1
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): JULY 21, 1999
LPA HOLDING CORP.
(Exact name of registrant as specified in its charter)
See Table of Additional Registrants
DELAWARE 333-56239-01 43-1144353
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer Identification
incorporation or organization) Number)
8717 WEST 110TH STREET, SUITE 300
OVERLAND PARK, KANSAS 66210
(913) 345-1250
(Address and Telephone Number of Registrant's Principal Executive Office)
ADDITIONAL REGISTRANTS
JURISDICTION OF COMMISSION IRS EMPLOYER
NAME INCOPRORATION FILE NUMBER IDENTIFICATION NO.
- --------------------------- --------------- ---------------- ------------------
La Petite Academy, Inc. Delaware 333-56239 43-1243221
LPA Services, Inc. Delaware 333-56239-02 74-2849053
2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On July 21, 1999, La Petite Academy, Inc. (the "Company") consummated a
merger with Bright Start, Inc., a Minnesota corporation ("Bright Start"),
pursuant to which Bright Start became a wholly-owned subsidiary of the Company.
In consideration for the merger, the Company paid a total of $9.3 million for
all of the issued and outstanding shares of Bright Start common stock and all of
the issued and outstanding options to purchase shares of Bright Start common
stock, and assumed approximately $2.0 million in debt.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired
Included herewith are (1) the unaudited balance sheet of Bright Start,
Inc. as of June 30, 1999 and the unaudited statements of operations and cash
flows for the 44 weeks ended June 30, 1999 and (2) the audited balance sheet of
Bright Start, Inc. as of August 31, 1998 and 1997 and statements of operations,
shareholders' equity and cash flows for the years then ended, with the report of
Ernst & Young LLP.
3
FINANCIAL STATEMENTS
BRIGHT START, INC.
JUNE 30, 1999 (UNAUDITED), AUGUST 31, 1998 AND 1997
4
Bright Start, Inc.
Financial Statements
June 30, 1999 (Unaudited), August 31, 1998 and 1997
CONTENTS
Report of Independent Auditors...........................................1
Audited Financial Statements
Balance Sheets...........................................................2
Statements of Operations.................................................4
Statement of Shareholders' Equity........................................5
Statements of Cash Flows.................................................7
Notes to Financial Statements............................................9
5
Report of Independent Auditors
The Board of Directors
Bright Start, Inc.
We have audited the balance sheets of Bright Start, Inc. as of August 31, 1998
and 1997, and the related statements of operations, shareholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bright Start, Inc. at August
31, 1998 and 1997, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
Ernst & Young LLP
October 9, 1998
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Bright Start, Inc.
Balance Sheets
JUNE 30 AUGUST 31 AUGUST 31
1999 1998 1997
------------------------------------------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 235,242 $ 627,972 $ 104,714
Accounts receivable, less allowance of $17,600
and $20,000 in 1998 and 1997, respectively 609,701 545,594 402,530
Prepaid expenses 301,753 320,742 278,144
------------------------------------------------
Total current assets 1,146,696 1,494,308 785,388
------------------------------------------------
Equipment and leasehold improvements, at cost:
Vehicles 856,474 815,474 767,336
Office furniture and equipment 456,011 395,644 370,725
Equipment and fixtures 510,474 461,030 428,208
Movable furnishings 1,323,370 1,273,302 1,225,605
Outdoor playground equipment 982,549 981,079 937,910
Learning equipment 508,995 488,550 488,989
Leasehold improvements 451,937 430,928 368,223
Playground improvements 47,777 23,577 10,239
------------------------------------------------
5,137,587 4,869,584 4,597,235
Less accumulated depreciation and amortization 3,083,890 2,588,069 1,953,083
------------------------------------------------
2,053,697 2,281,515 2,644,152
Intangibles and other assets:
Organization and acquisition costs, net of amortization of
$511,831 and $487,314 at 1998 and 1997, respectively 11,243 20,564 45,081
Goodwill, net of amortization of $2,183,793 and
$2,149,726 at 1998 and 1997, respectively 1,223,933 1,252,322 1,286,389
Deferred debt costs, net of amortization of $25,791 at 1997 - - 49,003
Other assets 106,292 91,160 84,366
------------------------------------------------
1,341,468 1,364,046 1,464,839
------------------------------------------------
================================================
Total assets $4,541,861 $5,139,869 $4,894,379
================================================
F-2
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JUNE 30 AUGUST 31 AUGUST 31
1999 1998 1997
-------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED)
