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 April 8, 2000 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 May 22, 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 May 22, 2000, each of the additional
registrants had the number of outstanding shares which is shown on the table
below.
2
ADDITIONAL REGISTRANTS
Number of Shares
Jurisdiction of Commission IRS Employer of Common
Name Incorporation File Number Identification No. Stock Outstanding
- ---- ------------- ----------- ------------------ -----------------
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)
3
LPA HOLDING CORP.
INDEX
- -------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
PAGE
----
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 11-15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18-21
4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
- -------------------------------------------------------------------------------
LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
APRIL 8, 2000 AND JULY 3, 1999
- -------------------------------------------------------------------------------
ASSETS APRIL 8, JULY 3,
2000 1999
Current assets:
Cash and cash equivalents $ 5,631 $ 4,572
Restricted cash investments 1,006 1,218
Accounts and notes receivable, net 8,109 8,077
Prepaid food and supplies 7,461 7,884
Other prepaid expenses 4,426 5,850
Refundable income taxes 106 192
Current deferred income taxes 1,876
----------- ------------
Total current assets 28,615 27,793
Property and equipment, at cost:
Land 6,120 6,120
Buildings and leasehold improvements 82,056 77,197
Equipment 23,662 20,451
Facilities under construction 2,160 15,261
----------- ------------
113,998 119,029
Less accumulated depreciation 57,775 48,310
----------- ------------
Net property and equipment 56,223 70,719
Other assets (Note 3) 69,974 61,780
Deferred income taxes 12,126 8,883
----------- ------------
$ 166,938 $ 169,175
----------- ------------
(continued)
4
5
LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
APRIL 8, 2000 AND JULY 3, 1999
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT APRIL 8, JULY 3,
2000 1999
Current liabilities:
Overdrafts due banks $ 4,979 $ 7,450
Accounts payable 5,295 7,972
Current reserve for closed schools 3,712 1,366
Current maturities of long-term debt
and capital lease obligations 2,193 2,187
Accrued salaries, wages and other
payroll costs 14,358 11,903
Accrued insurance liabilities 2,694 2,389
Accrued property and sales taxes 3,089 3,749
Accrued interest payable 6,671 2,388
Other current liabilities 4,200 11,199
Current deferred income taxes 361
----------- ------------
Total current liabilities 47,191 50,964
Long-term debt and capital lease
obligations (Note 4) 182,579 187,999
Other long-term liabilities (Note 5) 12,730 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 liquidation 45,680 29,310
preference of $1,179.639 and $1,143.444 as
of April 8, 2000 and July 3, 1999,
respectively
Stockholders' deficit:
Class A common stock ($.01 par value per
share); 950,000 shares authorized and 6 6
564,985 and 560,026 shares issued and
outstanding as of April 8, 2000 and
July 3, 1999, respectively
Class B common stock ($.01 par value per
share); 20,000 shares authorized, issued
and outstanding as of April 8, 2000 and
July 3, 1999
Common stock warrants 8,596 5,645
Accumulated deficit (129,844) (115,834)
----------- ------------
Total stockholders' deficit (121,242) (110,183)
----------- ------------
$ 166,938 $ 169,175
----------- ------------
See notes to consolidated financial statements.
(concluded)
5
6
LPA HOLDING CORP.
CONSOLIDTED STATEMENTS OF OPERATIONS
40 WEEKS ENDED APRIL 8, 2000
(In thousands of dollars)
- -------------------------------------------------------------------------------
12 WEEKS ENDED 40 WEEKS ENDED
----------------------------------------
APRIL 8, APRIL 10, APRIL 8, APRIL 10,
2000 1999 2000 1999
Operating revenue $ 92,228 $ 80,560 $ 280,743 $ 247,862
Operating expenses:
Salaries, wages and benefits 49,478 42,024 155,702 132,211
Facility lease expense 11,411 9,648 37,032 31,134
Depreciation 3,073 2,930 10,434 10,051
Restructuring Charge (Note 8) 7,500 7,500
Amortization of goodwill and
other intangibles 368 252 1,228 840
Other 20,190 18,150 68,301 60,910
-------- -------- --------- ---------
92,020 73,004 280,197 235,146
-------- -------- --------- ---------
Operating income 208 7,556 546 12,716
-------- -------- --------- ---------
Interest expense 4,976 4,253 15,919 14,732
Interest income (35) 0 (115) (162)
-------- -------- --------- ---------
Net interest costs 4,941 4,253 15,804 14,570
-------- -------- --------- ---------
Income (loss) before income taxes (4,733) 3,303 (15,258) (1,854)
Provision (benefit) for income taxes (1,715) 1,652 (5,479) 92
-------- -------- --------- ---------
Net income (loss) $ (3,018) $ 1,651 $ (9,779) $ (1,946)
-------- -------- --------- ---------
See notes to consolidated financial statements.
