<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 Commission File No.
January 15, 2000 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 February 28, 2000, LPA Holding Corp. had outstanding 564,985 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 February 28, 2000, 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)
Bright Start, Inc. Minnesota 333-56239-03 41-1694581 100 shares of Common Stock
(par value, $.01 per share)
</TABLE>
2
<PAGE> 3
LPA HOLDING CORP.
INDEX
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED):
Consolidated Balance Sheets 4-5
Consolidated Statements of Operations 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 10-14
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 17-20
</TABLE>
3
<PAGE> 4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
JANUARY 15, 2000 AND JULY 3,1999
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS JANUARY 15, JULY 3,
2000 1999
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,074 $ 4,572
Restricted cash investments 840 1,218
Accounts and notes receivable, net 7,175 8,077
Prepaid food and supplies 8,063 7,884
Other prepaid expenses 3,575 5,850
Refundable income taxes 152 192
Current deferred income taxes 345
-------- --------
Total current assets 24,224 27,793
Property and equipment, at cost:
Land 6,120 6,120
Buildings and leasehold improvements 80,897 77,197
Equipment 23,257 20,451
Facilities under construction 2,899 15,261
-------- --------
113,173 119,029
Less accumulated depreciation 54,720 48,310
-------- --------
Net property and equipment 58,453 70,719
Other assets (Note 3) 70,273 61,780
Deferred income taxes 11,941 8,883
-------- --------
$164,891 $169,175
======== ========
</TABLE>
(continued)
4
<PAGE> 5
LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
JANUARY 15, 2000 AND JULY 3,1999
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT JANUARY 15, JULY 3,
2000 1999
<S> <C> <C>
Current liabilities:
Overdrafts due banks $ 4,437 $ 7,450
Accounts payable 5,995 7,972
Current reserve for closed schools 1,263 1,366
Current maturities of long-term debt and capital lease obligations 2,301 2,187
Accrued salaries, wages and other payroll costs 12,834 11,903
Accrued insurance liabilities 2,632 2,389
Accrued property and sales taxes 3,229 3,749
Accrued interest payable 3,049 2,388
Other current liabilities 5,515 11,199
Current deferred income taxes 361
--------- ---------
Total current liabilities 41,255 50,964
Long-term debt and capital lease obligations (Note 4) 188,034 187,999
Other long-term liabilities (Note 5) 8,147 11,085
Series A 12% redeemable preferred stock ($.01 par value per share);
45,000 and 30,000 shares authorized, issued and outstanding at aggregate 44,046 29,310
liquidation preference of $1,148.004 and $1,143.444 as of January 15, 2000
and July 3, 1999, respectively
Stockholders' deficit:
Class A common stock ($.01 par value per share); 950,000 shares authorized 6 6
and 564,985 and 560,026 shares issued and outstanding as of January 15, 2000
and July 3, 1999, respectively
Class B common stock ($.01 par value per share); 20,000 shares authorized,
issued and outstanding as of January 15, 2000 and July 3, 1999
Common stock warrants 8,596 5,645
Accumulated deficit (125,193) (115,834)
--------- ---------
Total stockholders' deficit (116,591) (110,183)
--------- ---------
$ 164,891 $ 169,175
========= =========
</TABLE>
See notes to consolidated financial statements.
