1
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-56239
PROSPECTUS SUPPLEMENT DATED SEPTEMBER 4, 2001
(TO PROSPECTUS DATED NOVEMBER 8, 2000)
LA PETITE ACADEMY, INC.
LPA HOLDING CORP.
$145,000,000 10% SERIES B SENIOR NOTES DUE 2008
This Prospectus Supplement is intended to be read in conjunction with
the Prospectus dated November 8, 2000 of La Petite Academy, Inc. and LPA Holding
Corp. (collectively, the "Company"), which was prepared for use by J.P. Morgan
Securities Inc. in connection with offers and sales related to market-making
transactions in the above-referenced notes.
-------------------------------
RECENT DEVELOPMENTS. Attached hereto as part of this Prospectus
Supplement are the following documents filed by the Company:
1. Current Report on Form 8-K dated September 4, 2001, which includes,
among other things, certain preliminary financial results for the
fiscal year ended June 30, 2001, and an announcement that the
Company is in default under its credit agreement.
2. Current Report on Form 8-K dated April 18, 2001, announcing the
change in the Company's fiscal year end.
3. Quarterly Report on Form 10-Q for the period ended April 7, 2001,
which includes among other things, the unaudited consolidated
financial statements of the Company for the 12 weeks and 40 weeks
ended April 7, 2001.
4. Quarterly Report on Form 10-Q for the period ended January 13, 2001,
which includes among other things, the unaudited consolidated
financial statements of the Company for the 12 weeks and 28 weeks
ended January 13, 2001.
5. Quarterly Report on Form 10-Q for the period ended October 21, 2000,
which includes among other things, the unaudited consolidated
financial statements of the Company for the 16 weeks ended October
21, 2000.
-------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY
STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF
THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
2
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 4, 2001
Date of Report (Date of earliest event reported)
LPA HOLDING CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 333-56239-01 48-1144353
(State or Other Jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation) Identification No.)
LA PETITE ACADEMY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 333-56239 43-1243221
(State or Other Jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation) Identification No.)
8717 WEST 110TH STREET, SUITE 300
OVERLAND PARK, KANSAS 66210
(Address of principal executive offices, including Zip Code)
(913) 345-1250
(Registrant's telephone number, including area code)
N.A.
---------------------------------------------------------------
(Former name or former address, if changed since last report)
================================================================================
3
ITEM 5. OTHER EVENTS
LPA Holding Corp. ("Holding") and its wholly owned subsidiary, La
Petite Academy, Inc. ("La Petite" and, together with Holding and its
subsidiaries, the "Company"), based on preliminary unaudited financial
information for the fourth fiscal quarter ended June 30, 2001, are in default
under certain financial covenants contained in the Company's senior secured bank
credit agreement (the "Credit Agreement"). The Company believes based on the
preliminary unaudited financial information that the Company's revenue, EBITDA,
and operating income were approximately $385 million, $32 million, and $17
million, respectively, for the fiscal year ended June 30, 2001. EBITDA is
defined as net income before non-cash restructuring charges, extraordinary
items, net interest costs, income taxes, depreciation and amortization. Based on
the preliminary unaudited financial information, the Company is in default under
its Credit Agreement as of June 30, 2001, for failure to maintain the minimum
fixed charge coverage ratio, the maximum leverage ratio, and the minimum EBITDA.
As of June 30, 2001, the Company had $37.3 million outstanding under the term
loan facility, $13 million outstanding under the $25 million revolving credit
facility, outstanding letters of credit of $8.7 million under the Credit
Agreement and $3.2 million of remaining borrowing availability under the Credit
Agreement. At present the Company has approximately $1 million of availability
under its revolving credit facility. However, the agent bank under the Credit
Agreement has notified the Company that an event of default exists thereunder
and that no additional borrowings are permitted. Cash on hand is currently
approximately $1 million. If such default under the Credit Agreement is not
waived by the lenders thereunder, the lenders could declare all amounts
outstanding under the Credit Agreement to be immediately due and payable.
