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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 Commission File No. 333-56239-01
Period Ended October 21, 2000
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 December 4, 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 December 4, 2000, each of the
additional registrants had the number of outstanding shares which is shown on
the table below.
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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)
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LPA HOLDING CORP.
INDEX
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PART I. FINANCIAL INFORMATION
PAGE
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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 8-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12-15
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
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
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LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
OCTOBER 21, 2000 AND JULY 1, 2000
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
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ASSETS OCTOBER 21, JULY 1,
2000 2000
Current assets:
Cash and cash equivalents $ 3,174 $ 4,008
Restricted cash investments 4,826 837
Accounts and notes receivable, net 8,950 7,462
Prepaid food and supplies 6,775 7,127
Other prepaid expenses 3,350 5,324
Refundable income taxes 91 109
Deferred income taxes 950 950
-------- --------
Total current assets 28,116 25,817
Property and equipment, at cost:
Land 5,886 5,886
Buildings and leasehold improvements 81,008 79,568
Equipment 24,012 23,780
Facilities under construction 2,041 2,041
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112,947 111,275
Less accumulated depreciation 58,603 54,842
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Net property and equipment 54,344 56,433
Other assets (Note 3) 68,168 69,159
Deferred income taxes 17,149 14,238
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$167,777 $165,647
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(continued)
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LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
OCTOBER 21, 2000 AND JULY 1, 2000
(In thousands of dollars, except share and per share data)
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LIABILITIES AND STOCKHOLDERS' DEFICIT OCTOBER 21, JULY 1,
2000 2000
Current liabilities:
Overdrafts due banks $ 3,959 $ 4,756
Accounts payable 4,353 8,273
Current reserve for closed schools 3,218 3,268
Current maturities of long-term debt and capital lease obligations 1,537 1,897
Accrued salaries, wages and other payroll costs 14,307 14,212
Accrued insurance liabilities 2,568 2,586
Accrued property and sales taxes 4,365 3,490
Accrued interest payable 8,071 2,568
Other current liabilities 3,609 5,556
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Total current liabilities 45,987 46,606
Long-term debt and capital lease obligations (Note 4) 188,034 182,319
Other long-term liabilities (Note 5) 15,063 13,061
Series A 12% redeemable preferred stock ($.01 par value per share);
45,000 shares authorized, issued and outstanding at aggregate liquidation
preference of $1,245.516 as of October 21, 2000, and $1,211.291 as of July 1,
2000 49,584 47,314
Stockholders' deficit:
Class A common stock ($.01 par value per share); 950,000 shares authorized
and 564,985 shares issued and outstanding as of October 21, 2000 and July 1,
2000 6 6
Class B common stock ($.01 par value per share); 20,000 shares authorized,
issued and outstanding as of October 21, 2000 and July 1, 2000
Common stock warrants 8,596 8,596
Accumulated deficit (139,493) (132,255)
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Total stockholders' deficit (130,891) (123,653)
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$ 167,777 $ 165,647
========= =========
See notes to consolidated financial statements.
