<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 5, 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 identification number)
incorporation or organization)
8717 WEST 110TH STREET, SUITE 300
OVERLAND PARK, KANSAS 66210
(address of principal executive office and zip code)
(913) 345-1250
(registrant's telephone number, including area code)
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 19, 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 July 19, 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
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PART I. FINANCIAL INFORMATION
PAGE
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 11-14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17-19
3
<PAGE> 4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
40 WEEKS ENDED JUNE 5, 1999
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS JUNE 5, AUGUST 29,
1999 1998
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,371 $ 6,868
Restricted cash investments 1,775 1,756
Accounts and notes receivable, net 4,983 7,002
Prepaid supplies 7,772 5,987
Other prepaid expenses 4,288 2,259
Refundable income taxes 215 1,776
Current deferred income taxes 1,124
-------------- -------------
Total current assets 23,404 26,772
Property and equipment, at cost:
Land 6,120 6,120
Buildings and leasehold improvements 76,005 71,754
Equipment 20,126 18,695
Land and facilities under construction 15,668 2,264
-------------- -------------
117,919 98,833
Less accumulated depreciation 47,488 37,839
-------------- -------------
Net property and equipment 70,431 60,994
Other assets (Note 3) 62,462 64,919
Deferred income taxes 7,690 8,106
-------------- -------------
$ 163,987 $ 160,791
============== =============
</TABLE>
4
<PAGE> 5
LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
40 WEEKS ENDED JUNE 5, 1999
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY JUNE 5, AUGUST 29,
1999 1998
<S> <C> <C>
Current liabilities:
Overdrafts due banks $ 7,328 $ 2,890
Accounts payable 8,385 7,447
Current reserve for closed academies 1,459 1,595
Current maturities of long-term debt and capital lease obligations 6,121 2,121
Accrued salaries, wages and other payroll costs 11,807 10,937
Accrued insurance liabilities 3,789 4,043
Accrued property and sales taxes 3,365 4,103
Accrued interest payable 1,289 4,771
Other current liabilities 6,197 5,572
Current deferred income taxes 23
-------------- -------------
Total current liabilities 49,763 43,479
Long-term debt and capital lease obligations (Note 4) 184,376 185,727
Other long-term liabilities (Note 5) 9,521 11,661
Series A 12% redeemable preferred stock ($.01 par value per share);
30,000 shares authorized, issued and outstanding at aggregate 28,965 25,625
liquidation preference of $1,036.558 as of August 29, 1998, and
$1,133.396 as of June 5, 1999
Stockholders' equity:
Class A common stock ($.01 par value per share); 950,000 shares 6 6
authorized and 560,026 shares issued and outstanding as of August 29,
1998 and June 5, 1999
Class B common stock ($.01 par value per share); 20,000 shares
authorized, issued and outstanding as of August 29, 1998 and June 5,
1999
Common stock warrants 5,645 5,645
Accumulated deficit (114,289) (111,352)
-------------- -------------
Total stockholders' equity: (108,638) (105,701)
-------------- -------------
$ 163,987 $ 160,791
============== =============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF INCOME
40 WEEKS ENDED JUNE 5, 1999
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12 WEEKS ENDED 40 WEEKS ENDED
------------------------------ --------------------------------
JUNE 5, JUNE 6, JUNE 5, JUNE 6,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Operating revenue $ 81,986 $ 77,166 $ 255,005 $ 243,867
Operating expenses:
Salaries, wages and benefits 43,348 39,997 135,479 127,769
Facility lease expense 9,895 9,240 31,572 30,568
Depreciation 2,927 3,541 9,876 10,614
Amortization of goodwill and other
intangibles 252 428 840 1,632
Recapitalization costs (Note 1) 8,724 8,724
Other 17,467 16,700 60,579 58,633
-------------- ------------ ------------- -------------
73,889 78,630 238,346 237,940
-------------- ------------ ------------- -------------
Operating income 8,097 (1,464) 16,659 5,927
-------------- ------------ ------------- -------------
Interest expense 4,440 4,679 14,700 9,595
Minority interest in net income of
subsidiary 671 2,849
Interest income (20) (246) (144) (847)
-------------- ------------ ------------- -------------
Net interest costs 4,420 5,104 14,556 11,597