The Company is actively engaged in negotiations with its lenders to
obtain a waiver under its financial covenants as of June 30, 2001 and to amend
these financial covenants based on the Company's current operating conditions
and projections to enable the Company to be in compliance under the Credit
Agreement during the fiscal year ending June 29, 2002. Based on negotiation
discussions to date with the agent bank under the Credit Agreement, the Company
believes that it will be able to obtain the necessary waivers and amendments
from the lenders under the Credit Agreement. However, there can be no assurance
that the Company will be able to complete these negotiations with the lenders
successfully, and the failure to do so would have a material adverse effect on
the Company. Further, even if the Company is successful in obtaining a waiver
and amendment under the Credit Agreement, there can be no assurance that the
Company's cash flows from operations will be sufficient to meet its debt service
and working capital requirements in the future.
In addition, the Company has engaged the financial advisory firm of
Chanin Capital Partners LLC to assist management in analyzing and formulating
potential strategic alternatives related to a financial restructuring of the
Company. The Company or its affiliates may restructure or refinance the
Company's long-term indebtedness through an amendment or refinancing of the
Credit Agreement, through a refinancing of all or a portion of the Company's
$145 million principal amount of 10% Senior Notes due 2008 (the "Notes"), which
could include an exchange offer, a tender offer for the Notes or open-market or
privately-negotiated purchases of the Notes, through selling assets of the
Company and using the proceeds to repay indebtedness, through selling additional
equity of the Company, through seeking additional capital contributions from the
existing equity holders of the Company or through a combination of any of these
or other alternatives. There can be no assurance that a financial restructuring
of the Company, if commenced, would be successfully completed.
This report contains forward-looking statements such as
statements regarding the Company's intention and ability to obtain a waiver and
amendment from the lenders under its Credit Agreement and the intention and
ability of the Company and its affiliates to implement successfully a financial
restructuring plan. The words "may," "believe," "estimate," "expect," "plan,"
"intend," "anticipate" and similar expressions are intended to identify such
forward-looking statements. These forward-looking statements are based on the
Company's current expectations and projections about future events, activities
or developments and are subject to a number of risks, uncertainties and
assumptions. Among the important risks, uncertainties and other important
factors that could cause actual results to differ significantly from these
expressed or implied by such forward-looking statements are general economic
conditions; the results of the Company's refinancing strategy; fluctuations in
demand for childcare services; the Company's ability to open and profitably
operate academies; significant competition; restrictions contained in the Credit
Agreement, the indenture relating to the Notes and the Company's other material
agreements; as well as the other risk factors affecting the Company detailed in
the Company's Post-Effective Amendment No. 3 to the Registration Statement on
Form S-4 (File No. 333-56239) and in other documents filed by the Company with
the Securities and Exchange Commission.
4
SIGNATURES
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 hereunto duly authorized.
LPA HOLDING CORP.
(Registrant)
Dated: September 4, 2001 By: /s/ Jeffrey J. Fletcher
--------------------------------
Name: Jeffrey J. Fletcher
Title: Chief Financial Officer
and duly authorized
representative of
the registrant
5
SIGNATURES
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 hereunto duly authorized.
LA PETITE ACADEMY, INC.
(Registrant)
Dated: September 4, 2001 By: /s/ Jeffrey J. Fletcher
--------------------------------
Name: Jeffrey J. Fletcher
Title: Chief Financial Officer
and duly authorized
representative of the
registrant
6
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): April 18, 2001
LPA HOLDING CORP.
-----------------------------------------------------------
(Exact name of registrant as specified in its charter)
SEE TABLE OF ADDITIONAL REGISTRANTS
Delaware 333-56239-01 48-1144353
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employee
of incorporation) File Number) Identification No.)
8717 West 110th Street, Suite 300 Overland Park, Kansas 66210
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 913-345-1250
7
ADDITIONAL REGISTRANTS
Jurisdiction of Commission IRS Employer
Name Incorporation File Number Identification No.
