales taxes (1,239) (1,349)
Accrued interest payable 337 251
Other changes in assets and liabilities, net (2,290) (2,026)
-------- --------
Net cash from operating activities 2,333 6,321
-------- --------
CASH FLOWS USED FOR INVESTING ACTIVITIES
Capital expenditures (14,744) (4,776)
Proceeds from sale of assets 3,912 339
-------- --------
Net cash used for investing activities (10,832) (4,437)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt and capital lease obligations (5,088) (229)
Borrowings under the Revolving Credit Agreement 9,000
Increase in bank overdrafts 1,388 (406)
Decrease (increase) in restricted cash investments (200) (465)
-------- --------
Net cash from (used for) financing activities 5,100 (1,100)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (3,399) 784
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,868 23,971
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,469 $ 24,755
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 9,364 $ 4,211
Income taxes 65 1,951
Cash received during the period for:
Interest $ 123 $ 665
Income taxes 1,776 204
NON-CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations of $929 were incurred during the 28 weeks ended
March 14, 1998, when the Company entered into leases for new computer
equipment
</TABLE>
See notes to consolidated financial statements.
7
<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). The Recapitalization was
completed May 11, 1998.
Parent, consolidated with La Petite and Services, is referred to herein as
the Company.
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
29, 1998.
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.
9
<PAGE> 9
The information included in these interim consolidated financial statements
reflects 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.
3. OTHER ASSETS
(in thousands of dollars)
<TABLE>
<CAPTION>
March 13, 1999 August 29, 1998
<S> <C> <C>
Intangible assets:
Excess purchase price over net assets acquired $ 64,277 $ 64,277
Curriculum 1,497 1,497
Accumulated amortization (13,033) (11,784)
-------- --------
52,741 53,990
Deferred financing costs 7,605 7,605
Accumulated amortization (712) (259)
Other assets 2,847 3,583
-------- --------
$ 62,481 $ 64,919
======== ========
</TABLE>
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
(in thousands of dollars)
<TABLE>
<CAPTION>
March 13, 1999 August 29, 1998
<S> <C> <C>
Senior Notes, 10.0% due May 15, 2008 $145,000 $145,000
Borrowings under credit agreement 44,500 40,000
Capital lease obligations 2,260 2,848
-------- --------
191,760 187,848
Less current maturities of long-term debt
and capital lease obligations (7,121) (2,121)
-------- --------
$184,639 $185,727
======== ========
</TABLE>
5. OTHER LONG-TERM LIABILITIES (in thousands of dollars)
<TABLE>
<CAPTION>
March 13, 1999 August 29, 1998
<S> <C> <C>
Unfavorable lease, net of
accumulated amortization $ 4,181 $ 4,848
Non-current reserve for closed academies 3,010 3,822
Long-term insurance liabilities 4,003 2,991
------- -------
$11,194 $11,661
======= =======
</TABLE>
10
<PAGE> 10
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
operation.
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 28 weeks ended March
13, 1999 were as follows:
<TABLE>
<CAPTION>
12 Weeks Ended 28 Weeks Ended
-------------------------------------------- ---------------------------------------------
(In thousands of dollars)
March 13, Percent of March 14, Percent of March 13, Percent of March 14, Percent of
1999 Revenue 1998 Revenue 1999 Revenue 1998 Revenue
--------------------- ---------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue $ 74,230 100.0% $ 70,811 100.0% $173,019 100.0% $166,701 100.0%
Operating expenses:
Salaries, wages and
benefits 39,731 53.5 37,384 52.8 92,131 53.2 87,772 52.7
Facility lease payments 9,358 12.6 9,129 12.9 21,677 12.5 21,328 12.8
Depreciation 2,756 3.7 3,073 4.3 6,949 4.0 7,073 4.2
Amortization of goodwill
and other intangibles 252 0.3 516 0.7 588 0.3 1,204 0.7
Other 17,355 23.4 17,325 24.5 43,112 24.9 41,933 25.2
-------- ----- -------- ----- -------- ----- -------- -----
Total operating expenses 69,452 93.6 67,427 95.2 164,457 95.1 159,310 95.6
-------- ----- -------- ----- -------- ----- -------- -----
Operating income $ 4,778 6.4% $ 3,384 4.8% $ 8,562 4.9% $ 7,391 4.4%
======== ==== ======== === ======== === ======== ===
EBITDA $ 7,786 10.5% $ 6,973 9.8% $ 16,099 9.3% $ 15,668 9.4%
======== ==== ======== === ======== === ======== ===
</TABLE>
The Company's operating results for the 12 weeks and 28 weeks ended March 13,
1999 are consistent and comparable with the same periods ended March 14, 1998.