(concluded)
5
<PAGE> 6
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
28 WEEKS ENDED JANUARY 15, 2000
(In thousands of dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12 WEEKS ENDED 28 WEEKS ENDED
--------------------------------------------------
JANUARY 15, JANUARY 16, JANUARY 15, JANUARY 16,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Operating revenue $ 80,150 $ 70,559 $ 188,515 $ 167,302
Operating expenses:
Salaries, wages and benefits 46,114 38,759 106,224 90,187
Facility lease expense 11,199 9,281 25,621 21,486
Depreciation 3,115 2,961 7,361 7,121
Amortization of goodwill
and other intangibles 368 252 860 588
Other 20,439 18,128 48,111 42,760
--------- --------- --------- ---------
81,235 69,381 188,177 162,142
--------- --------- --------- ---------
Operating income (loss) (1,085) 1,178 338 5,160
--------- --------- --------- ---------
Interest expense 4,707 4,465 10,943 10,479
Interest income (43) (82) (80) (162)
--------- --------- --------- ---------
Net interest costs 4,664 4,383 10,863 10,317
--------- --------- --------- ---------
Loss before income taxes (5,749) (3,205) (10,525) (5,157)
Benefit for income taxes (2,103) (998) (3,764) (1,560)
--------- --------- --------- ---------
Net loss $ (3,646) $ (2,207) $ (6,761) $ (3,597)
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
28 WEEKS ENDED JANUARY 15, 2000
(In thousands of dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
28 WEEKS ENDED
-------------------------
JANUARY 15, JANUARY 16,
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,761) $ (3,597)
Adjustments to reconcile net loss to net cash from (used for) operating
activities
Depreciation and amortization 8,729 8,163
Deferred income taxes (3,764) (1,537)
Changes in assets and liabilities:
Accounts and notes receivable 1,205 (1,125)
Prepaid expenses and supplies 2,787 1,472
Accrued property and sales taxes (563) (497)
Accrued interest payable 661 642
Accounts payable and other accrued liabilities (7,830) (2,251)
Other changes in assets and liabilities, net (1,286) 1,807
-------- --------
Net cash from (used for) operating activities (6,822) 3,077
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Bright Start net of cash acquired (10,254)
Capital expenditures (16,868) (13,247)
Proceeds from sale of assets 23,113 5,983
-------- --------
Net cash used for investing activities (4,009) (7,264)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt and capital lease obligations (34,122) (835)
Borrowings under the Revolving Credit Agreement 32,000 7,000
Proceeds from issuance of preferred stock and warrants 15,000
Exercise of stock options 89
Deferred financing costs and stock offering expenses (175)
Reduction in bank overdrafts (3,012) 159
Decrease (increase) in restricted cash investments 378 (979)
-------- --------
Net cash from financing activities 10,333 5,170
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (498) 983
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,572 4,820
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,074 $ 5,803
-------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 9,820 $ 9,440
Income taxes 61 49
Cash received during the period for:
Interest $ 79 $ 129
Income taxes 45 1,777
NON-CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations of $34,000 and $291,000 were incurred during the 16
weeks ended January 15, 2000 and January 16, 1999, respectively, 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 (LPA), 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
LPA 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
cash. As part of the Recapitalization, LPA purchased $72.5 million (less
the value of options retained by management) of common stock of the Parent
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, LPA received warrants to purchase up to 6.0% of
Parent's common stock on a fully diluted basis. The Recapitalization was
completed May 11, 1998. On December 15, 1999, LPA acquired an additional
$15.0 million of Parent's redeemable preferred stock and received warrants
to purchase an additional 3% of Parent's common stock on a fully-diluted
basis. The $15.0 million proceeds received by Parent was contributed to La
Petite as common equity. As a result of the recapitalization and additional
purchase of preferred stock and warrants, LPA beneficially owns 80.0% of
the common stock of Parent on a fully diluted basis and $45 million of
redeemable preferred stock of Parent. CCP, owns a majority of the economic
interests of LPA and an entity controlled by Robert E. King owns a majority
of the voting interests of LPA.
On July 21, 1999 the La Petite acquired all the outstanding shares of
Bright Start, Inc. ("Bright Start"). See note 7 to the consolidated
financial statements.
Parent, consolidated with La Petite, Bright Start 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. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Annual Report of the Company on Form 10-K for the fiscal year ended July 3,
1999.
8
<PAGE> 9
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.
The consolidated financial statements include the accounts of Parent and
its wholly-owned subsidiary, La Petite and its wholly-owned subsidiaries
Services and Bright Start after elimination of all significant
inter-company accounts and transactions.
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. The results for
the interim period are not necessarily indicative of the results to be
expected for the entire fiscal year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Certain reclassifications to prior year amounts have been made in order to
conform to the current year presentation.