- ---- --------------- ----------- ------------------
La Petite Academy, Inc. Delaware 333-56239 43-1243221
LPA Services, Inc. Delaware 333-56239-02 74-2849053
Bright Start, Inc. Minnesota 333-56239-03 41-1694581
8
ITEM 8.
On April 18, 2001, LPA Holding Corp's Board of Directors and their Credit
Agreement Agents approved a change in the Company's fiscal year end from the
52/53 period ending on the first Saturday in July to the 52/53 period ending
on the Saturday closest to June 30. This change was made to align our business
fiscal year with our tax fiscal year. A report on Form 10-K covering the
transition period will be filed in accordance with the Securities and Exchange
Commission filing requirements.
9
SIGNATURES
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 hereunto duly authorized.
LPA Holding Corp.
----------------------------------
(Registrant)
Date: April 24, 2001 By /s/ Jeffrey J. Fletcher
----------------------------------
Name: Jeffrey J. Fletcher
Title: Chief Financial Officer and
duly authorized representative
of the registrant
10
SIGNATURES
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 hereunto duly authorized.
La Petite Academy, Inc.
----------------------------------
(Registrant)
Date: April 24, 2001 By /s/ Jeffrey J. Fletcher
----------------------------------
Name: Jeffrey J. Fletcher
Title: Chief Financial Officer and
duly authorized representative
of the registrant
11
SIGNATURES
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 hereunto duly authorized.
LPA Services, Inc.
----------------------------------
(Registrant)
Date: April 24, 2001 By /s/ Jeffrey J. Fletcher
----------------------------------
Name: Jeffrey J. Fletcher
Title: Chief Financial Officer and
duly authorized representative
of the registrant
12
SIGNATURES
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 hereunto duly authorized.
Bright Start, Inc.
----------------------------------
(Registrant)
Date: April 24, 2001 By /s/ Jeffrey J. Fletcher
----------------------------------
Name: Jeffrey J. Fletcher
Title: Chief Financial Officer and
duly authorized representative
of the registrant
13
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 7, 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 May 21, 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 May 21, 2001, each of the additional
registrants had the number of outstanding shares, which is shown on the
following table.
14
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)
2
15
LPA HOLDING CORP.
INDEX
- --------------------------------------------------------------------------------
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 1. LEGAL PROCEEDINGS 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17-20
3
16
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands of dollars, except share and per share data)
- --------------------------------------------------------------------------------
ASSETS April 7, July 1,
2001 2000
Current assets:
Cash and cash equivalents $ 4,359 $ 4,008
Restricted cash investments 3,926 837
Receivables (net of allowance for doubtful accounts of $917 and
$406, respectively) 11,579 7,462
Prepaid supplies and expenses 13,327 12,451
Other current assets 1,184 1,059
--------- ---------
Total current assets 34,375 25,817
Property and equipment (net of accumulated depreciation of $63,599
and $54,842, respectively) 53,276 56,433
Intangible assets (net of accumulated amortization of $18,705 and
$16,533, respectively) 57,013 59,185
Other assets (net of accumulated amortization of $3,053 and $2,141,
respectively) 9,061 9,974
Deferred income taxes 15,965 14,238
--------- ---------
$ 169,690 $ 165,647
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Overdrafts due banks $ 5,945 $ 4,756
Accounts payable 4,905 8,273
Other current liabilities (Note 3) 35,965 33,577
--------- ---------
Total current liabilities 46,815 46,606
Long-term debt and capital lease obligations (Note 4) 194,532 182,319
Other long-term liabilities 9,403 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 $1,324.823 and $1,211.291, respectively 53,123 47,314
Stockholders' deficit:
Class A Common Stock ($.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 (142,785) (132,255)
--------- ---------