(concluded)
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LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
SIXTEEN WEEKS ENDED OCTOBER 21, 2000 AND OCTOBER 23, 1999
(In thousands of dollars)
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OCTOBER 21, OCTOBER 23,
2000 1999
Operating revenue $ 114,274 $ 108,534
Operating expenses:
Salaries, wages and benefits 65,011 60,110
Facility lease expense 13,689 14,041
Depreciation 3,926 4,246
Amortization of goodwill and other
intangibles 872 872
Other 29,007 27,842
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112,505 107,111
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Operating income 1,769 1,423
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Interest expense 7,176 6,236
Interest income (28) (37)
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Net interest costs 7,148 6,199
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Loss before income taxes and cumulative
effect of change in accounting principle (5,379) (4,776)
Benefit for income taxes (1,976) (1,661)
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Loss before cumulative effect of a change
in accounting principle (3,403) (3,115)
Cumulative effect of a change in accounting
principle, net of taxes of $1,069 (Note 9) (1,565)
--------- ---------
Net Loss $ (4,968) $ (3,115)
========= =========
See notes to consolidated financial statements
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LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIXTEEN WEEKS ENDED OCTOBER 21, 2000 AND OCTOBER 23,1999
(In thousands of dollars)
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OCTOBER OCTOBER
21, 2000 23, 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (4,968) (3,115)
Adjustments to reconcile net loss to net cash from (used for)
operating activities:
Cumulative effect of change in accounting principle 2,634
Depreciation and amortization 5,140 5,409
Deferred income taxes (2,911) (1,661)
Changes in assets and liabilities:
Accounts and notes receivable (1,361) (2,468)
Prepaid expenses and supplies 2,326 2,266
Accrued property and sales taxes 875 1,153
Accrued interest payable 5,503 4,507
Accounts payable and other accrued liabilities (5,639) (4,787)
Other changes in assets and liabilities, net (1,264) (2,187)
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Net cash from (used for) operating activities 335 (883)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Bright Start, net of cash acquired ( 10,020)
Capital expenditures (1,920) ( 15,186)
Proceeds from sale of assets 183 22,390
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Net cash used for investing activities (1,737) (2,816)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt and capital lease obligations (645) (2,589)
Borrowings under the Revolving Credit Agreement 6,000 10,000
Reduction in bank overdrafts (797) (3,647)
Decrease (increase) in restricted cash investments (3,990) 244
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Net cash from financing activities 568 4,008
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NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (834) 309
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,008 4,572
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 3,174 4,881
====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) 1,332 1,485
Income taxes 94 43
Cash received during the period for:
Interest 33 34
Income taxes 19 7
NON-CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations of $34 were incurred during the 16 weeks ended
October 23, 1999, when the Company entered into leases for new computer
equipment
See notes to consolidated financial statements.
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LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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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, which has no independent assets or operations, 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, 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 Parent
(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 July 21, 1999, La Petite acquired all the outstanding shares of Bright
Start, Inc. ("Bright Start"). See note 7 to the consolidated financial
statements.
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 81.3% of the common stock of
Parent on a fully diluted basis and $45 million of redeemable preferred
stock of Parent. An affiliate of 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.
Parent, consolidated with La Petite, Bright Start and Services, is referred
to herein as the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 accounting principles generally accepted in the United
States of America (GAAP) 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 1,
2000.
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The Company utilizes a 52 or 53-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 GAAP 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)
OCTOBER 21, 2000 JULY 1, 2000
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Intangible assets:
Excess purchase price over net assets acquired $ 74,221 $ 74,221
Curriculum 1,497 1,497
Accumulated amortization (17,402) (16,533)
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58,316 59,185
Deferred financing costs 8,769 8,769
Accumulated amortization (2,483) (2,141)
Other assets 3,566 3,346
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$ 68,168 $ 69,159
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4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
(in thousands of dollars)
OCTOBER 21, 2000 JULY 1, 2000
---------------- ------------
Senior Notes, 10.0% due May 15, 2008 $ 145,000 $ 145,000
Borrowings under credit agreement 44,000 38,250
Capital lease obligations 571 966
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189,571 184,216
Less current maturities of long-term debt and capital lease
obligations (1,537) (1,897)
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$ 188,034 $ 182,319
========= =========
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5. OTHER LONG-TERM LIABILITIES
(in thousands of dollars)
OCTOBER 21, 2000 JULY 1, 2000
---------------- ------------
Derivative instruments $ 3,177
Unfavorable lease, net of accumulated
amortization 3,533 $ 3,973
Non-current reserve for closed schools 4,380 5,295
Long-term insurance liabilities 3,973 3,793
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$15,063 $13,061
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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. 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 an allocation to goodwill of $10.1
million which is being amortized on a straight-line basis over 20 years.
The Company's financial statements reflect the results of operations of
Bright Start during the periods subsequent to July 21, 1999.