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.
Eleven Academies in operation at the end of the second quarter of fiscal year
1998 were closed prior to the end of the second quarter of fiscal year 1999.
Nine new Academies were opened during this same period. As a result, the Company
operated 742 Academies at the end of
11
<PAGE> 11
the second quarter of fiscal year 1999, two less than at the end of the same
quarter of fiscal year 1998. The closures resulted from management decisions to
not renew the leases of certain Academies at lease expiration.
Operating revenue increased 4.8% during the 12 weeks and 3.8% during the 28
weeks ended March 13, 1999. Excluding closed and new Academies from both years,
operating revenue increased 5.1% during the 12 weeks and 4.2% during the 28
weeks, full time equivalent (FTE) attendance decreased 0.4% during the 12 weeks
and 0.6% during the 28 weeks and average weekly FTE tuition increased 5.5%
during the 12 weeks and 4.8% during the 28 weeks ended March 13, 1999. The
decline in FTE's is principally related to reductions in the numbers of infants
served as infant rooms are being phased out and converted to preschool-age
classrooms, where the demand warrants the change for next Fall. The increase in
average weekly FTE tuition was principally due to selective price increases
which were put into place in February of fiscal years 1998 and 1999, based on
geographic market conditions and class capacity utilization.
Salaries, wages, and benefits increased $2.3 million or 6.3% during the 12 weeks
and $4.4 million or 5.0% during the 28 weeks ended March 13, 1999 as compared to
the same periods of fiscal year 1998. The increases were principally due to
increased average hourly wage rates as staff hours worked were relatively stable
in both periods. As a percentage of revenue, labor costs were 53.5% and 53.2%
for the 12 and 28 weeks ended March 13, 1999, respectively, compared to 52.8%
and 52.7% for the same periods of fiscal year 1998.
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 as a
percentage of revenue during the 12 and 28 weeks ended March 13, 1999 as
compared to the same periods of fiscal year 1998. The decrease in amortization
of goodwill and other intangible assets was due to certain assets becoming fully
amortized.
As a result of the foregoing, operating income for the 12 and 28 weeks ended
March 13, 1999, were $4.8 million and $8.6 million respectively as compared to
operating income of $3.4 million and $7.4 million during the same periods of
fiscal year 1998. This reflects gains in operating income of 41.2% for the
second quarter and 15.8% for the year to date. Earnings before interest, taxes,
depreciation and amortization (EBITDA) was $7.8 million for the 12 weeks and
$16.1 million for the 28 weeks ended March 13, 1999 as compared to $7.0 million
and $15.7 million for the same periods of fiscal year 1998. EBITDA as a
percentage of revenue improved to 10.5% in the second quarter of fiscal 1999 as
compared to 9.8% in the second quarter of fiscal 1998.
Net interest expense for the 12 and 28 weeks ended March 13, 1999 increased $2.5
million and $3.6 million, respectively from the same periods of fiscal year
1998. The increase was mainly due to increased interest payments related to the
issuance of $145.0 million of 10% Senior Notes and a $40.0 million term loan
facility under the Credit Agreement which occurred as part of the
Recapitalization (see Notes to the Consolidated Financial Statements). After
adding back to pre-tax income the permanent differences, the effective income
tax rate for the 12 and 28 weeks ended March 13, 1999 was approximately 40%,
unchanged from the same periods of fiscal year 1998.
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.
12
<PAGE> 12
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. 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. In addition, La
Petite has outstanding letters of credit in an aggregate amount equal to $3.4
million and $16.6 million remains available for working capital purposes under
the Revolving Credit Facility.
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 opened eight Academies during the fiscal 1999, has 17 new Academies
under construction and expects to open approximately 25 to 30 new Academies
between now and the end of fiscal 1999 and 35 in fiscal 2000. Construction of
new Academies will not be started in fiscal 1999 if they will not be open in
time for Fall enrollment. 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. Letters of commitment, and some
construction financing, has been obtained, for the sale and leaseback for all
units planned for opening in fiscal 1999. Due diligence is currently in process
and sale closings are expected to generally occur during the third quarter.
Although the Company expects sale and leaseback transactions to continue to
finance its expansion, no assurance can be given that such funding will always
be available.