Total stockholders' deficit (134,183) (123,653)
--------- ---------
$ 169,690 $ 165,647
========= =========
See notes to consolidated financial statements
4
17
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands of dollars)
- --------------------------------------------------------------------------------
12 Weeks Ended 40 Weeks Ended
------------------------- ------------------------
April 7, April 8, April 7, April 8,
2001 2000 2001 2000
Revenues, net $ 93,109 $ 92,346 $ 292,244 $ 281,140
Operating expenses:
Salaries, wages and benefits 50,419 49,478 163,458 155,702
Facility lease expense 10,429 11,125 34,331 36,080
Depreciation and amortization 3,436 3,727 11,798 12,614
Restructuring charge (Note 7) 7,500 7,500
Provision for doubtful accounts 1,451 634 3,338 2,054
Other 19,736 19,674 68,034 66,644
--------- --------- --------- ---------
Total operating expenses 85,471 92,138 280,959 280,594
--------- --------- --------- ---------
Operating income 7,638 208 11,285 546
Interest income 17 35 65 115
Interest expense (5,444) (4,976) (15,466) (15,919)
--------- --------- --------- ---------
Income (loss) before income taxes and cumulative
effect of a change in accounting principle 2,211 (4,733) (4,116) (15,258)
Provision (benefit) for income taxes 1,146 (1,715) (960) (5,479)
--------- --------- --------- ---------
Income (loss) before cumulative effect of a change
in accounting principle 1,065 (3,018) (3,156) (9,779)
Cumulative effect of a change in accounting
principle, net of taxes of $1,069 (Note 8) (1,565)
--------- --------- --------- ---------
Net income (loss) $ 1,065 $ (3,018) $ (4,721) $ (9,779)
--------- --------- --------- ---------
See notes to consolidated financial statements.
5
18
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands of dollars)
- --------------------------------------------------------------------------------
40 Weeks Ended
------------------------
April 7, April 8,
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,721) $ (9,779)
Adjustments to reconcile net loss to net cash from operating activities:
Effect of accounting principle change 2,634
Restructuring charge 7,500
Depreciation and amortization 12,653 13,382
Deferred income taxes (1,895) (5,479)
Changes in assets and liabilities:
Receivables (3,991) 270
Prepaid supplies and expenses (876) 2,538
Accounts payable and other current liabilities (910) (6,183)
Other changes in assets and liabilities, net (5,333) (553)
-------- --------
Net cash provided by (used for) operating activities (2,439) 1,696
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Bright Start, net of cash acquired (10,296)
Capital expenditures (6,913) (18,423)
Proceeds from sale of assets 179 23,146
-------- --------
Net cash used for investing activities (6,734) (5,573)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt and capital lease obligations (1,576) (7,686)
Net borrowings under the Revolving Credit Agreement 13,000
Proceeds from issuance of preferred stock and warrants 15,000
Deferred financing costs and stock offering expenses (209)
Exercise of stock options 89
Increase (reduction) in bank overdrafts 1,189 (2,470)
Decrease (increase) in restricted cash investments (3,089) 212
-------- --------
Net cash provided by financing activities 9,524 4,936
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 351 1,059
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,008 4,572
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,359 $ 5,631
-------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 11,646 $ 10,915
Income taxes 137 81
Cash received during the period for:
Interest $ 72 $ 74
Income taxes 43 87
See notes to consolidated financial statements.
6
19
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
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
providers 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.
At April 7, 2001, the Company operated a total of 744 schools, located in 35
states, and served approximately 82,000 children.
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 Saturday
closest to June 30 and is 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.
7
20
Certain reclassifications to prior year amounts have been made in order to
conform to the current year presentation.
