1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 13, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
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 (IRS employer identification number)
incorporation or organization)
8717 WEST 110TH STREET, SUITE 300
OVERLAND PARK, KS 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 26, 2001, 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 26, 2001, each of the
additional registrants had the number of outstanding shares, which is shown on
the following table.
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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
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED): ----
Consolidated Balance Sheets 4
Consolidated Statements of Operations 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-9
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 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17-20
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
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LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands of dollars, except share and per share data)
- -------------------------------------------------------------------------------
ASSETS JANUARY 13, JULY 1,
2001 2000
Current assets:
Cash and cash equivalents $ 3,746 $ 4,008
Restricted cash investments 4,364 837
Receivables (net of allowance for doubtful
accounts of $720 and $406, respectively) 9,711 7,462
Prepaid supplies and expenses 10,197 12,451
Other current assets 1,630 1,059
--------- ---------
Total current assets 29,648 25,817
Property and equipment (net of accumulated
depreciation of $61,352 and $54,842, respectively) 56,743 56,433
Intangible assets (net of accumulated amortization of
$18,053 and $16,533, respectively) 57,664 59,185
Other assets (net of accumulated amortization of $2,739
and $2,141, respectively) 9,315 9,974
Deferred income taxes 16,689 14,238
--------- ---------
$ 170,059 $ 165,647
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Overdrafts due banks $ 4,582 $ 4,756
Accounts payable 5,361 8,273
Other current liabilities (Note 3) 34,687 33,577
--------- ---------
Total current liabilities 44,630 46,606
Long-term debt and capital lease obligations (Note 4) 196,767 182,319
Other long-term liabilities 10,786 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
$1,289.082 and $1,211.291, respectively 51,305 47,314
Stockholders' deficit:
Class A Common Stock ($.01 par value per share); 950,000
shares authorized and 564,985 issued and outstanding 6 6
Class B Common stock ($.01 par value per share); 20,000
shares authorized, issued and outstanding
Common stock warrants 8,596 8,596
Accumulated deficit (142,031) (132,255)
--------- ---------
Total stockholders' deficit (133,429) (123,653)
--------- ---------
$ 170,059 $ 165,647
========= =========
See notes to consolidated financial statements.
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LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands of dollars)
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12 WEEKS ENDED 28 WEEKS ENDED
---------------------------------------------------
JANUARY 13, JANUARY 15, JANUARY 13, JANUARY 15,
2001 2000 2001 2000
Revenues, net $84,861 $80,260 $199,135 $188,794
Operating expenses:
Salaries, wages and benefits 48,028 46,114 113,039 106,224
Facility lease expense 10,213 10,914 23,902 24,955
Depreciation and amortization 3,564 3,769 8,362 8,887
Provision for doubtful accounts 999 593 1,887 1,420
Other 20,179 19,955 48,298 46,970
------- ------- -------- --------
Total operating expenses 82,983 81,345 195,488 188,456
------- ------- -------- --------
Operating income (loss) 1,878 (1,085) 3,647 338
Interest income 20 43 48 80
Interest expense (2,846) (4,707) (10,022) (10,943)
------- ------- -------- --------
Loss before income taxes and cumulative
effect of a change in accounting principle (948) (5,749) (6,327) (10,525)
Benefit for income taxes (130) (2,103) (2,106) (3,764)
------- ------- -------- --------
Loss before cumulative effect of a change
in accounting principle (818) (3,646) (4,221) (6,761)
Cumulative effect of a change in accounting
principle, net of taxes of $1,069 (Note 8) (1,565)
------- ------- -------- --------
Net loss $ (818) $(3,646) $ (5,786) $ (6,761)
======= ======= ======== ========
See notes to consolidated financial statements.