Current liabilities:
Current maturities of long-term debt $ 172,339 $ 211,444 $ 225,148
Line of credit 150,000 - 295,000
Note payable, shareholders - - 200,000
Accounts payable 111,026 328,957 382,294
Accrued salaries and related expenses 657,773 760,699 525,074
Other accrued expenses 143,189 177,367 186,213
Advance tuition 308,080 353,902 122,862
-------------------------------------------
Total current liabilities 1,542,407 1,832,369 1,936,591
Deferred rent 11,577 16,402 22,193
Long-term debt, less current maturities 265,474 345,029 503,085
Subordinated debt 1,649,842 - 1,346,904
-------------------------------------------
Total liabilities 3,469,300 2,193,800 3,808,773
Commitments
Shareholders' equity:
Preferred Stock, Series A, par value $.01; authorized,
issued and outstanding shares - 0 in 1998 and 770,000 in - - 7,700
1997
Preferred Stock, Series B, par value $.01; authorized shares
- 1,000,000; issued and outstanding shares - 0 in
1998 and 833,333 in 1997 - - 8,333
Preferred Stock, Series C, par value $.01; authorized,
issued and outstanding shares - 519,063--1998 and 1997 - 5,191 5,191
Preferred Stock, Series D, par value $.01; authorized,
issued and outstanding shares - 0 in 1998 and 250,000 in 1997 - - 2,500
Common Stock, par value $.01 per share; authorized
shares - 12,460,937, issued and outstanding shares -
3,379,821 in 1998 and 326,000 in 1997 33,898 33,798 3,260
Additional paid-in capital 5,995,816 8,160,176 5,115,204
Retained earnings (deficit) (4,957,153) (5,253,096) (4,056,582)
------------------------------------------
1,072,561 2,946,069 1,085,606
---------------------------------------------
Total liabilities and shareholders' equity $4,541,861 $5,139,869 $4,894,379
=============================================
See accompanying notes.
F-3
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Bright Start, Inc.
Statements of Operations
44 WEEKS ENDED YEAR ENDED AUGUST 31
JUNE 30, 1999 1998 1997
---------------------------------------------------
Revenues: (UNAUDITED)
Tuition $18,308,469 $21,493,210 $18,843,413
U.S. Department of Agriculture subsidy 356,773 340,930 286,462
Registration 171,338 232,897 234,810
Other 91,958 148,366 140,284
---------------------------------------------------
18,928,538 22,215,403 19,504,969
---------------------------------------------------
Operating expenses:
Payroll and related expenses 10,336,254 11,350,629 10,150,638
Rent 3,189,530 3,728,105 3,460,908
Other center operating expenses 3,575,282 4,144,325 3,805,696
General and administrative 908,567 1,814,730 1,598,366
Depreciation and amortization 544,088 743,999 779,978
---------------------------------------------------
18,553,721 21,781,788 19,795,586
---------------------------------------------------
Income (loss) from operations 374,817 433,615 (290,617)
Other income (expense) 9,482 (1,051) 1,423
Interest expense (69,536) (174,370) (261,578)
---------------------------------------------------
Income (loss) before debt conversion expense and
income taxes 314,763 258,194 (550,772)
Debt conversion expense - (983,947) -
---------------------------------------------------
Income (loss) before income taxes 314,763 (725,753) (550,772)
Income tax expense 981 1,075 978
---------------------------------------------------
Net income (loss) $ 313,782 $ (726,828) $ (551,750)
===================================================
See accompanying notes.
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Bright Start, Inc.
Statement of Shareholders' Equity
PREFERRED STOCK
--------------------------------------------------------------------------------
SERIES A SERIES B SERIES C
--------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------------
Balance August 31, 1995 770,000 $7,700 833,333 $8,333 519,063 $5,191
Exercise of stock options - - - - - -
Accretion of Series C stock to
redemption value - - - - - -
Net loss - - - - - -
--------------------------------------------------------------------------------
Balance August 31, 1996 770,000 7,700 833,333 8,333 519,063 5,191
Exercise of stock options - - - - - -
Accretion of Series C stock to
redemption value - - - - - -
Discount on subordinated debt - - - - - -
Net loss - - - - - -
--------------------------------------------------------------------------------
Balance August 31, 1997 770,000 7,700 833,333 8,333 519,063 5,191
Exercise of stock options - - - - - -
Accretion of Series C stock to
redemption value - - - - - -
Conversion of preferred stock
to common stock (770,000) (7,700) (833,333) (8,333) - -
Conversion of subordinated debt
to common stock - - - - - -
Conversion of shareholder notes
payable to common stock - - - - - -
Net loss - - - - - -
--------------------------------------------------------------------------------
Balance August 31, 1998 - $ - - $ - 519,063 $5,191
================================================================================
See accompanying notes.