3. OTHER CURRENT LIABILITIES (in thousands of dollars)
April 7, 2001 July 1, 2000
------------- ------------
Current reserve for closed schools $ 3,135 $ 3,268
Current maturities of long-term debt and capital lease
obligations 1,107 1,897
Accrued salaries, wages and other payroll costs 15,772 14,212
Accrued insurance liabilities 2,150 2,586
Accrued property and sales taxes 2,559 3,490
Accrued interest payable 7,468 2,568
Other current liabilities 3,774 5,556
------- -------
$35,965 $33,577
------- -------
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (in thousands of dollars)
April 7, 2001 July 1, 2000
------------- ------------
Senior Notes, 10.0% due May 15, 2008 $ 145,000 $ 145,000
Borrowings under credit agreement 50,500 38,250
Capital lease obligations 139 966
--------- ---------
195,639 184,216
Less current maturities of long-term debt and capital lease
obligations (1,107) (1,897)
--------- ---------
$ 194,532 $ 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.
8
21
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
April 7, 2001, the Company had an accrual for the closing of these Academies
of $4.2 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 an interest rate swap agreement with an imbedded
collar with respect to the term loan for the purpose of managing exposure to
interest rate fluctuations. Management has elected to record this derivative
instrument at fair value in accordance with the provisions of SFAS No. 133.
At April 7, 2001, liabilities related to this agreement in the amount of
$0.1 million were recorded on the balance sheet as other long-term
liabilities. The change in fair value of this derivative and, prior to its
termination on January 11, 2001, the change in fair value of a derivative
instrument relating to the Company's Senior Notes was recorded as
adjustments to interest expense of $0.3 million and $1.9 million for the 12
and 40 weeks ended April 7, 2001, respectively.
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.
9
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 744 and 791 schools at the end of the third quarter of
fiscal year 2001 and for the same period of 2000, respectively. The net decrease
of 47 schools is a result of 48 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 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 (in
thousands of dollars):
12 Weeks Ended
-------------------------------------------------------------
April Percent April Percent Change
7, of 8, of Amount
2001 Revenue 2000 Revenue Inc(Dec)
-------- ------- -------- ------- --------
Revenues, net $ 93,109 100.0% $ 92,346 100.0% $ 763
Operating expenses:
Salaries, wages and benefits 50,419 54.2 49,478 53.6 941
Facility lease expense 10,429 11.2 11,125 12.1 (696)
Depreciation and amortization 3,436 3.7 3,727 4.0 (291)
Restructuring charge 7,500 8.1 (7,500)
Provision for doubtful accounts 1,451 1.5 634 0.7 817
Other 19,736 21.2 19,674 21.3 62
-------- ------- -------- ------- --------
Total operating expenses 85,471 91.8 92,138 99.8 (6,667)
-------- ------- -------- ------- --------
Operating income $ 7,638 8.2% $ 208 0.2% $ 7,430
-------- ------- -------- ------- --------
EBITDA (as defined) $ 11,074 11.9% $ 11,435 12.4% $ (361)
======== ======= ======== ======= ========
10
23
Operating revenue increased $0.8 million or 0.8% from the same period last year.
This revenue increase is a result of a $2.4 million increase at established
academies, a $1.7 million increase at new academies, offset by a reduction in
revenue from closed academies of $3.3 million. The revenue increase at
established academies is principally due to a 6.6% increase in the average
weekly FTE tuition rate offset by a decline in the FTE attendance of 3.4%. 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.
Salaries, wages, and benefits increased $0.9 million or 1.9% from the same
period last year. As a percentage of revenue, labor costs increased to 54.2%
from 53.6% in the prior year. The $0.9 million increase in salaries, wages, and
benefits includes incremental labor costs of $2.1 million at established
academies, incremental labor costs of $0.6 million at new academies, increased
field management and corporate administration labor costs of $0.4 million,
increased costs for bonuses and benefits of $0.4 million, offset by reduced
incremental labor costs of $2.6 million at closed academies. The increase in
labor costs at established schools was mainly due to a 8.3% increase in average
hourly wage rates offset by a 1.8% decline in labor hours compared to the prior
year.
Facility lease expense decreased $0.7 million or 6.3% 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 $0.3 million from the same period last
year. This decrease was mainly due to the closings that occurred in late fiscal
year 2000.