3. OTHER ASSETS
(in thousands of dollars)
<TABLE>
<CAPTION>
January 15, July 3,
2000 1999
----------- ---------
<S> <C> <C>
Intangible assets:
Excess purchase price over net assets acquired $ 74,377 $ 64,277
Curriculum 1,497 1,497
Accumulated amortization (15,266) (13,746)
-------- --------
60,608 52,028
Deferred financing costs 8,423 8,423
Accumulated amortization (1,596) (1,088)
Other assets 2,838 2,417
-------- --------
$ 70,273 $ 61,780
======== ========
</TABLE>
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
(in thousands of dollars)
<TABLE>
<CAPTION>
January 15, July 3,
2000 1999
---------- ---------
<S> <C> <C>
Senior Notes, 10.0% due May 15, 2008 $ 145,000 $ 145,000
Borrowings under credit agreement 43,750 43,250
Capital lease obligations 1,585 1,936
--------- ---------
190,335 190,186
Less current maturities of long-term debt
and capital lease obligations (2,301) (2,187)
--------- ---------
$ 188,034 $ 187,999
========= =========
</TABLE>
9
<PAGE> 10
5. OTHER LONG-TERM LIABILITIES
(in thousands of dollars)
<TABLE>
<CAPTION>
January 15, July 3,
2000 1999
---------- --------
<S> <C> <C>
Unfavorable lease, net of accumulated amortization $ 3,134 $ 3,800
Non-current reserve for closed schools 1,742 2,681
Long-term insurance liabilities 3,271 4,604
------- -------
$ 8,147 $11,085
======= =======
</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
operation.
7. ACQUISITIONS
On July 21, 1999 the Company acquired all the outstanding shares of Bright
Start, Inc. ("Bright Start") for $9.3 million in cash and assumed
approximately $2.0 million in debt. At the time of the acquisition, Bright
Start operated 43 preschools in the states of Minnesota, Wisconsin, Nevada,
and New Mexico with one new school under construction. For the year ended
August 31, 1998, Bright Start had operating revenue of $22.2 million and at
August 31, 1998 total assets were $5.1 million. The acquisition was
accounted for as a purchase and, accordingly, the purchase price has been
allocated to the fair value of net assets acquired and resulted in a
preliminary allocation to goodwill of $10.1 million which is being
amortized on a straight-line basis over 20 years. Such allocations are
preliminary in nature, pending the outcome of a detailed analysis being
performed by the Company of the assets and liabilities acquired. The
Company's financial statements reflect the results of operations of Bright
Start during the period subsequent to July 21, 1999. On an unaudited
pro-forma basis assuming the acquisition had occurred at the beginning of
the periods presented, the Company's operating revenue for the 12 and 28
weeks ended January 16, 1999 would have been $75.6 million, and $179.1
million, respectively. The Company's net loss for the 12 and 28 weeks ended
January 16, 1999 would have been $2.3 million and $4.0 million,
respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and the related notes thereto included
elsewhere in this document.
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 schools) 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.
10
<PAGE> 11
Between January 16, 1999 and the end of the second quarter of fiscal year 2000,
the Company opened 24 new schools and acquired 43 schools through the Bright
Start acquisition. Fourteen schools were closed during the same period. As a
result, the Company operated 792 schools at the end of the second quarter of
fiscal year 2000, 53 more than at the end of the same quarter last year. The
closures resulted from management decisions to not renew the leases or contracts
of certain schools at expiration.
New schools, as defined by the Company, are schools open less than one year at
the start of the current fiscal year. The Company's operating results for the 12
and 28 weeks ended January 15, 2000 includes pre-opening costs and operating
losses associated with 28 new schools. Pre-opening costs cover all activities
associated with preparing a new school for opening other than capital
development cost. Pre-opening costs, which are included in other operating costs
and which were mostly completed by the end of first quarter of fiscal year 2000,
were $0.6 million for the 28 weeks ended January 15, 2000 as compared to $0.1
million and $0.2 million for the 12 and 28 weeks ended January 16, 1999. New
schools typically generate operating losses during the first twelve to eighteen
months of operation, until the schools achieve normalized occupancies. Included
in operating income and EBITDA are new schools operating losses of $0.8 million
and $1.4 million for the 12 and 28 weeks ended January 15, 2000. New school
operating losses during the 12 and 28 weeks ended January 15, 2000 were
immaterial, as most of the new schools were not yet in operation during this
period.