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Bright Start, Inc.
Statement of Shareholders' Equity
SERIES D COMMON STOCK ADDITIONAL RETAINED
------------------------------------------------ PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
-----------------------------------------------------------------------------------------------
Balance August 31, 1995 250,000 $2,500 296,472 $ 2,965 $4,260,142 $ (898,466) $3,388,365
Exercise of stock options - - 26,528 265 22,412 - 22,677
Accretion of Series C stock to
redemption value - - - - 30,936 (30,936) -
Net loss - - - - - (2,544,494) (2,544,494)
----------------------------------------------------------------------------------------------
Balance August 31, 1996 250,000 2,500 323,000 3,230 4,313,490 (3,473,896) 866,548
Exercise of stock options - - 3,000 30 2,970 - 3,000
Accretion of Series C stock to
redemption value - - - - 30,936 (30,936) -
Discount on subordinated debt - - - - 767,808 - 767,808
Net loss - - - - - (551,750) (551,750)
----------------------------------------------------------------------------------------------
Balance August 31, 1997 250,000 2,500 326,000 3,260 5,115,204 (4,056,582) 1,085,606
Exercise of stock options - - 25,709 257 15,950 - 16,207
Accretion of Series C stock to
redemption value - - - - 30,936 (30,936) -
Conversion of preferred stock
to common stock (250,000) (2,500) 2,048,333 20,483 436,800 (438,750) -
Conversion of subordinated debt
to common stock - - 888,889 8,889 2,357,690 - 2,366,579
Conversion of shareholder notes
payable to common stock - - 90,890 909 203,596 - 204,505
Net loss - - - - - (726,828) (726,828)
==============================================================================================
Balance August 31, 1998 - $ - 3,379,821 $33,798 $8,160,176 $(5,253,096) $2,946,069
==============================================================================================
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Bright Start, Inc.
Statements of Cash Flows
44 WEEKS ENDED YEAR ENDED AUGUST 31
JUNE 30, 1999 1998 1997
------------------------------------------------------
OPERATING ACTIVITIES (UNAUDITED)
Net income (loss) $ 313,782 $ (726,828) $(551,750)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 506,377 681,820 669,355
Amortization 37,710 62,184 109,697
Debt conversion expense - 983,947 -
Deferred rent (4,825) (5,791) (5,790)
Non-cash interest - 81,131 123,051
Loss on disposal of fixed assets 5,685 20,241 2,297
Changes in operating assets and liabilities:
Accounts receivable (64,107) (143,064) (74,186)
Prepaid expenses and other assets 3,857 (49,392) 24,804
Accounts payable (217,931) (53,337) 32,004
Accrued expenses (137,104) 249,284 (28,506)
Advance tuition (45,822) 231,040 25,667
------------------------------------------------------
Net cash provided by operating activities 397,622 1,331,235 326,643
INVESTING ACTIVITIES
Purchase of equipment and leasehold improvements, net (284,244) (339,424) (577,495)
------------------------------------------------------
Net cash used in investing activities (284,244) (339,424) (577,495)
FINANCING ACTIVITIES
Principal payments on long-term debt (741,390) (240,738) (208,526)
Proceeds from issuance of long-term debt 72,782 68,978 92,709
Proceeds from issuance of shareholder loans - - 200,000
Principal payments on shareholder loans - (18,000) -
Proceeds from exercise of stock options 12,500 16,207 -
Proceeds from line of credit 150,000 - 270,000
Principal payments on line of credit - (295,000) (250,000)
------------------------------------------------------
Net cash (used in) provided by financing activities (506,108) (468,553) 104,183
------------------------------------------------------
Increase (decrease) in cash and cash equivalents (392,730) 523,258 (146,669)
Cash and cash equivalents at beginning of year 627,972 104,714 251,383
======================================================
Cash and cash equivalents at end of year $ 235,242 $ 627,972 $ 104,714
======================================================
F-7
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Bright Start, Inc.