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LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands of dollars)
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28 WEEKS ENDED
-------------------------
JANUARY 13, JANUARY 15,
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,786) $ (6,761)
Adjustments to reconcile net loss to net cash used
for operating activities
Effect of accounting principle change 2,634
Depreciation and amortization 8,960 9,396
Deferred income taxes (3,040) (3,764)
Changes in assets and liabilities:
Receivables (2,123) 1,205
Prepaid supplies and expenses 2,254 2,787
Accounts payable and other current liabilities (1,464) (7,676)
Other changes in assets and liabilities, net (4,772) (2,009)
-------- ---------
Net cash used for operating activities (3,337) (6,822)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Bright Start, net of cash acquired (10,254)
Capital expenditures (7,257) (16,868)
Proceeds from sale of assets 186 23,113
-------- ---------
Net cash used for investing activities (7,071) (4,009)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt and capital lease obligations (1,153) (3,122)
Net borrowings under the Revolving Credit Agreement 15,000 1,000
Proceeds from issuance of preferred stock and warrants 15,000
Exercise of stock options 89
Reduction in bank overdrafts (174) (3,012)
Decrease (increase) in restricted cash investments (3,527) 378
-------- ---------
Net cash from financing activities 10,146 10,333
-------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (262) (498)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,008 4,572
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,746 $ 4,074
======== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 10,834 $ 9,820
Income taxes 113 61
Cash received during the period for:
Interest $ 54 $ 79
Income taxes 19 45
NON-CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations of $34 were incurred during
the 28 weeks ended January 15, 2000 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. GENERAL
La Petite Academy, Inc. (La Petite), founded in 1968, is the largest
privately held and one of the leading for-profit preschool educational
facilities in the United States. La Petite Academy, Inc. provides
center-based educational services and childcare to children between the
ages of six weeks and 12 years.
La Petite is owned by LPA Holding Corporation (Parent). On March 17, 1998,
LPA Investment LLC (LPA), a Delaware limited liability company owned by an
affiliate of J.P. Morgan Partners (JPMP), formerly Chase Capital Partners,
and by an entity controlled by Robert E. King, a director of La Petite and
Parent, entered into an Agreement and Plan of Merger pursuant to which a
wholly owned subsidiary of LPA was merged into Parent (the
Recapitalization). 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 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 JPMP 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.
La Petite has two wholly-owned subsidiaries, LPA Services, Inc. (Services),
a third party administrator for La Petite insurance claims, and Bright
Start, Inc.("Bright Start"), an operator of preschools in various states.
See Note 6 to these consolidated financial statements for additional
information regarding the Bright Start acquisition.
Parent, consolidated with La Petite, Bright Start and Services, is referred
to herein as the Company.
2. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments (consisting of changes in
accounting, reclassifications and normal recurring adjustments) necessary
for their fair presentation in conformity with accounting principles
generally accepted in the United States of America (GAAP). The results for
the interim period are not necessarily indicative of the results to be
expected for the entire fiscal year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or omitted.
These financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Form 10-K for the fiscal year ended July 1, 2000.
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.
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 contain 3
periods or 12 weeks.
Certain reclassifications to prior year amounts have been made in order to
conform to the current year presentation.
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At January 13, 2001, the Company operated a total of 749 schools, located in
35 states, and served approximately 82,000 children.
3. OTHER CURRENT LIABILITIES (in thousands of dollars)
JANUARY 13, 2001 JULY 1, 2000
---------------- ------------
Current reserve for closed schools $ 3,218 $ 3,268
Current maturities of long-term debt
and capital lease obligations 1,296 1,897
Accrued salaries, wages and other
payroll costs 14,723 14,212
Accrued insurance liabilities 2,636 2,586
Accrued property and sales taxes 2,699 3,490
Accrued interest payable 3,582 2,568
Other current liabilities 6,533 5,556
-------- --------
$ 34,687 $ 33,577
======== ========
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (in thousands of dollars)
JANUARY 13, 2001 JULY 1, 2000
---------------- ------------
Senior Notes, 10.0% due May 15, 2008 $145,000 $145,000
Borrowings under credit agreement 52,750 38,250
Capital lease obligations 313 966
-------- --------
198,063 184,216
Less current maturities of long-term
debt and capital lease obligations (1,296) (1,897)
-------- --------
$196,767 $182,319
======== ========
5. 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.
6. 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.
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7. RESTRUCTURING CHARGE
In the third quarter of fiscal year 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
January 13, 2001, the Company had an accrual for the closing of these
Academies of $5.0 million.
8. 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.
The Company maintains interest rate swap agreements with imbedded collars on
the term loan for the purpose of managing exposure to interest rate
fluctuations. Management has elected to record these derivatives at fair
value in accordance with the provisions of SFAS No. 133. At January 13,
2001, assets and liabilities related to these agreements in the amounts of
$0.1 million and $0.6 million, respectively, were recorded on the balance
sheet as other long-term assets and other current liabilities. The change in
fair value of these derivatives has been recorded as adjustments to interest
rate expense of $2.3 million and $2.2 million for the 12 and 28 weeks ended
January 13, 2001, respectively.