6
7
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
40 WEEKS ENDED APRIL 8, 2000
(In thousands of dollars)
- -------------------------------------------------------------------------------
40 WEEKS ENDED
---------------------------
APRIL 8, APRIL 10,
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,779) $ (1,946)
Adjustments to reconcile net loss to net
cash from (used for) operating
activities
Restructure Charge 7,500
Depreciation and amortization 12,430 11,540
Deferred income taxes (5,479) 11
Changes in assets and liabilities:
Accounts and notes receivable 270 (1,566)
Prepaid expenses and supplies 2,538 (444)
Accrued property and sales taxes (703) (621)
Accrued interest payable 4,283 3,989
Accounts payable and other
accrued liabilities (9,763) 1,979
Other changes in assets and
liabilities, net 399 622
----------- ------------
Net cash from operating activities 1,696 13,564
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Bright Start, net of
cash acquired (10,296)
Capital expenditures (18,423) (22,682)
Proceeds from sale of assets 23,146 6,542
----------- ------------
Net cash used for
investing activities (5,573) (16,140)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt and capital
lease obligations (43,686) (8,328)
Borrowings under the Revolving
Credit Agreement 36,000 11,000
Proceeds from issuance of preferred stock
and warrants 15,000
Exercise of stock options 89
Deferred financing costs and stock
offering expenses (209) (175)
Increase (reduction) in bank overdrafts (2,470) 313
Decrease (increase) in restricted
cash investments 212 (1,080)
----------- ------------
Net cash from financing activities 4,936 1,730
----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,059 (846)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,572 4,820
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,631 $ 3,974
----------- ------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 10,915 $ 10,411
Income taxes 86 82
Cash received during the period for:
Interest $ 112 $ 160
Income taxes 91 1,845
NON-CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations of $34,000 and
$291,000 were incurred during the 40 weeks
ended April 8, 2000 and April 10, 1999,
respectively, when the Company entered
into leases for new computer equipment
See notes to consolidated financial statements.
7
8
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. ORGANIZATION AND MERGER
Vestar/LPA Investment Corp. (Parent), 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 Parent,
which was renamed LPA Holding Corp., 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 Parent (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, 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
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)
APRIL 8, 2000 JULY 3, 1999
------------- ------------
Intangible assets:
Excess purchase price over net
assets acquired $ 74,377 $ 64,277
Curriculum 1,497 1,497
Accumulated amortization (15,917) (13,746)
------------ ------------
59,957 52,028
Deferred financing costs 8,632 8,423
Accumulated amortization (1,856) (1,088)
Other assets 3,241 2,417
------------ ------------
$ 69,974 $ 61,780
------------ ------------
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
(in thousands of dollars)
APRIL 8, 2000 JULY 3, 1999
------------- ------------
Senior Notes, 10.0% due May 15, 2008 $ 145,000 $ 145,000
Borrowings under credit agreement 38,500 43,250
Capital lease obligations 1,272 1,936
------------ ------------
184,772 190,186
Less current maturities of long-term debt
and capital lease obligations (2,193) (2,187)
------------ ------------
$ 182,579 $ 187,999
------------ ------------
9
10
5. OTHER LONG-TERM LIABILITIES
(in thousands of dollars)
APRIL 8, 2000 JULY 3, 1999
------------- ------------
Unfavorable lease, net of accumulated
amortization $ 2,848 $ 3,800
Non-current reserve for closed schools 6,441 2,681
Long-term insurance liabilities 3,441 4,604
------------ ------------
$ 12,730 $ 11,085
------------ ------------
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 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 40 weeks ended April 10, 1999 would have been $85.9
million, and $265.0 million, respectively. The Company's net income for the
12 weeks ended April 10, 1999 would have been $1.7 million and the net loss
for the 40 weeks ended April 10, 1999 would have been $2.3 million.