Total capital expenditures for fiscal 1996, 1997, 1998 and for the 28 weeks
ended March 13, 1999, were $8.6 million, $7.3 million, $13.6 million and $14.7
million, respectively. The Company views all capital expenditures, other than
those incurred in connection with the development of new Academies, to be
maintenance capital expenditures. Maintenance capital expenditures for fiscal
1996, 1997, 1998 and for the 28 weeks ended March 13, 1999 were $6.7 million,
$7.0 million, $9.2 million and $3.3 million, respectively. For fiscal 1999, the
Company expects total maintenance capital expenditures to be approximately $9.7
million.
During fiscal year 1999 the Company has invested $11.5 million in new Academy
development. Sale and lease back transactions, completed or currently in
process, will fund most of this development, by the end of the third quarter. As
of March 13, 1999, the Company had drawn $5.0 million on the Revolving Credit
Facility to temporarily fund this investment. At the end of the second quarter
$16.6 million remained available under the Revolving Credit Facility.
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, 1998 and for the 28 weeks ended March 13, 1999
were $9.4 million, $9.2 million, $9.9 million and $5.5 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.
In August and September of 1998, the National Highway Transportation Safety
Administration (NHTSA) issued interpretative letters that appear to modify its
interpretation of regulations governing the sale by automobile dealers
13
<PAGE> 13
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 the sale of any new 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, but not those currently in use. 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 some states may require drivers who have commercial
licenses.
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 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. Currently average
wage rates have been increasing faster than the rate at which tuition has been
increased.
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 have been installed as part of the
annual licensing fees, and are currently being tested. Also, during 1999, the
Company will test and, if necessary, modify 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On May 11, 1998, the Company entered into a Credit Agreement providing for (a)
the Term Loan Facility in aggregate principal amount of $40 million and (b) the
Revolving Credit Facility providing for revolving loans to the Company in an
aggregate principal amount (including swingline loans and the aggregate stated
amount of letters of credit) of $25 million. Borrowings under the Credit
Agreement will bear interest at a rate per annum equal (at the Company's option)
to: (a) an adjusted London inter-bank offered rate (LIBOR) plus a percentage
based on the Company's financial performance; or (b) a rate equal to the highest
of The Chase Manhattan Bank's published
14
<PAGE> 14
prime rate, a certificate of deposit rate plus 1% or the federal funds effective
rate plus 1/2 of 1%, known as the average banking rate (ABR) plus, in each case
a percentage based on the Company's financial performance. The borrowing margins
applicable to the Credit Agreement are initially 3.25% for LIBOR loans and 2.25%
for ABR loans.
As of March 13, 1999 borrowings under the Term Loan Facility were $39.5 million
and borrowings under the Revolving Credit Facility were $5.0 million. To reduce
the impact of interest rate changes on the Term Loan Facility, the Company
entered into interest rate collar agreements during the second quarter. The
collar agreements cover the LIBOR portion of the Term Loan Facility interest
rate percentage, effectively setting maximum and minimum interest rates. There
was no initial cost associated with the collar agreements, as the floor and cap
rates were set to offset each other. Any differential paid or received based on
the collar agreements is recognized as an adjustment to interest expense. A 1%
change in an applicable index rate, after giving effect to the interest rate
collar, would result in an interest expense increase of $0.4 million or interest
expense decrease of $0.1 million per year.
******
15
<PAGE> 15
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.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits required by Item 601 of Regulation S-K:
1. Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K:
None
16
<PAGE> 16
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 April 9, 1999
By: James R. Kahl
President, Chief Executive Officer an
duly authorized representative of the
registrant
17
<PAGE> 17
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 April 9, 1999
By: Phillip M. Kane
Senior Vice President, Chief
Financial Officer and duly
authorized representative of the
registrant
18
<PAGE> 18
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 April 9, 1999
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 MARCH 13, 1999 AND THE CONSOLIDATED STATEMENTS
OF INCOME FOR THE 12 WEEKS ENDED MARCH 13, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001062774
<NAME> LPA Holding Corp
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 7-MOS
<FISCAL-YEAR-END> AUG-28-1999
<PERIOD-END> MAR-13-1999
<CASH> 3,469
<SECURITIES> 0
<RECEIVABLES> 6,091
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 21,957
<PP&E> 110,671
<DEPRECIATION> 44,686
<TOTAL-ASSETS> 159,300
<CURRENT-LIABILITIES> 44,981
<BONDS> 184,639
6
27,934
<COMMON> 0
<OTHER-SE> (109,448)
<TOTAL-LIABILITY-AND-EQUITY> 159,300
<SALES> 0
<TOTAL-REVENUES> 173,019
<CGS> 0
<TOTAL-COSTS> 164,457
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,260
<INCOME-PRETAX> (1,574)
<INCOME-TAX> (136)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,438)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