On January 11, 2001, the Company entered into an agreement with the
counterparty to terminate the interest rate swap on the Senior Notes. The
termination agreement requires the Company to pay the counterparty $575,000
on February 28, 2001. Such amount has been recorded as a liability at
January 13, 2001.
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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INTRODUCTION
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.
The Company operated 749 and 792 schools at the end of the second quarter of
fiscal year 2001 and for the same period of 2000, respectively. The net decrease
of 43 schools is a result of 44 closures and one opening. 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.
Full-time equivalent (FTE) attendance, as defined by the Company, is not a
measure of the absolute number of students attending the Company's Academies,
but rather is an approximation of the full-time equivalent number of students
based on Company's 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 average weekly FTE tuition
rate, as defined by the Company, is the tuition revenue divided by the FTE
attendance for the respective period.
RESULTS OF OPERATIONS
The Company's operating results for the comparative 12 weeks were as follows:
12 WEEKS ENDED
-------------------------------------------------------
JANUARY PERCENT JANUARY PERCENT CHANGE
13, OF 15, OF AMOUNT
2001 REVENUE 2000 REVENUE INC(DEC)
-------- ------- ------- ------- --------
Revenues, net $ 84,861 100.0% $80,260 100.0% $4,601
Operating expenses:
Salaries, wages and benefits 48,028 56.6 46,114 57.5 1,914
Facility lease expense 10,213 12.0 10,914 13.6 (701)
Depreciation and amortization 3,564 4.2 3,769 4.7 (205)
Provision for doubtful accounts 999 1.2 593 0.7 406
Other 20,179 23.8 19,955 24.9 224
-------- ------ ------- ------ ------
Total operating expenses 82,983 97.8 81,345 101.4 1,638
-------- ------ ------- ------ ------
Operating income (loss) $ 1,878 2.2% $(1,085) -1.4% $2,963
-------- ------ ------- ------ ------
EBITDA (as defined) $ 5,442 6.4% $ 2,684 3.3% $2,758
======== ====== ======= ====== ======
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Operating revenue increased $4.6 million or 5.7% from the same period last year.
This revenue increase is principally a result of a 15.2% increase in the average
weekly FTE tuition rate offset by a decline in the FTE attendance of 7.9%. The
increase in the average weekly FTE tuition rate was principally due to selective
price increases that were put into place in September 2000 and January 2001
based on geographic market conditions and class capacity utilization; and a
change in our Flex Day Plan where the Company started charging for holidays. The
decrease in FTE attendance is due to a decline in FTE attendance at our
established schools and the closed schools, offset by an increase at our new
schools.
Salaries, wages, and benefits increased $1.9 million or 4.2% from the same
period last year. As a percentage of revenue, labor costs declined to 56.6% from
57.5% the prior year. The $1.9 million increase in salaries, wages, and benefits
includes incremental labor costs of $2.6 million at established schools,
incremental labor costs of $0.7 million at new schools, increased field
management and corporate administration labor costs of $0.6 million, increased
costs for bonuses and benefits of $0.3 million, offset by reduced incremental
labor costs of $2.2 million at closed schools. The increase in labor costs at
established schools was mainly due to a 7.1% increase in average hourly wage
rates and a 0.6% increase in labor hours compared to the prior year.
Facility lease expense decreased $0.7 million or 6.4% from the same period last
year. This decrease was principally due to the closings that occurred in late
fiscal year 2000, offset by slightly increased lease expense on lease renewals.
Depreciation and amortization decreased $0.2 million from the same period last
year. This decrease was mainly due to the closings that occurred in late fiscal
year 2000.
Provision for doubtful accounts increased $0.4 million from the same period last
year. This increase is a result of increasing revenue and higher write-offs.
Other operating expenses increased $0.2 million or 1.1% from the same period
last year. 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 23.8% from 24.9% the prior year.
As a result of the foregoing, the Company had operating income of $1.9 million
compared to an operating loss of $1.1 million in the prior year. EBITDA is
defined as net income before non-cash restructuring charges, extraordinary
items, net interest costs, income taxes, depreciation and amortization. EBITDA
was $5.4 million as compared to $2.7 million in the prior year. The increase in
operating income and EBITDA is principally due to higher revenues offset by
increased labor costs. EBITDA should not be considered in isolation or as a
substitute for net income, cash flow from operating activities and other
consolidated income or cash flow statement data prepared in accordance with the
accounting principles generally accepted in the United States of America or as a
measure of the Company's profitability or liquidity. EBITDA may not be
comparable to similarly titled measures used by other companies.