-------------- ------------ ------------- -------------
Income (loss) before income taxes
and extraordinary item 3,677 (6,568) 2,103 (5,670)
Provision (benefit) for income taxes 1,836 (1,325) 1,700 510
-------------- ------------ ------------- -------------
Income (loss) before extraordinary
item 1,841 (5,243) 403 (6,180)
-------------- ------------ ------------- -------------
Extraordinary loss on retirement of
debt, net of applicable income taxes
of $3,702 (Note 7) 5,416 5,416
-------------- ------------ ------------- -------------
Net income (loss) $ 1,841 $ (10,659) $ 403 $ (11,596)
============== ============ ============= =============
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
40 WEEKS ENDED JUNE 5, 1999
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
40 WEEKS ENDED
-------------------------------------
JUNE 5, 1999 JUNE 6, 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 403 $ (11,596)
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 11,473 12,896
Deferred income taxes 1,563 (3,987)
Minority interest in net income of La Petite Academy, Inc. 2,849
Changes in assets and liabilities:
Accounts and notes receivable 1,906 (37)
Prepaid expenses and supplies (3,816) (502)
Accrued property and sales taxes (738) (994)
Accrued interest payable (3,482) 700
Other changes in assets and liabilities, net 2,085 (3,465)
----------------- ----------------
Net cash from (used for) operating activities 9,394 (929)
----------------- ----------------
CASH FLOWS USED FOR INVESTING ACTIVITIES
Capital expenditures (26,767) (8,228)
Proceeds from sale of assets 8,625 533
----------------- ----------------
Net cash used for investing activities (18,142) (7,695)
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt and capital lease obligations (8,351) (120,814)
Borrowings under the Revolving Credit Agreement 11,000
Additions to long-term debt 185,000
Deferred financing costs (818) (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 in bank overdrafts 4,439 3,531
Decrease (increase) in restricted cash investments (19) 1,352
----------------- ----------------
Net cash from (used for) financing activities 6,251 (8,441)
----------------- ----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,497) (17,065)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,868 23,971
----------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,371 $ 6,906
================= ================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 17,425 $ 8,246
Income taxes 275 2,100
Cash received during the period for:
Interest $ 143 $ 958
Income taxes 2,099 207
NON-CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations of $2,879 were incurred during the 40 weeks ended
June 6, 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 first Saturday in
July 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. (See note 8)
8
<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>
JUNE 5, AUGUST 29,
1999 1998
Intangible assets:
<S> <C> <C>
Excess purchase price over net assets acquired $ 64,277 $ 64,277
Curriculum 1,497 1,497
Accumulated amortization (13,567) (11,784)
-------------- ---------------
52,207 53,990
Deferred financing costs 8,423 7,605
Accumulated amortization (1,016) (259)
Other assets 2,848 3,583
-------------- ---------------
$ 62,462 $ 64,919
============== ===============
</TABLE>
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
(in thousands of dollars)
<TABLE>
<CAPTION>
JUNE 5, AUGUST 29,
1999 1998
<S> <C> <C>
Senior Notes, 10.0% due May 15, 2008 $ 145,000 $ 145,000
Borrowings under credit agreement 43,500 40,000
Capital lease obligations 1,997 2,848
-------------- --------------
190,497 187,848
Less current maturities of long-term debt and capital
lease obligations (6,121) (2,121)
-------------- --------------
$ 184,376 $ 185,727
============== ===============
</TABLE>
5. OTHER LONG-TERM LIABILITIES
(in thousands of dollars)
<TABLE>
<CAPTION>
JUNE 5, AUGUST 29,
1999 1998
<S> <C> <C>
Unfavorable lease, net of accumulated amortization $ 3,895 $ 4,848
Non-current reserve for closed academies 2,866 3,822
Long-term insurance liabilities 2,760 2,991
-------------- ---------------
$ 9,521 $ 11,661
============== ===============
</TABLE>
9
<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.
7. EXTRAORDINARY LOSS
On May 11, 1998, the Company incurred a $5.4 million extraordinary loss
related to (i) 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 reflected interest
expense and the write off of premiums and related deferred financing costs,
net of applicable income tax benefit.