8. RESTRUCTURING CHARGE
In the third quarter of 2000, management committed to 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 consisted principally of $5.9
million for the present value of rent, real estate taxes, common area
maintenance charges and utilities, net of anticipated sublease income, and
$1.1 million for the write-down of fixed assets to fair market value. At
October 21, 2000, the Company had an accrual for the closing of these
Academies of $5.5 million. As of October 21, 2000, 43 schools have been
closed and management plans to address the closing of the remaining six
schools by the end of fiscal year 2001.
9. NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," (as amended by SFAS 137 and
138), establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. This Statement requires that an
entity recognize all derivatives as either assets or liabilities and
measure those instruments at fair value. The new Standard became effective
for the Company beginning in the first quarter of fiscal year 2001. The
impact of adopting this Statement resulted in a net cumulative transition
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loss of $2.6 million ($1.6 million, net of taxes) which was recorded as a
cumulative effect of change in accounting principle as of July 2, 2000.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements," which will be adopted by the Company during the fourth quarter
of the Company's fiscal year 2001. The adoption of this Statement is not
expected to have a material impact on the Company's consolidated financial
statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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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 October 23, 1999 and the end of the first quarter of fiscal year 2001,
the Company opened one school and closed 43 schools. As a result, the Company
operated 749 schools at the end of the first quarter of fiscal year 2001. The
closures resulted from management's decision to close certain schools located in
areas where the demographic conditions no longer supported an economically
viable operation.
New schools, as defined by the Company, are schools open less than two years at
the start of the current fiscal year. The Company's operating results for the 16
weeks ended October 21, 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, were $0.6 million for the 16 weeks ended October 23, 1999 compared to
none in the 16 weeks ended October 21, 2000. 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 $0.4 million and $0.4 million for the
16 weeks ended October 21, 2000 and $0.7 million and $0.6 million for the 16
weeks ended October 23, 1999.
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 16 weeks ended October 21,
2000 and October 23, 1999 were as follows:
OCTOBER 21, PERCENT OF OCTOBER 23, PERCENT OF
2000 REVENUE 1999 REVENUE
Operating revenue $114,274 100.0% $108,534 100.0%
Operating expenses:
Salaries, wages and benefits 65,011 56.9 60,110 55.4
Facility lease payments 13,689 12.0 14,041 12.9
Depreciation 3,926 3.4 4,246 3.9
Amortization of goodwill
and other intangibles 872 0.8 872 0.8
Other 29,007 25.4 27,842 25.7
-------- ----- -------- -----
Total operating expenses 112,505 98.5 107,111 98.7
-------- ----- -------- -----
Operating income $ 1,769 1.5% $ 1,423 1.3%
======== ===== ======== =====
EBITDA $ 6,567 5.7% $ 6,541 6.0%
======== ===== ======== =====
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Operating revenue increased $5.7 million or 5.3% during the 16 weeks ended
October 21, 2000, as compared to the corresponding period of fiscal 2000. The
increase in operating revenue includes $6.8 million of incremental revenue from
established schools, $2.9 million of incremental revenue from new schools, most
of which were opened late in the 1999 year or early in the 2000 year, offset by
$4.0 million of reduced revenue from closed schools.
Tuition revenue increased 5.2% during the 16 weeks ended October 21, 2000, as
compared to the corresponding periods of fiscal 2000. The increase in tuition
reflects a decrease in full time equivalent (FTE) attendance of 4.7% and an
increase of the average weekly FTE tuition rates of 9.9%. The decrease in FTE
attendance is principally due to a 2.3% decline at our established schools, a
4.2% decline due to closed schools offset by a 1.9% increase at new schools. The
decline in our established schools is principally in our school age classrooms.
The increase in average weekly FTE tuition rates was principally due to
selective price increases that were put into place in February 2000 and
September 2000, based on geographic market conditions and class capacity
utilization.