Net interest expense decreased $1.8 million from the same period last year. The
decrease was principally due to a $2.3 million mark-to-market adjustment for
derivative instruments, offset by increased borrowings on the revolver and
interest incurred on the closed reserves.
After adding back to pre-tax income permanent differences, the effective income
tax rate was approximately 41% in both years.
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The Company's operating results for the comparative 28 weeks were as follows:
28 WEEKS ENDED
----------------------------------------------------------
JANUARY PERCENT JANUARY PERCENT CHANGE
13, OF 15, OF AMOUNT
2001 REVENUE 2000 REVENUE INC(DEC)
-------- ------- ------- ------- -------
Revenues, net $199,135 100.0% $188,794 100.0% $10,341
Operating expenses:
Salaries, wages and benefits 113,039 56.8 106,224 56.3 6,815
Facility lease expense 23,902 12.0 24,955 13.2 (1,053)
Depreciation and amortization 8,362 4.2 8,887 4.7 (525)
Provision for doubtful accounts 1,887 0.9 1,420 0.8 467
Other 48,298 24.3 46,970 24.9 1,328
-------- ----- -------- ----- -------
Total operating expenses 195,488 98.2 188,456 99.8 7,032
-------- ----- -------- ----- -------
Operating income $ 3,647 1.8% $ 338 0.2% $ 3,309
======== ===== ======== ===== =======
EBITDA (as defined) $ 12,009 6.0% $ 9,225 4.9% $ 2,784
======== ===== ======== ===== =======
Operating revenue increased $10.3 million or 5.5% from the same period last
year. This revenue increase is principally a result of a 12.1% increase in the
average weekly FTE tuition rate offset by a decline in the FTE attendance of
5.8%. The increase in the average weekly FTE tuition rate was principally due to
selective price increases that were put into place in February 2000, September
2000 and January 2001 based on geographic market conditions and class capacity
utilization; and a change in our Flex Day Plan where the Company started
charging for holidays. The decrease in FTE attendance is principally due to a
decline in FTE attendance at our established schools and the closed schools,
offset by an increase at our new schools.
Salaries, wages, and benefits increased $6.8 million or 6.4% from the same
period last year. As a percentage of revenue, labor costs increased to 56.8% as
compared to 56.3% the prior year. The $6.8 million increase in salaries, wages,
and benefits includes incremental labor costs of $7.8 million at established
schools, incremental labor costs of $2.0 million at new schools, increased field
management and corporate administration labor costs of $0.9 million, increased
costs for bonuses and benefits of $1.3 million, offset by reduced incremental
labor costs of $5.2 million at closed schools. The increase in labor costs at
established schools was mainly due to a 7.4% increase in average hourly wage
rates and a 1.8% increase in labor hours compared to the prior year.
Facility lease expense decreased $1.1 million or 4.2% from the same period last
year. This decrease was principally due to the closings that occurred in late
fiscal year 2000, offset by slightly increased lease expense on lease renewals.
Depreciation and amortization decreased $0.5 million from the same period last
year. This decrease was mainly due to the closings that occurred in late fiscal
year 2000.
Provision for doubtful accounts increased $0.5 million from the same period last
year. This increase is a result of increasing revenue and higher write-offs.
Other operating expenses increased $1.3 million or 2.8% from the same period
last year. This increase was primarily due to a non-recurring credit to prior
year expense including a $1.1 million actuarial insurance reserve adjustment
based on favorable claims experience and a $0.9 million gain on vehicle asset
sales. In addition there were increased current year repairs and maintenance and
miscellaneous costs offset by reduced current year supplies and pre-
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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 24.3% from 24.9% the prior year.
As a result of the foregoing, the Company had operating income of $3.6 million
compared to $0.3 million in the prior year. EBITDA is defined as net income
before non-cash restructuring charges, extraordinary items, net interest costs,
income taxes, depreciation and amortization. EBITDA was $12.0 million as
compared to $9.2 million in the prior year. The increase in operating income and
EBITDA is principally due to higher revenues offset by increased labor costs.