A restructuring charge was recorded in the prior year for $7.5 million to
provide for costs associated with the Academy closures approved by the Board due
to demographic conditions which no longer support an economically viable
operation. (See Note 7 to the consolidated financial statements).
Provision for doubtful accounts increased $0.8 million from the same period last
year. This increase is a result of increasing revenue, higher write-offs, and an
increase in the reserve of $0.2 million.
Other operating expenses increased $0.1 million or 0.3% from the same period
last year. Repairs and maintenance, utilities and phone, marketing and
miscellaneous costs increased while insurance, food, auto, and supplies
decreased. As a percentage of revenue, other operating costs decreased to 21.2%
from 21.3% the prior year.
As a result of the foregoing, the Company had operating income of $7.6 million
compared to $0.2 million in the prior year. The $7.4 million increase in
operating income is principally due to the restructuring charge that occurred 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 $11.1 million as compared to $11.4 million in the prior
year. The decrease in EBITDA is principally due to increased labor and provision
for doubtful accounts costs offset by higher revenues and reduced facility lease
expense. 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 increased $0.5 million from the same period last year. The
increase was principally due to a $0.3 million mark-to-market adjustment for
derivative instruments, 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.
11
24
The Company's operating results for the comparative 40 weeks were as follows (in
thousands of dollars):
40 Weeks Ended
----------------------------------------------------------------
April Percent April Percent Change
7, of 8, of Amount
2001 Revenue 2000 Revenue Inc(Dec)
--------- ------- --------- ------- ---------
Revenues, net $ 292,244 100.0% $ 281,140 100.0% $ 11,104
Operating expenses:
Salaries, wages and benefits 163,458 55.9 155,702 55.4 7,756
Facility lease expense 34,331 11.8 36,080 12.8 (1,749)
Depreciation and amortization 11,798 4.0 12,614 4.5 (816)
Restructuring charge 7,500 2.7 (7,500)
Provision for doubtful accounts 3,338 1.1 2,054 0.7 1,284
Other 68,034 23.3 66,644 23.7 1,390
--------- ------- --------- ------- ---------
Total operating expenses 280,959 96.1 280,594 99.8 365
--------- ------- --------- ------- ---------
Operating income $ 11,285 3.9% $ 546 0.2% $ 10,739
--------- ------- --------- ------- ---------
EBITDA (as defined) $ 23,083 7.9% $ 20,660 7.3% $ 2,423
========= ======= ========= ======= =========
Operating revenue increased $11.1 million or 3.9% from the same period last
year. This revenue increase is due to a $14.9 million increase at established
academies, a $6.5 million increase at new academies, offset by a reduction in
revenue from closed academies of $10.3 million. The increase in revenue at
established academies is principally a result of a 9.7% increase in the average
weekly FTE tuition rate offset by a decline in the FTE attendance of 3.6%. 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.
Salaries, wages, and benefits increased $7.8 million or 5.0% from the same
period last year. As a percentage of revenue, labor costs increased to 55.9% as
compared to 55.4% the prior year. The $7.8 million increase in salaries, wages,
and benefits includes incremental labor costs of $9.9 million at established
schools, incremental labor costs of $2.7 million at new schools, increased field
management and corporate administration labor costs of $1.4 million, increased
costs for bonuses and benefits of $1.6 million, offset by reduced incremental
labor costs of $7.8 million at closed schools. The increase in labor costs at
established schools was mainly due to a 8.8% increase in average hourly wage
rates, offset by a 0.4% decrease in labor hours compared to the prior year.
Facility lease expense decreased $1.7 million or 4.8% 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 $0.8 million from the same period last
year. This decrease was mainly due to the closings that occurred in late fiscal
year 2000.
A restructuring charge was recorded in the prior year for $7.5 million to
provide for costs associated with the Academy closures approved by the Board due
to demographic conditions which no longer support an economically viable
operation. (See Note 7 to the consolidated financial statements).
12
25
Provision for doubtful accounts increased $1.3 million from the same period last
year. This increase is a result of increasing revenue, higher write-offs, and an
increase in the reserve of $0.5 million.