8. SUBSEQUENT EVENT-FISCAL YEAR END
On June 10, 1999, the Company changed its fiscal year to be the period
starting on the first Sunday in July and ending on the first Saturday in
July in the subsequent year. The report covering the transition period will
be filed on a Form 10-K.
9. SUBSEQUENT EVENT-ACQUISITION
The Company is in negotiations to acquire all outstanding shares of Bright
Start, Inc. ("Bright Start"). Bright Start operates 43 preschools in the
states of Minnesota, Wisconsin, Nevada, and New Mexico. For the year ended
August 31, 1998 Bright Start had operating revenue of $22.7 million and at
August 31, 1998 total assets were $5.1 million. The acquisition, if
completed, will be accounted for under the purchase method of accounting.
10
<PAGE> 11
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
5, 1999 were as follows:
<TABLE>
<CAPTION>
12 WEEKS ENDED 40 WEEKS ENDED
------------------------------------------- -------------------------------------------
(IN THOUSANDS OF DOLLARS)
JUNE 5 PERCENT JUNE 6 PERCENT JUNE 5, PERCENT JUNE 6, PERCENT
OF OF OF OF
1999 REVENUE 1998 REVENUE 1999 REVENUE 1998 REVENUE
--------------------- -------------------- --------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue $ 81,986 100.0% $ 77,166 100.0% $ 255,005 100.0% $ 243,867 100.0%
Operating expenses:
Salaries, wages and 43,348 52.9 39,997 51.8 135,479 53.1 127,769 52.4
benefits
Facility lease expense 9,895 12.1 9,240 12.0 31,572 12.4 30,568 12.5
Depreciation 2,927 3.6 3,541 4.6 9,876 3.9 10,614 4.4
Amortization of goodwill
and other intangibles 252 0.3 428 0.6 840 0.3 1,632 0.7
Recapitalization costs 8,724 11.3 8,724 3.6
Other 17,467 21.3 16,700 21.6 60,579 23.8 58,633 24.0
---------- ---------- --------- --------- ---------- ---------- ---------- ---------
Total operating expenses 73,889 90.1 78,630 101.9 238,346 93.5 237,940 97.6
---------- ---------- --------- --------- ---------- ---------- ---------- ---------
Operating income $ 8,097 9.9% $ (1,464) -1.9% $ 16,659 6.5% $ 5,927 2.4%
========== ========== ========= ========= ========== ========== ========== =========
EBITDA $ 11,276 13.8% $ 11,229 14.6% $ 27,375 10.7% $ 26,897 11.0%
========== ========== ========= ========= ========== ========== ========== =========
</TABLE>
The Company's operating results for the 12 weeks and 40 weeks ended June 5, 1999
are consistent and comparable with the same periods ended June 6, 1998 except
for pre-opening costs and operating losses associated with new educational
facilities (the Academies). Pre-opening costs are included in other operating
costs, and cover all activities associated with preparing a new Academy for
opening. Pre-opening costs for the 12 weeks and 40 weeks ended June 5, 1999 were
$0.2 million and $0.5 million respectively. New Academies also typically
generate operating losses during the first few months of operation, until the
Academies achieve normalized occupancies. Included in operating income and
EBIDTA were new Academy operating losses of $0.3 million and $0.5 million for
the 12 weeks and 40 weeks ended June 5, 1999. There were no significant
pre-opening costs or new Academy operating losses during the same periods last
year as the new Academy construction program was not fully underway until fiscal
year 1999.
Historically, the Company's operating revenue has followed the seasonality of
the school year. The number of new children attending La Petite's 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.
Thirteen Academies in operation at the end of the third quarter of fiscal year
1998 were closed prior to the end of the third quarter of fiscal year 1999.
Twelve new Academies were opened during this same period. As a result, the
Company operated 745 Academies at the end of the third quarter of fiscal year
1999, one 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.
11
<PAGE> 12
Operating revenue increased 6.2% during the 12 weeks and 4.6% during the 40
weeks ended June 5, 1999. Excluding closed and new Academies from both years,
operating revenue increased 6.4% during the 12 weeks and 4.9% during the 40
weeks, full time equivalent (FTE) attendance decreased 0.9% during the 12 weeks
and 0.7% during the 40 weeks and average weekly FTE tuition increased 7.3%
during the 12 weeks and 5.6% during the 40 weeks ended June 5, 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: (i) selective price increases which
were put into place in February of fiscal years 1998 and 1999, based on
geographic market conditions and class capacity utilization and (ii) changes in
various tuition rate discount policies which took place in fiscal year 1999.