Salaries, wages, and benefits increased $4.9 million or 8.2% during the 16 weeks
ended October 21, 2000, as compared to the corresponding period of fiscal 2000.
As a percentage of revenue, labor costs were 56.9% for the 16 weeks ended
October 21, 2000 as compared to 55.4% for the 16 weeks ended October 23, 1999.
The increase in salaries, wages, and benefits includes incremental labor costs
at established schools of $5.0 million, incremental labor costs at new schools
of $1.4 million, increased field management and corporate administration labor
costs of $0.5 million, increased benefit costs of $0.8 million, offset by
reduced incremental labor costs at closed schools of $2.8 million.
The increase in labor costs at established schools was mainly due to a 7.7%
increase in average hourly wage rates and a 2.6% increase in labor hours during
the 16 weeks ended October 21, 2000 over the prior year. New schools, which
remain in the start up stage, experience higher labor costs relative to revenue
as compared to established schools.
Facility lease expense decreased $0.4 million or 2.5% during the 16 weeks ended
October 21, 2000 as compared to the prior year. The decrease in facility lease
was mainly due to the closings that occurred in late fiscal year 2000.
Depreciation expense decreased $0.3 million or 7.5% during the 16 weeks ended
October 21, 2000 as compared to the prior year. The decrease in depreciation was
mainly due to the closings that occurred in late fiscal year 2000.
Amortization of goodwill and other intangibles did not change during the 16
weeks ended October 21, 2000 as compared to the prior year.
Other operating expenses increased $1.2 million or 4.2% during the 16 weeks
ended October 21, 2000 as compared to the prior year. The increase was primarily
due to unusual, non-recurring credits to prior year expense including a $1.1
million actuarial insurance reserve adjustment and a $0.9 million gain on
vehicle asset sales. In addition, there were reduced current year supplies and
pre-opening costs. Other operating costs include repairs and maintenance,
utilities, telephone, insurance, marketing, real estate taxes, food, supplies,
transportation, pre-opening costs and miscellaneous. As a percentage of revenue,
other operating costs decreased to 25.4% in the 16 weeks ended October 21, 2000
as compared to 25.7% during the 16 weeks ended October 23, 1999.
As a result of the foregoing, the Company had operating income of $1.8 million
during the 16 weeks ended October 21, 2000 as compared to operating income of
$1.4 million during the 16 weeks ended October 23, 1999. Adjusted earnings
before non-cash restructuring charge, interest, taxes, depreciation and
amortization (EBITDA) was $6.6 and $6.5 million for the 16 weeks ended October
21, 2000 and October 23, 1999, respectively.
Net interest expense increased $0.9 million for the 16 weeks ended October 21,
2000 as compared to the prior year. The increase was mainly due to higher
interest rates and interest incurred on the closed reserves.
After adding back to pre-tax income permanent differences, the effective income
tax rate for the 16 weeks ended October 21, 2000 was approximately 43% before
cumulative effect of change in accounting principle, as compared to 41% for the
16 weeks ended October 23, 1999.
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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 amortizes in
an amount equal to $1.0 million per year in fiscal years 2001 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
October 21, 2000, there was $38.0 million outstanding on the term loan, and $6.0
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
$15.0 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 October 21, 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 (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 $0.3 million during the 16 weeks ended
October 21, 2000 as compared to cash flows used for operating activities of $0.9
million during the 16 weeks ended October 23, 1999. The $1.2 million increase in
cash flows from operations was mainly due to an $8.8 million change in
short-term sale leaseback construction funding, a $2.6 million non-cash
adjustment for the change in accounting principle, a $1.4 million change in the
insurance reserves and a $1.0 million increase in accrued interest; this was
offset by a $6.3 million decrease in accounts payable, a $2.8 million reduction
in other payables, a $1.9 million increase in net loss and a $1.3 million change
in deferred taxes.