Statements of Cash Flows (continued)
44 WEEKS ENDED YEAR ENDED AUGUST 31
JUNE 30, 1999 1998 1997
---------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND (UNAUDITED)
FINANCING ACTIVITIES
Conversion of convertible subordinated debt, net of
discount, to common stock $ - $1,425,402 $ -
Conversion of shareholder loan plus related accrued
interest to common stock - 204,505 -
Conversion of Series A, B, and D Preferred Stock to
common stock - 18,533 -
Conversion of Series C Preferred Stock to Subordinated debt 2,199,789
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 46,106 $ 89,025 $ 163,179
Cash paid for income taxes 981 1,075 678
See accompanying notes.
F-8
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Bright Start, Inc.
Notes to Financial Statements
Years ended August 31, 1998 and 1997
1. DESCRIPTION OF BUSINESS
Bright Start, Inc. (the Company) owns and operates forty-one child care centers
located in Minnesota, Wisconsin, Nevada and New Mexico and three kindergarten
through fifth grade elementary schools in New Mexico. The Company is subject to
the regulatory requirements for child care centers in the various states in
which they operate and provides educationally-based early childhood programs for
infants through kindergarten. It also operates programs for care of school-age
children before and after their regular school day.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements have been prepared according to
generally accepted accounting principles for interim financial information and
include all adjustments, consisting of normal recurring accruals, which, in the
opinion of management, are necessary for a fair presentation of financial
position, results of operations and cash flows. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. Results of operations for interim
periods are not necessarily indicative of results to be expected for a full
year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost and are depreciated
using accelerated and straight-line methods over the following estimated useful
lives:
YEARS
-------------------
Vehicles 5 - 8
Office furniture and equipment 5 - 7
Equipment and fixtures 7
Movable furnishings 5 - 7
Outdoor playground equipment 7 - 10
Learning equipment 3 - 5
Leasehold improvements 10 - 31 1/2
Playground improvements 3
F-9
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Bright Start, Inc.
Notes to Financial Statements
Years ended August 31, 1998 and 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets consist of acquisition and organization costs and goodwill.
Acquisition and organization costs are amortized on a straight-line basis over
five years and goodwill is amortized on a straight-line basis over 40 years.
Deferred debt costs were amortized using the interest method at a rate of 9.75%
until March 31, 1998 at which time the unamortized balance was expensed due to
the conversion of the related subordinated debt to common stock (see Note 5).
IMPAIRMENT OF LONG-LIVED ASSETS
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
GROSS RECEIPTS TAX
The Company pays an average gross receipts tax of approximately 5.5% on gross
revenues in New Mexico. This tax is netted against tuition revenue in the
accompanying income statement.
INCOME TAXES
The Company accounts for income taxes using the liability method. Deferred
income taxes are provided for temporary differences between financial reporting
and tax bases of assets and liabilities.
F-10
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Bright Start, Inc.
Notes to Financial Statements
Years ended August 31, 1998 and 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from the estimates.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation (Statement 123), but applies
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), and related interpretations in accounting for its stock
plans. Under APB 25, when the exercise price of stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the current
year presentation.
3. LINE OF CREDIT
The Company has a Revolving Credit Agreement (the Credit Line) with U.S. Bank,
N.A. (formerly First Bank, N.A.) (the Bank) to make loans to the Company of up
to $300,000 through January 31, 1999. The Credit Line is secured by all
available assets of the Company and a full personal guaranty by the Company's
Chief Executive Officer. Interest on the outstanding balance is due monthly at a
rate of 1.5% over the Bank's reference rate (10.0% at August 31, 1998). There
was no outstanding balance under the credit line at August 31, 1998.
The Credit Line contains certain financial and non-financial covenants. The
Company was in compliance with all covenants at August 31, 1998.
F-11
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Bright Start, Inc.