Salaries, wages, and benefits increased $3.4 million, or 8.4%, during the 12
weeks and $7.7 million, or 6.0%, during the 40 weeks ended June 5, 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
52.9% and 53.1% for the 12 and 40 weeks ended June 5, 1999, respectively,
compared to 51.8% and 52.4% 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 40 weeks ended June 5, 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.
Fiscal year 1998 Recapitalization Costs consisted principally of transaction
bonuses and related taxes of $1.5 million and payments for the cancellation of
options of $7.2 million
During the third quarter of fiscal year 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 reflected interest expense
and the write off of premiums, and related deferred financing costs, net of
applicable income tax benefit.
As a result of the foregoing, operating income for the 12 and 40 weeks ended
June 5, 1999, were $8.1 million and $16.7 million respectively as compared to an
operating loss of $1.5 million and operating income of $5.9 million during the
same periods of fiscal year 1998. Excluding Recapitalization Costs, this
reflects gains in operating income of 11.5% for the third quarter and 13.7% for
the year to date. Earnings before recapitalization, extraordinary items,
interest, taxes, depreciation and amortization (EBITDA) was $11.3 million for
the 12 weeks and $27.4 million for the 40 weeks ended June 5, 1999 as compared
to $11.2 million and $26.9 million for the same periods of fiscal year 1998.
Net interest expense for the 12 and 40 weeks ended June 5, 1999 decreased $0.7
million and increased $3.0 million, respectively from the same periods of fiscal
year 1998. The year to date 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 40 weeks ended June 5, 1999 was approximately
44%, as compared to approximately 25% and 59% for the 12 and 40 weeks ended June
6, 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.
12
<PAGE> 13
The Company incurred substantial indebtedness in connection with the
Recapitalization. See Note 1 of the Notes to Consolidated Financial Statements.
In connection with the Recapitalization, Parent and La Petite entered into the
Credit Agreement, consisting of the $40 million Term Loan Facility and the $25
million Revolving Credit Facility. Parent and La Petite borrowed the entire $40
million available under the Term Loan Facility 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 $5.5
million, and $15.5 million was available under the Revolving Credit Facility at
June 5, 1999.
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 twelve new Academies during fiscal 1999, and has 16 Academies
under construction which are scheduled to open between now and the end of fiscal
1999. 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 have been
obtained for the sale and leaseback of all units planned for opening in fiscal
1999. Due diligence is currently in process and sale closings are expected to
generally occur over the next few months. Although the Company expects sale and
leaseback transactions to continue to finance its expansion, no assurance can be
given that such funding will always be available.
Total capital expenditures for fiscal 1996, 1997, 1998 and for the 40 weeks
ended June 5, 1999, were $8.6 million, $7.3 million, $13.6 million and $26.8
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 40 weeks ended June 5, 1999 were $6.7 million, $7.0
million, $9.2 million and $5.5 million, respectively.
During fiscal year 1999 the Company has invested $21.3 million in new Academy
development and has received $11.8 million as construction financing for sale
and leaseback transactions. Sale and lease back transactions, completed or
currently in process, will fund most of this development, by the end of the
current fiscal year. As of June 5, 1999, the Company had drawn $4.0 million on
the Revolving Credit Facility to temporarily fund a portion of this investment.
In addition to maintenance capital expenditures, the Company expends additional
funds to ensure that its facilities are in good working condition. Such funds
are expensed in the periods in which they are incurred. The amounts of such
expenses in fiscal 1996, 1997, 1998 and for the 40 weeks ended June 5, 1999 were
$9.4 million, $9.2 million, $9.9 million and $8.0 million, respectively.