Full-time equivalent (FTE) attendance, as defined by the Company, is not a
measure of the absolute number of students attending the Company's schools, but
rather is an approximation of the full-time equivalent number of students in
attendance based on Company estimates and weighted averages. For example, a
student attending full-time is equivalent to one FTE, while a student attending
only one-half of each day is equivalent to 0.5 FTE.
The Company's operating results for the comparative 12 and 28 weeks ended
January 15, 2000 and January 16, 1999 were as follows:
<TABLE>
<CAPTION>
12 Weeks Ended 28 Weeks Ended
--------------------------------------------------------------------------------------
January Percent January Percent January Percent January Percent
15, of 16, of 15, of 16, of
2000 Revenue 1999 Revenue 2000 Revenue 1999 Revenue
----------------------------------------- ------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue $ 80,150 100.0% $ 70,559 100.0% $ 188,515 100.0% $ 167,302 100.0%
Operating expenses:
Salaries, wages and benefits 46,114 57.5 38,759 54.9 106,224 56.3% 90,187 53.9%
Facility lease payments 11,199 14.0 9,281 13.2 25,621 13.6% 21,486 12.8%
Depreciation 3,115 3.9 2,961 4.2 7,361 3.9% 7,121 4.3%
Amortization of goodwill
and other intangibles 368 0.5 252 0.4 860 0.5% 588 0.4%
Other 20,439 25.5 18,128 25.7 48,111 25.5% 42,760 25.6%
--------- --------- ---------- --------- ---------- --------- ---------- ---------
Total operating expenses 81,235 101.4 69,381 98.3 188,177 99.8% 162,142 96.9%
--------- --------- ---------- --------- ---------- --------- ---------- ---------
Operating income $ (1,085) -1.4% $ 1,178 1.7% $ 338 0.2% $ 5,160 3.1%
--------- --------- ---------- --------- ---------- --------- ---------- ---------
EBITDA $ 2,398 3.0% $ 4,391 6.2% $ 8,559 4.5% $ 12,869 7.7%
========== === =========== === =========== === =========== ===
</TABLE>
Operating revenue increased $9.6 million or 13.6% during the 12 weeks and $21.2
million or 12.7% during the 28 weeks ended January 15, 2000. The increase in
operating revenue includes Bright Start operating revenue of $5.3 million and
$12.3 million during the 12 and 28 weeks ended January 15, 2000. New schools
contributed incremental revenue of $2.6 million and $4.9 million during the 12
and 28 weeks ended January 15, 2000, while closed schools reduced incremental
revenue by $0.9 million and $2.1 million during the 12 and 28 weeks ended
January 15, 2000.
11
<PAGE> 12
Tuition revenue increased 15.2% during the 12 weeks and 12.7% during the 28
weeks ended January 15, 2000. The increase in tuition revenue reflects a 6.1%
and 5.5% increase in average weekly FTE tuition rates and a 8.6% and 6.8%
increase in FTE's during the 12 and 28 weeks ended January 15, 2000. 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 1999,
based on geographic market conditions and class capacity utilization. The
increase in FTE's came principally from the addition of Bright Start and new La
Petite schools offset by a 1.0% and 1.9% decline in FTE attendance at
established schools during the 12 and 28 weeks ended January 15, 2000. The
decline in established FTE's were principally in the infant, toddler and school
age programs, which offset increases in the Company's pre-school program.