Other operating expenses increased $1.4 million or 2.1% 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 $1.3 million gain on vehicle asset
sales. In addition there were increased current year repairs and maintenance,
utilities and phone and miscellaneous costs offset by reduced current year
supplies, auto leases, real estate taxes and pre-opening costs. As a percentage
of revenue, other operating costs decreased to 23.3% from 23.7% the prior year.
As a result of the foregoing, the Company had operating income of $11.3 million
compared to $0.5 million in the prior year. The increase in operating income is
principally due to the restructuring charge that occurred in the prior year and
higher revenue offset by increased labor costs. EBITDA is defined as net income
before non-cash restructuring charges, extraordinary items, net interest costs,
income taxes, depreciation and amortization. EBITDA was $23.1 million as
compared to $20.7 million in the prior year. The increase in 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 $0.4 million from the same period last year. The
decrease was principally due to a $1.9 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
April 7, 2001, there was $37.5 million outstanding on the term loan, and $13.0
million outstanding on the Revolving Credit Facility. In addition, La Petite had
outstanding letters of credit in an aggregate amount equal to $5.6 million, and
$6.4 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 7, 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.
13
26
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 $2.4 million during the 40 weeks
ended April 7, 2001 as compared to cash flows from operating activities of $1.7
million during the same period in fiscal year 2000. The $4.1 million decrease in
operating cash flow is principally due a $7.7 million increase in accounts
receivable and prepaid supplies and expense, a $5.3 million reduction in
accounts payable and other current liabilities, offset by a $5.7 million change
in short-term leaseback construction funding and a $3.6 increase in deferred
income taxes.
Cash flows used for investing activities were $6.7 million during the 40 weeks
ended April 7, 2001, as compared to cash flows used of $5.6 million during the
40 weeks ended April 8, 2000. The $1.1 million increase in cash flows used for
investing activities was principally due to a decrease of $23.0 million in
proceeds from new school sale lease-backs and miscellaneous asset sales; an
increase of $0.8 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 $9.5 million during the 40 weeks ended
April 7, 2001, compared to cash flows from financing activities of $4.9 million
during the same period of fiscal year 2000. The $4.6 million increase in cash
flows from financing activities was principally due to a $13.0 million increase
in borrowings on the revolver, $6.1 million reduction in payments on the
revolver and capital lease obligations and a $3.7 million decrease in bank
overdrafts related to the timing of monthly expense payments, offset by the
issuance of $15.0 million of additional preferred stock in the prior year, and a
$3.3 million increase in restricted cash investments. 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 April 7, 2001, the Company had $2.1
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 7, 2001 and April 8,
2000, exclusive of the Bright Start acquisition, were $6.9 million, and $18.4
million, respectively. The decrease in total capital expenditures is a result of
decreased spending on the development of new schools. 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 7, 2001 and April 8, 2000 were
$6.8 million and $6.0 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 40 weeks ended April 7, 2001 and April 8, 2000, were $9.7
million, and $8.8 million, respectively.
14
27
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 $37.5 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 $18.6 million at April 7, 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 required the Company to pay the counterparty $575,000 on February 28,
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 April 7, 2001, the
notional value of the interest rate collar was $18.8 million. A 1% change in an
applicable index rate, after giving effect to the interest rate
collarsagreement, would decrease annual earnings by $0.2 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 8 to the consolidated financial statements).
******
15
28
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 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits required by Item 601 of Regulation S-K:
None
b. Reports on Form 8-K:
On April 30, 2001, the Company filed a current report on Form 8-K
reporting the change of the Company's fiscal year to end the Saturday
closest to June 30.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
16
29
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 21, 2001 /s/ Jeffrey J. Fletcher
--------------------------------------
By: Jeffrey J. Fletcher
Chief Financial Officer and duly
authorized representative of the registrant
17
30
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 21, 2001 /s/ Jeffrey J. Fletcher
--------------------------------------
By: Jeffrey J. Fletcher
Chief Financial Officer and duly
authorized representative of the registrant
18
31
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 21, 2001 /s/ Jeffrey J. Fletcher
______________________________________
By: Jeffrey J. Fletcher
Chief Financial Officer and duly
authorized representative of the registrant
19
32
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 21, 2001 /s/ Jeffrey J. Fletcher
--------------------------------------
By: Jeffrey J. Fletcher
Chief Financial Officer and duly
authorized representative of the registrant
20
33
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.