In August and September of 1998, the National Highway Transportation Safety
Administration (NHTSA) issued interpretative letters that appear to modify its
interpretation of regulations governing the sale by automobile dealers of
vehicles intended to be used for the transportation of children to and from
school. These letters indicate that dealers may no longer sell 15-passenger vans
for this use and that the sale of any new vehicle designed to transport
13
<PAGE> 14
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 have affected 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 payroll
processing, human resources information, general ledger/financial reporting,
accounts payable disbursements, fixed assets record keeping and purchase order
accounting, the Company utilizes software under licensing arrangements for
systems that have already been upgraded and are currently year 2000 compliant.
The costs of the upgrades were included as part of the annual licensing fees.
Also, during 1999, the Company is testing and, if necessary, modifying its
smaller applications to insure that any year 2000 issues are corrected on a
timely basis.
The Company has not assessed the year 2000 readiness of its major suppliers or
third-party funding agencies. Due to the general uncertainty inherent in
addressing year 2000 readiness, the most likely worst case year 2000 scenario
and the impact it may have on the Company is uncertain. In the event that major
suppliers of curriculum material are unable to fulfill purchase orders for
supplies, Academy Directors will need to buy necessary supplies from local
retailers. This could have adverse cost consequences to the Company, but on the
assumption that the banking system continues to function, should not have a
material impact on operations. The Company also provides preschool and
child-care services for children that are funded by various state and local
government agencies. In the event that any such agency were unable to timely
reimburse the Company for such services, it would have an adverse impact on the
Company's cash flow. Such impact is not expected to be material and the Company
generally has the option to discontinue providing such services for nonpayment.
14
<PAGE> 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
On May 11, 1998, the Company recapitalized, providing for (a) Series B Senior
Notes in the aggregate principal amount of $145 million, (b) a Term Loan
Facility in the aggregate principal amount of $40 million and (c) a Revolving
Credit Facility providing for revolving loans to the Company in an aggregate
principal amount (including swingline loans and the aggregate stated amount of
letters of credit) of $25 million. Borrowings under the Senior notes bear
interest at 10% per annum. Borrowings under the Credit Agreement will bear
interest at a rate per annum equal (at the Company's option) to: (a) an adjusted
London inter-bank offered rate ("LIBOR") plus a percentage based on the
Company's financial performance; or (b) a rate equal to the highest of The Chase
Manhattan Bank's published prime rate, a certificate of deposit rate plus 1% of
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.
To reduce the impact of interest rate changes on the Term Loan Facility, the
company entered into interest rate collar agreements during the second quarter.
The collar agreements cover the LIBOR portion of the Term Loan Facility interest
rate percentage, effectively setting maximum and minimum interest rates.
To reduce interest expense on the $145 million Series B Senior Notes, the
Company entered into an interest rate swap transaction with an imbedded collar
during the third quarter. The fixed rate debt was exchanged for a variable rate
arrangement based on LIBOR plus a fixed percentage. The imbedded collar covers
the LIBOR portion of variable rate swap, effectively setting maximum and minimum
interest rates.
There were no initial costs associated with either the swap or the interest rate
collar agreements as the floor and ceiling cap rates were priced to offset each
other. Any differential paid or received based on the swap/collar agreements is
recognized as an adjustment to interest expense. A 1% change in an applicable
index rate, after giving effect to the interest rate collars and swap agreement,
would result in an interest expense increase of $1.8 million per year.
******
15
<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.
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:
Current report on Form 8-K filed on June 25, 1999 reporting the change
of the Company's fiscal year to be the period starting on the first
Sunday in July and ending on the first Saturday in July in the
subsequent year.
16
<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.
LPA HOLDING CORP.
Dated July 19, 1999 /s/ James R. Kahl
--------------------------------------------
By: James R. Kahl
President, Chief Executive Officer and duly
authorized representative of the registrant
17
<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.
LA PETITE ACADEMY, INC.
Dated July 19, 1999 /s/ Phillip M. Kane
--------------------------------------------
By: Phillip M. Kane
Senior Vice President, Chief Financial Officer and
duly authorized representative of the registrant
18
<PAGE> 19
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 19, 1999 /s/ Phillip M. Kane
-----------------------------------------------
By: Phillip M. Kane
Vice President of Finance, Chief Financial Officer
and duly authorized representative of the registrant
19
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 5, 1999 AND THE CONSOLIDATED STATEMENTS OF
INCOME FOR THE 40 WEEKS ENDED JUNE 5, 1999.
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