8. RESTRUCTURING CHARGE
On February 17, 2000, the Board approved a plan to close certain Academies
located in areas where the demographic conditions no longer support an
economically viable operation and to restructure its operating management
to better serve the remaining Academies. Accordingly, the Company recorded
a $7.5 million restructuring charge ($4.5 million after tax) to provide for
costs associated with the Academy closures and restructuring of 49
Academies. The charge includes the present value of rent and real estate
taxes, net of anticipated sublease income, the write-down of fixed assets
to fair market value, the write-off of assigned goodwill, and other
restructuring costs related to the closures. None of the school closures
took place in the third quarter. Subsequent to the end of the third
quarter, as of May 22, 2000, 29 Academies have been closed, ten are
scheduled to close by fiscal year-end, and the remaining Academies are
scheduled to close in fiscal year 2001.
10
11
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.
Between April 10, 1999 and the end of the third quarter of fiscal year 2000, the
Company opened 21 new schools and acquired 43 schools through the acquisition of
Bright Start. Fifteen schools were closed during the same period. As a result,
the Company operated 791 schools at the end of the third quarter of fiscal year
2000, 49 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 40 weeks ended April 8, 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 40 weeks ended April 8, 2000 as compared to $0.1
million and $0.3 million for the 12 and 40 weeks ended April 10, 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 EBIDTA are new schools operating losses of $0.2 million
and $1.6 million for the 12 and 40 weeks ended April 8, 2000. New school
operating losses during the 12 and 40 weeks ended April 8, 1999, were $0.4
million as the new schools started opening.
11
12
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 40 weeks ended April
8, 2000 and April 10, 1999 were as follows:
12 WEEKS ENDED 40 WEEKS ENDED
-----------------------------------------------------------------------------------
APRIL PERCENT APRIL PERCENT APRIL PERCENT APRIL PERCENT
8, OF 10, OF 8, OF 10, OF
2000 REVENUE 1999 REVENUE 2000 REVENUE 1999 REVENUE
--------------------------------------------------------------- -------------------
(DOLLARS IN THOUSANDS)
Operating revenue $ 92,228 100.0% $ 80,560 100.0% $ 280,743 100.0% $ 247,862 100.0%
Operating expenses:
Salaries, wages and benefits 49,478 53.6 42,024 52.2 155,702 55.5 132,211 53.3
Facility lease payments 11,411 12.4 9,648 12.0 37,032 13.2 31,134 12.6
Depreciation 3,073 3.3 2,930 3.6 10,434 3.7 10,051 4.1
Restructuring Charge 7,500 7,500 2.7
Amortization of goodwill
and other intangibles 368 0.4 252 0.3 1,228 0.4 840 0.3
Other 20,190 21.9 18,150 22.5 68,301 24.3 60,910 24.6
-------- ------ -------- ----- --------- ----- --------- -----
Total operating expenses 92,020 99.8 73,004 90.6 280,197 99.8 235,146 94.9
-------- ------ -------- ----- --------- ----- --------- -----
Operating income $ 208 0.2% $ 7,556 9.4% $ 546 0.2% $ 12,716 5.1%
-------- ------ -------- ----- --------- ----- --------- -----
Adjusted EBITDA $ 11,149 12.1% $ 10,738 13.3% $ 19,708 7.0% $ 23,607 9.5%
-------- ------ -------- ----- --------- ----- --------- -----
Operating revenue increased $11.7 million or 14.5% during the 12 weeks and $32.9
million or 13.3% during the 40 weeks ended April 8, 2000, as compared to the
corresponding periods of fiscal 1999. The increase in operating revenue includes
Bright Start operating revenue of $5.6 million and $18.0 million during the 12
and 40 weeks ended April 8, 2000. New schools contributed incremental revenue of
$3.1 million and $8.0 million during the 12 and 40 weeks ended April 8, 2000,
while closed schools reduced incremental revenue by $1.0 million and $3.1
million during the 12 and 40 weeks ended April 8, 2000.