Salaries, wages, and benefits increased $7.4 million or 19.0% during the 12
weeks and $16.0 million or 17.8% during the 28 weeks ended January 15, 2000. The
increase in salaries, wages, and benefits includes Bright Start salaries, wages,
and benefits of $3.0 million and $7.0 million during the 12 and 28 weeks ended
January 15, 2000. New schools contributed incremental labor costs of $1.6
million and $3.1 million during the 12 and 28 weeks ended January 15, 2000,
while closed schools reduced incremental labor costs by $0.7 million and $1.5
million during the 12 and 28 weeks ended January 15, 2000. Excluding Bright
Start and new schools, salaries and wages for established schools increased $2.7
million or 8.1% during the 12 weeks and $6.1 million or 7.8% during the 28 weeks
ended January 15, 2000. The increase in labor costs at established schools was
mainly due to a 6.3% and 6.7% increase in average hourly wage rates and a 1.6%
and 1.4% increase in labor hours during the 12 and 28 weeks ended January 15,
2000. New schools, which remain in the start up stage, experienced higher labor
costs relative to revenue as compared to established schools. The remaining
increase in salaries, wages, and benefits was primarily due to increased benefit
costs related to benefit plan enhancements. As a percentage of revenue, labor
costs were 57.5% and 56.3% for the 12 and 28 weeks ended January 15, 2000 as
compared to 54.9% and 53.9% for the 12 and 28 weeks ended January 16, 1999.
Facility lease payments as a percentage of revenue, were 14.0% and 13.6% for the
12 and 28 weeks ended January 15, 2000 as compared to 13.2% and 12.8% for the 12
and 28 weeks ended January 16, 1999. The increase in facility lease payments as
a percentage of revenue was mainly due to higher relative lease costs associated
with the Bright Start schools and the 28 new schools.
Amortization of goodwill and other intangibles increased 46.0% and 46.3% for the
12 and 28 weeks ended January 15, 2000 as compared to the 12 and 28 weeks ended
January 16, 1999. This increase is due to the amortization of goodwill
associated with the Bright Start Acquisition.
Many of the Company's operating costs are relatively fixed and do not decline or
increase directly with small changes in attendance. Depreciation and other
operating costs, which includes repair and maintenance, utilities, insurance,
marketing, real estate taxes, food, supplies and transportation, excluding
pre-opening costs, declined or remained unchanged as a percentage of revenue
during the 12 and 28 weeks ended January 15, 2000, as compared to the 12 and 28
weeks ended January 16, 1999.
As a result of the foregoing, the Company incurred an operating loss of $1.1
million during the 12 weeks ended January 15, 2000 and operating income of $0.3
million during the 28 weeks ended January 15, 2000 as compared to an operating
income of $1.2 million and $5.2 during the 12 and 28 weeks ended January 16,
1999. Earnings before interest, taxes, depreciation and amortization (EBITDA)
was $2.4 million and $8.6 million for the 12 and 28 weeks ended January 15, 2000
as compared to $4.4 million and 12.9 million for the 12 and 28 weeks ended
January 16, 1999. Excluding pre-opening costs and new school operating losses,
EBIDTA would have been $3.2 million and $10.5 million for the 12 and 28 weeks
ended January 15, 2000 as compared to $4.6 million and 13.1 million for the 12
and 28 weeks ended January 16, 1999.
Interest expense for the 12 and 28 weeks ended January 15, 2000 increased $0.2
million and $0.5 million as compared to the 12 and 28 weeks ended January 16,
1999. The increase was mainly due to interest associated with higher average
borrowings under the Revolving Credit Facility resulting from the Bright Start
Acquisition.
After adding back to pre-tax income permanent differences, the effective income
tax rate for the 12 and 28 weeks ended January 15, 2000 was approximately 41%,
as compared to 39% and 41% for the 12 and 28 weeks ended January 16, 1999.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are from cash flows generated by
operations, borrowings under the revolving credit facility under the Credit
Agreement, and sale and leaseback financing for newly constructed schools. 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.
Parent and La Petite have entered into the Credit Agreement, as amended,
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 in connection with 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.