34
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)
2
35
LPA HOLDING CORP.
INDEX
- --------------------------------------------------------------------------------
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
3
36
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
- -------------------------------------------------------------------------------
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.
4
37
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands of dollars)
- -------------------------------------------------------------------------------
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.
5
38
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands of dollars)
- -------------------------------------------------------------------------------
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.
6
39
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
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.
7
40
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.
8
41
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.
9
42
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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
======== ====== ======= ====== ======
10
43
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.
11
44
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-
12
45
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
13
46
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.
14
47
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.
******
15
48
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 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.
16
49
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
17
50
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
18
51
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
19
52
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
20
53
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.
54
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)
2
55
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 8-11
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
3
56
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
OCTOBER 21, 2000 AND JULY 1, 2000
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
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
-------- --------
112,947 111,275
Less accumulated depreciation 58,603 54,842
-------- --------
Net property and equipment 54,344 56,433
Other assets (Note 3) 68,168 69,159
Deferred income taxes 17,149 14,238
-------- --------
$167,777 $165,647
======== ========
(continued)
4
57
LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
OCTOBER 21, 2000 AND JULY 1, 2000
(In thousands of dollars, except share and per share data)
- --------------------------------------------------------------------------------
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
--------- ---------
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)
--------- ---------
Total stockholders' deficit (130,891) (123,653)
--------- ---------
$ 167,777 $ 165,647
========= =========
See notes to consolidated financial statements.
(concluded)
5
58
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
SIXTEEN WEEKS ENDED OCTOBER 21, 2000 AND OCTOBER 23, 1999
(In thousands of dollars)
- --------------------------------------------------------------------------------
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
--------- ---------
112,505 107,111
--------- ---------
Operating income 1,769 1,423
--------- ---------
Interest expense 7,176 6,236
Interest income (28) (37)
--------- ---------
Net interest costs 7,148 6,199
--------- ---------
Loss before income taxes and cumulative
effect of change in accounting principle (5,379) (4,776)
Benefit for income taxes (1,976) (1,661)
--------- ---------
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
6
59
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIXTEEN WEEKS ENDED OCTOBER 21, 2000 AND OCTOBER 23,1999
(In thousands of dollars)
- --------------------------------------------------------------------------------
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)
------ ------
Net cash from (used for) operating activities 335 (883)
------ ------
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
------ ------
Net cash used for investing activities (1,737) (2,816)
------ ------
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
------ ------
Net cash from financing activities 568 4,008
------ ------
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.
7
60
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
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.
8
61
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)
<Table>
<Caption>
OCTOBER 21, 2000 JULY 1, 2000
---------------- ------------
Intangible assets:
Excess purchase price over net assets acquired $ 74,221 $ 74,221
Curriculum 1,497 1,497
Accumulated amortization (17,402) (16,533)
-------- --------
58,316 59,185
Deferred financing costs 8,769 8,769
Accumulated amortization (2,483) (2,141)
Other assets 3,566 3,346
-------- --------
$ 68,168 $ 69,159
======== ========
</Table>
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
--------- ---------
189,571 184,216
Less current maturities of long-term debt and capital lease
obligations (1,537) (1,897)
--------- ---------
$ 188,034 $ 182,319
========= =========
9
62
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
------- -------
$15,063 $13,061
======= =======
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
10
63
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.
11
64
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 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%
======== ===== ======== =====
12
65
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
- --------------------------------------------------------------------------------
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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72
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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73
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
21