Cash flows used for investing activities were $1.7 million during the 16 weeks
ended October 21, 2000 as compared to cash flows used of $2.8 million during the
16 weeks ended October 23, 1999. The $1.1 million decrease in cash flows used
for investing activities was principally due to reduced capital expenditures of
$11.6 million for new school development, $10.0 million for the Bright Start
acquisition, and $1.7 million of maintenance expenditures, offset by a decrease
of $22.2 million in proceeds from new school sale lease-backs.
Cash flows from financing activities were $0.6 million during the 16 weeks ended
October 21, 2000 compared to cash flows from financing activities of $4.0
million during the 16 weeks ended October 23, 1999. The $3.4 million decrease in
cash flows from financing activities was principally due to $4.2 million
increase in restricted cash investments and a $2.1 million decrease in net
borrowings offset by a $2.9 million decrease in bank overdrafts related to the
timing of monthly expense payments. Restricted cash investments represents cash
deposited in escrow accounts to be utilized for the expected claim payout under
the Company's workers compensation insurance coverage.
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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 October 21, 2000, the Company had
$2.0 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 16 weeks ended October 21, 2000 and October
23, 1999, exclusive of the Bright Start acquisition, were $1.9 million, and
$15.2 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 16
weeks ended October 21, 2000 and October 23, 1999 were $1.9 million and $3.5
million, respectively.
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 16 weeks ended October 21, 2000 and October 23, 1999 were $4.0
million, and $3.7 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. During the 16 weeks ended October 21, 2000, the
Company experienced inflationary pressures on average wage rates, as hourly
rates increased approximately 8%. 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. A sustained recession with high
unemployment may have a material adverse effect on the Company's operations.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," (as amended by SFAS 137 and
138), establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. This Statement requires that an entity recognize all
derivatives as either assets or liabilities and measure those instruments at
fair value. The new Standard became effective for the Company beginning in the
first quarter of fiscal year 2001. The impact of adopting this Statement
resulted in a net cumulative transition loss of $2.6 million ($1.6 million, net
of taxes) which was recorded as a cumulative effect of change in accounting
principle as of July 2, 2000.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements," which will
be adopted by the Company during the fourth quarter of the Company's fiscal year
2001. The adoption of this Statement is not expected to have a material impact
on the Company's consolidated financial statements.
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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 $38.0 million at October 21, 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 $6.0 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 equal to the higher 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 currently 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 2001 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 a
specified percentage of excess cash flow (as defined).
To reduce the impact of interest rate changes on the term loan, the Company
entered into interest rate collar agreements during the second quarter of fiscal
year 1999. The collar agreements cover the LIBOR interest rate portion of the
term loan interest rate, effectively setting maximum and minimum interest rates
of 9.5% and 7.9%.
To reduce interest expense on the $145 million senior notes, the Company entered
into an interest rate swap transaction with an imbedded collar during the third
quarter of fiscal year 1999. 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 of 10.9% and 9.2%.
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 October 21, 2000, the
notional value of such derivatives was $183.0 million. As a result of adopting
SFAS No. 133, the Company has recorded a charge related to these derivatives as
a cumulative effect of a change in accounting principle in the Statement of
Operations (see Note 9 to the consolidated financial statements).
******
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PART II - OTHER INFORMATION
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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
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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 December 4, 2000 /s/ Jeffrey J. Fletcher
----------------------------------
By: Jeffrey J. Fletcher
Chief Financial Officer and duly
authorized representative of the
registrant
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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 December 4, 2000 /s/ Jeffrey J. Fletcher
----------------------------------
By: Jeffrey J. Fletcher
Chief Financial Officer and duly
authorized representative of the
registrant
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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 December 4, 2000 /s/ Jeffrey J. Fletcher
----------------------------------
By: Jeffrey J. Fletcher
Chief Financial Officer and duly
authorized representative of the
registrant
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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 December 4, 2000 /s/ Jeffrey J. Fletcher
----------------------------------
By: Jeffrey J. Fletcher
Chief Financial Officer and duly
authorized representative of the
registrant
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