The Credit Agreement will terminate on May 11, 2005. The term loan will amortize
in an amount equal to $1.0 million per year in fiscal years 2000 through 2003,
$7.8 million in fiscal year 2004, and $27.5 million in fiscal year 2005. The
term loan is also 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 excess cash flow (as defined). On
January 15, 2000 there was $38.8 million outstanding on the term loan, $5.0
million outstanding on the Revolving Credit Facility. In addition, La Petite had
outstanding letters of credit in an aggregate amount equal to $4.0 million and
$16.0 million was available for working capital purposes under the Revolving
Credit Facility. The Company's Credit Agreement, senior notes and preferred
stock contain certain covenants that limit the ability of the Company to incur
additional indebtedness or pay cash dividends or certain other restricted
payments. As of January 15, 2000 the Company was in compliance with the
foregoing covenants.
On July 21, 1999 the Company acquired all the outstanding shares of Bright
Start, Inc. ("Bright Start") for $9.3 million in cash and assumed approximately
$2.0 million in debt. Bright Start operated 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 $22.2 million and at August 31, 1998
total assets were $5.1 million. See note 7 to the consolidated financial
statements.
On December 15, 1999, LPA acquired an additional $15.0 million of redeemable
preferred stock in the Parent and received warrants to purchase an additional
3.0% of the Parent's outstanding common stock on a fully diluted basis. The
proceeds of that investment were contributed to La Petite as common equity. In
connection with such purchase and contribution, the banks waived their right
under the Credit Agreement to require that such proceeds be used to repay
amounts outstanding under the Credit Agreement. The proceeds of such equity
contribution were used to repay borrowings under the revolving credit facility
that were incurred to finance the Bright Start acquisition.
Cash flows used for operating activities were $6.8 million during the 28 weeks
ended January 15, 2000 as compared to cash flows from operating activities of
$3.1 million during the 28 weeks ended January 16, 1999. The $9.9 million
decrease in cash flows from operations was mainly due to a $3.2 million increase
in net loss, a $5.7 million change in short term sale leaseback construction
funding, a $1.9 million reduction in insurance liabilities, offset by timing
differences in payable and prepaid expenses.
Cash flows used for investing activities were $4.0 million during the 28 weeks
ended January 15, 2000 as compared to cash flows used of $7.3 million during the
28 weeks ended January 16, 1999. The $3.3 million decrease in cash flows used
for investing activities was principally due to $10.2 million used for the
Bright Start acquisition, a $3.6 million increase in new school development,
offset by a $17.0 million increase in proceeds from new school sale lease-backs.
Cash flows from financing activities were $10.3 million during the 28 weeks
ended January 15, 2000 compared to cash flows from financing activities of $5.2
million during the 28 weeks ended January 16, 1999. The $5.1 million increase in
cash flows from financing activities was principally due to the $15.0 million
issuance of preferred stock and warrants, a $1.3 million net decrease in
restricted cash requirements, offset by an $8.3 decrease in net
13
<PAGE> 14
borrowings and a $3.2 million decrease in bank overdrafts related to the timing
of monthly expense payments. Restricted cash investments represents cash
deposited in escrow accounts as collateral for the self-insured portion of the
Company's workers compensation insurance coverage.
The Company opened 15 new schools during the 28 weeks ended January 15, 2000.
The opening of these schools along with the Bright Start acquisition satisfies
the Company's growth plans for fiscal year 2000. The cost to open a new school
ranges from $1.0 million to $1.5 million, of which approximately 85% is
typically financed through a sale and leaseback transaction. Alternatively, the
school 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. As of January 15, 2000 the Company had $2.9 million invested in new
school development in excess of amounts received from sale and leaseback
transactions.
Purchasers of schools 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 their capitalized cost over the term of
the lease. In addition, many of the Company's leases provide for either
contingent rentals if the school's operating revenue exceeds certain levels or a
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 the 28 weeks ended January 15, 2000 and January
16, 1999, exclusive of the Bright Start acquisition, were $16.9 million, and
$13.2 million, respectively. The Company views all capital expenditures, other
than those incurred in connection with the development of new schools, to be
maintenance capital expenditures. Maintenance capital expenditures for the 28
weeks ended January 15, 2000 and January 16, 1999 were $4.4 million. For fiscal
year 2000, the Company expects total maintenance capital expenditures to be
approximately $10.0 million.