EBITDA should not be considered in isolation or as a substitute for net income,
cash flow from operating activities and other consolidated income or cash flow
statement data prepared in accordance with the accounting principles generally
accepted in the United State of America or as a measure of the Company's
profitability or liquidity. EBITDA may not be comparable to similarly titled
measures used by other companies.
Net interest expense decreased $0.9 million from the same period last year. The
decrease was principally due to a $2.2 million mark-to-market adjustment for
derivative instruments, offset by increased higher interest rates early in this
fiscal year and interest incurred on the closed reserves.
After adding back to pre-tax income permanent differences, the effective income
tax rate was approximately 42% as compared to 41% the prior year.
The cumulative effect of a change in accounting principles is a result of
adopting SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities". (See Note 8 to the consolidated financial statements).
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 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
January 13, 2001, there was $37.8 million outstanding on the term loan, and
$15.0 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 $6.0 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 13, 2001, the Company was in compliance with
the foregoing covenants.
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 $3.3 million during the 28 weeks
ended January 13, 2001 as compared to cash flows used for operating activities
of $6.8 million during the same period in fiscal year 2000. The $3.5 million
increase in operating cash flow is principally due to a $5.7 million change in
short-term sale leaseback
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construction funding, a $1.0 million decrease in net loss, offset by a $1.5
million increase in accounts receivable and a $1.8 million reduction in accounts
payable and other current liabilities.
Cash flows used for investing activities were $7.1 million during the 28 weeks
ended January 13, 2001 as compared to cash flows used of $4.0 million during the
28 weeks ended January 15, 2000. The $3.1 million increase in cash flows used
for investing activities was principally due a decrease of $23.0 million in
proceeds from new school sale lease-backs, an increase of $2.8 million of
maintenance capital expenditures, offset by reduced capital expenditures of
$12.4 million for new school development and the $10.3 million net payment for
the Bright Start acquisition in the prior year.
Cash flows from financing activities were $10.1 million during the 28 weeks
ended January 13, 2001 compared to cash flows from financing activities of $10.3
million during the same period of fiscal year 2000. The $0.2 million decrease in
cash flows from financing activities was principally due to the issuance of
$15.0 million of additional preferred stock in the prior year, a $3.9 million
increase in restricted cash investments offset by a $14.0 million increase in
borrowings on the revolver, a $1.9 million reduction in long term debt and
capital lease obligations 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 to be utilized for the expected
claim payout under the Company's workers compensation insurance coverage.
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. The Company intends to explore other efficient real estate financing
transactions in the future as needed. As of January 13, 2001, 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 28 weeks ended January 13, 2001 and January
15, 2000, exclusive of the Bright Start acquisition, were $7.3 million, and
$16.9 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 13, 2001 and January 15, 2000 were $7.2 million and $4.4
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 28 weeks ended January 13, 2001 and January 15, 2000, were $6.6
million, and $6.2 million, respectively.
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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 $37.8 million 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 $19.0 million at January 13, 2001.
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, 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%.
On January 11, 2001, the Company entered into an agreement with the counterparty
to terminate the interest rate swap on the Senior Notes. The termination
agreement requires the Company to pay the counterparty $575,000 on February 28,
2001. Such amount has been recorded as a liability at January 13, 2001.
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 13, 2001, the
notional value of such derivatives was $37.8 million. A 1% change in an
applicable index rate, after giving effect to the interest rate collars and swap
agreement, would have no impact on annual earnings as a result of the Company
currently paying the maximum rates in the agreements. 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 8 to the consolidated financial statements).
The Company maintains interest rate swap agreements with imbedded collars on the
term loan for the purpose of managing exposure to interest rate fluctuations.
Management has elected to record these derivatives at fair value in accordance
with the provisions of SFAS No. 133. At January 13, 2001, assets and liabilities
related to these agreements in the amounts of $0.1 million and $0.6 million,
respectively, were recorded on the balance sheet as other long-term assets and
other current liabilities. The change in fair value of these derivatives has
been recorded as adjustments to interest rate expense of $2.3 million and $2.2
million for the 12 and 28 weeks ended January 13, 2001, respectively.
******
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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 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
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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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 February 26, 2001 /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 February 26, 2001 /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 February 26, 2001 /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 February 26, 2001 /s/ Jeffrey J. Fletcher
--------------------------------------
By: Jeffrey J. Fletcher
Chief Financial Officer and duly authorized
representative of the registrant
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