Tuition revenue increased 14.9% during the 12 weeks and 13.4% during the 40
weeks ended April 8, 2000. The increase in tuition revenue reflects a 5.6%
increase in average weekly FTE tuition rates for both the 12 and 40 weeks ended
April 8, 2000, and a 8.8% and 7.4% increase in FTE's during the 12 and 40 weeks
ended April 8, 2000. The increase in average weekly FTE tuition rates was
principally due to selective price increases which were put into place in the
second quarters of fiscal year 1999 and 2000, 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 0.7% and 1.6% decline in FTE attendance at established schools during the
12 and 40 weeks ended April 8, 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 $7.5 million or 17.7% during the 12
weeks and $23.5 million or 17.8% during the 40 weeks ended April 8, 2000, as
compared to the corresponding periods of fiscal 1999. The increase in salaries,
wages, and benefits includes Bright Start salaries, wages, and benefits of $3.1
million and $10.0 million during the 12 and 40 weeks ended April 8, 2000. New
schools contributed incremental labor costs of $1.6 million and $4.7 million
during the 12 and 40 weeks ended April 8, 2000, while closed schools reduced
incremental labor costs by $0.7 million and $2.3 million during the 12 and 40
weeks ended April 8, 2000. Excluding Bright Start and new schools, salaries and
wages for established schools increased $3.0 million or 8.3% during the 12 weeks
and $9.1 million or 8.0% during the 40 weeks ended April 8, 2000. The increase
in labor costs at established schools was
12
13
mainly due to a 6.9% and 6.7% increase in average hourly wage rates and a 0.6%
and 1.1% increase in labor hours during the 12 and 40 weeks ended April 8, 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 53.6% and 55.5% for the 12 and 40 weeks ended April 8, 2000 as compared to
52.2% and 53.3% for the 12 and 40 weeks ended April 10, 1999.
Facility lease payments as a percentage of revenue, were 12.4% and 13.2% for the
12 and 40 weeks ended April 8, 2000 as compared to 12.0% and 12.6% for the 12
and 40 weeks ended April 10, 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 46.2% for the
12 and 40 weeks ended April 8, 2000 as compared to the 12 and 40 weeks ended
April 10, 1999. This increase is due to the amortization of goodwill associated
with the Bright Start Acquisition.
On February 17, 2000, the Board approved a plan to close certain Academies
located in areas where the demographic conditions no longer support an
economically viable operation and to restructure its operating management to
better serve the remaining Academies. Accordingly, the Company recorded a $7.5
million restructuring charge ($4.5 million after tax) to provide for costs
associated with the Academy closures and restructuring of 49 Academies. The
charge includes the present value of rent and real estate taxes, net of
anticipated sublease income, the write-down of fixed assets to fair market
value, the write-off of assigned goodwill, and other restructuring costs related
to the. None of the school closures took place in the third quarter. Subsequent
to the end of the third quarter, as of May 22, 2000, 29 Academies have been
closed, ten are scheduled to close by fiscal year-end, and the remaining
Academies are scheduled to close in fiscal year 2001.
Many of the Company's other operating expenses 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 40 weeks ended April 8, 2000, as compared to the 12
and 40 weeks ended April 10, 1999.
As a result of the foregoing, the Company had operating income of $0.2 million
and $0.5 million during the 12 and 40 weeks ended April 8, 2000 as compared to
operating income of $7.6 million and $12.7 during the 12 and 40 weeks ended
April 10, 1999. Adjusted earnings before non-cash restructuring charge,
interest, taxes, depreciation and amortization (EBITDA) was $11.1 million and
$19.7 million for the 12 and 40 weeks ended April 8, 2000 as compared to $10.7
million and 23.6 million for the 12 and 40 weeks ended April 10, 1999. Excluding
pre-opening costs and new school operating losses, Adjusted EBIDTA would have
been $11.3 million and $21.9 million for the 12 and 40 weeks ended April 8, 2000
as compared to $11.2 million and 24.4 million for the 12 and 40 weeks ended
April 10, 1999.