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 for the 28 weeks ended January 15, 2000 and January 16, 1999 were $5.8
million, and $5.6 million, respectively.
INFLATION AND GENERAL ECONOMIC CONDITIONS
During the past three 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.
During the 28 weeks ended January 15, 2000 the Company experienced inflationary
pressures on average wage rates, as hourly rates increased approximately 7%.
Management believes this is occurring industry wide and there is no assurance
that such wage rate increases can be recovered through future increases in
tuition.
MANAGEMENT INFORMATION SYSTEMS AND THE YEAR 2000
The arrival of the year 2000 has not had an adverse impact on the Company's
computerized information systems and the cost of compliance has been immaterial.
The most important new system for the Company has been the installation of its
Academy Document and Information Network (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 with upgrades that are year 2000 compliant.
The costs of the upgrades were included as part of the annual licensing fees.
The Company completed its testing and, if necessary, modification of its smaller
applications to insure that any year 2000 issues were corrected prior to
December 31, 1999.
Although the Company did not assess the year 2000 readiness of its major
suppliers or third-party funding agencies, the Company is not currently aware of
any year 2000 failures on the part of its major suppliers or third-party funding
14
<PAGE> 15
agencies. The most likely worst case year 2000 scenario that could potentially
still occur and the impact it could have on the Company is uncertain. In the
event that major suppliers of curriculum material are unable to fulfill purchase
orders for supplies, school 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 was 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
Our current indebtedness consists of senior notes in the aggregate principal
amount of $145 million, the term loan under our credit agreement in the
aggregate principal amount of $38.8 million at January 15, 2000 and the
revolving credit facility under our credit agreement providing for revolving
loans 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 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, known as the average
banking rate ("ABR"), equal to the highest of The Chase Manhattan Bank's
published prime rate, a certificate of deposit rate plus 1% or the federal funds
effective rate plus 1/2 of 1%, plus, in each case, a percentage based on the
Company's financial performance. The borrowing margins applicable to the Credit
Agreement are initially 3.25% for LIBOR loans and 2.25% for ABR loans. The
senior notes will mature in May 2008 and the Credit Agreement will mature in May
2005. The term loan will amortize in an amount equal to $1.0 million per year in
fiscal years 2000 through 2003, $7.8 million in fiscal year 2004, and $27.5
million in fiscal year 2005.
To reduce the impact of interest rate changes on the term loan, the Company
entered into interest rate collar agreements. The collar agreements cover the
LIBOR interest rate portion of the term loan interest rate, effectively setting
maximum and minimum interest rates.
To reduce interest expense on the $145 million senior notes, the Company entered
into an interest rate swap transaction with an imbedded collar. The effect of
this transaction is that 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 are
recognized as an adjustment to interest expense. As of January 15, 2000, the
notional value of such derivatives was $184.0 million with an unrealized loss of
$2.5 million. 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 $0.4 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:
On February 16, 2000, the Company filed a current report on Form 8-K
announcing the appointment of Judith A. Rogala as the Company's new
chief executive officer and president.
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 February 28, 2000 /s/ Joan K. Singleton
---------------------------------------
By: Joan K. Singleton
Vice President-Chief Financial Officer,
Treasurer 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 February 28, 2000 /s/ Joan K. Singleton
---------------------------------------
By: Joan K. Singleton
Vice President-Chief Financial Officer,
Treasurer 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 February 28, 2000 /s/ Joan K. Singleton
---------------------------------------
By: Joan K. Singleton
Vice President-Chief Financial Officer,
Treasurer and duly authorized
representative of the registrant
19
<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.
BRIGHT START, INC.
Dated February 28, 2000 /s/ Joan K. Singleton
---------------------------------------
By: Joan K. Singleton
Vice President-Chief Financial Officer,
Treasurer and duly authorized
representative of the registrant
20
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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