Interest expense for the 12 and 40 weeks ended April 8, 2000 increased $0.8
million and $1.2 million as compared to the 12 and 40 weeks ended April 10,
1999. The increase was mainly due to interest associated with higher average
borrowings under the Revolving Credit Facility resulting from the acquisition of
Bright Start and higher interest rates.
After adding back to pre-tax income permanent differences, the effective income
tax rate for the 12 and 40 weeks ended April 8, 2000 was approximately 41%, as
compared to 44% and 39% for the 12 and 40 weeks ended April 10, 1999. The 1999
fiscal year effective income tax rate was impacted by the resolution of issues
raised by the IRS regarding the Company's benefit plan.
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
13
14
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 amortizes 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
April 8, 2000 there was $38.5 million outstanding on the term loan, and nothing
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
$21.0 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 April 8, 2000 the Company was in compliance with the foregoing
covenants.
On July 21, 1999 the Company acquired all the outstanding shares of 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 from operating activities were $1.7 million during the 40 weeks ended
April 8, 2000 as compared to cash flows from operating activities of $13.6
million during the 40 weeks ended April 10, 1999. The $11.9 million decrease in
cash flows from operations was mainly due to a $7.8 million increase in net
loss, a $5.5 change in deferred income taxes, a $8.3 million change in short
term sale leaseback construction funding, offset by the non-cash restructuring
charge of $7.5 million and by timing differences in supplies and accrued
salaries.
Cash flows used for investing activities were $5.6 million during the 40 weeks
ended April 8, 2000 as compared to cash flows used of $16.1 million during the
40 weeks ended April 10, 1999. The $10.5 million decrease in cash flows used for
investing activities was principally due to a $16.6 million increase in proceeds
from new school sale lease-backs, a $3.7 million decrease in new school
development, and a $0.5 million decrease in maintenance capital expenditures,
offset by a $10.3 million used for the Bright Start acquisition.
Cash flows from financing activities were $4.9 million during the 40 weeks ended
April 8, 2000 compared to cash flows from financing activities of $1.7 million
during the 40 weeks ended April 10, 1999. The $3.2 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 $10.4 decrease in net borrowings and
a $2.8 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 40 weeks ended April 8, 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
14
15
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 April 8, 2000
the Company had $2.2 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 contingent
rentals if the school's operating revenue exceeds certain levels. 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 40 weeks ended April 8, 2000 and April 10,
1999, exclusive of the Bright Start acquisition, were $18.4 million, and $22.7
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 40
weeks ended April 8, 2000 and April 10, 1999 were $6.0 million and $6.5 million,
respectively. 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 40 weeks ended April 8, 2000 and April 10, 1999 were $8.8
million, and $8.1 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 40 weeks ended April 8, 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
agencies.
15
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Current indebtedness consists of senior notes in the aggregate principal amount
of $145 million, the term loan under the credit agreement in the aggregate
principal amount of $38.5 million at April 8, 2000 and the revolving credit
facility under the 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 April 8, 2000, the
notional value of such derivatives was $184.0 million with an unrealized loss of
$2.9 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 $0.5 million per year.
******
16
17
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
17
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 HOLDING CORP.
Dated May 22, 2000 /s/ Charles A. Rico
----------------------------------------
By: Charles A. Rico
Controller and duly authorized
representative of the registrant
18
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.
LA PETITE ACADEMY, INC.
Dated May 22, 2000 /s/ Charles A. Rico
By: Charles A. Rico
----------------------------------------
Controller and duly authorized
representative of the registrant
19
20
SIGNATURE
- ------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LPA SERVICES, INC.
Dated May 22, 2000 /s/ Charles A. Rico
By: Charles A. Rico
----------------------------------------
Controller and duly authorized
representative of the registrant
20
21
SIGNATURE
- ------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BRIGHT START, INC.
Dated May 22, 2000 /s/ Charles A. Rico
By: Charles A. Rico
----------------------------------------
Controller and duly authorized
representative of the registrant
21