Notes to Financial Statements
Years ended August 31, 1998 and 1997
4. LONG-TERM DEBT
Long-term debt consists of the following:
1998 1997
--------------------------
Note payable for purchase of child care centers in Wisconsin, payable in
quarterly installments of $10,417 to October 2000 plus interest at the
lesser of 1% above Firstar Bank base rate or 8%, collateralized
by assets purchased $ 52,083 $ 93,750
Note payable for purchase of child care centers in Nevada, payable in
quarterly installments of $10,592, to June 1999, including interest
at 9%, unsecured 19,162 68,768
Note payable for purchase of Wee Care Learning Center in Nevada, payable in
quarterly installments of $3,125 to April 1999 plus
interest at 8%, unsecured 9,375 21,875
Note payable for purchase of Wee Wonder Child Care Center in Nevada, payable
in quarterly installments of $4,375 to February 1999 plus
interest at 7.5%, collateralized by assets purchased 8,750 26,250
Note payable for purchase of Kurious Kids Academy in Wisconsin, payable in
quarterly installments of $9,286 to March 2003 plus interest at
8%, collateralized by assets purchased 176,429 213,572
Capitalized lease agreement for equipment related to newly developed centers
from FBS Business Financial Corporation, payable in monthly installments of
$4,183 to August 2001, including interest at 10.58%,
collateralized by leased assets 127,440 162,111
Capitalized lease agreement for computer equipment from GreatAmerica Leasing
Corporation, payable in monthly installments of $474 to February 2001,
including interest at 12.18%, collateralized by leased
assets 13,231 -
Loans payable for vehicles purchased, payable in monthly installments from
$355 to $536 including interest ranging from 9.75% to 14.99%, expiring
through February 16, 2002, collateralized by vehicles
purchased 150,003 141,907
--------------------------
556,473 728,233
Less current maturities 211,444 225,148
==========================
Total long-term debt $345,029 $ 503,085
==========================
F-12
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Bright Start, Inc.
Notes to Financial Statements
Years ended August 31, 1998 and 1997
4. LONG-TERM DEBT (CONTINUED)
Future maturities of long-term debt are as follows:
Year ending August 31:
1999 $211,444
2000 146,202
2001 126,904
2002 44,066
2003 27,857
===========
$556,473
===========
5. CONVERTIBLE SUBORDINATED DEBT
On March 31, 1995 the Company issued a $2,000,000 convertible subordinated note
(the Note). The proceeds from the Note issuance were used to complete the New
Mexico acquisition in 1995. Deferred debt costs of $74,794 were capitalized and
amortized using the interest method. The original Note was convertible into
300,000 shares of Common Stock at $6.667 per share. Effective October 1, 1996
the Company negotiated an amendment with the issuer that waived all future
interest payments in exchange for reducing the initial conversion price to $4.25
per share. As a result of the amended conversion price the Note became
convertible into 470,588 shares of Common Stock. A discount on the Note of
approximately $768,000 was recorded during 1997 to reflect the present value of
the principal payments. This discount was being amortized to interest expense
over the remaining life of the Note. During 1998, noncash interest on the
amortization of the discount of $78,498 was recorded.
On March 31, 1998, the Note was converted at the option of the issuer in
exchange for a new lower conversion price of $2.25 per share. As a result of the
conversion, 888,889 shares of voting common stock were issued and debt
conversion expense of $941,177 was recorded to reflect the 418,301 additional
shares issued over the contractual amount at the new conversion price of $2.25
per share. The remaining unamortized balance of the related deferred debt costs
in the amount of $42,770 was also written off to debt conversion expense.
F-13
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Bright Start, Inc.
Notes to Financial Statements
Years ended August 31, 1998 and 1997
6. PREFERRED STOCK
SERIES A AND B PREFERRED STOCK
The Company had issued and outstanding 770,000 shares of Series A Preferred and
833,333 shares of Series B Preferred Stock. The shares were convertible into
voting common shares of the Company at any time at the option of the
shareholders on a one-for-one basis. On March 31, 1998, all Series A and Series
B Preferred Stock was converted into voting common stock at the option of the
shareholders at the stated conversion price. As a result of the conversion,
1,603,333 additional shares of common stock were issued.
SERIES C PREFERRED STOCK
In conjunction with the New Mexico acquisition in 1995, the Company issued
519,063 shares of Series C Preferred Stock. The shares are convertible into
voting common shares of the Company at any time at the option of the
shareholders on a one-for-one basis but are automatically converted into common
shares pursuant to the filing of a registration statement. The Series C shares
are redeemable at the option of the Company any time between April 1, 1999 and
March 31, 2002 and before the Series A and B Preferred shares. The stock was
valued at $4.00 per share and contains a put option which entitles the
shareholders to redeem their shares at a price of $4.238 per share no earlier
than April 1, 1999. If the shareholders elect this redemption, the amount shall
be paid in four equal annual installments of $550,000 plus interest beginning
April 1, 1999. Prior to the redemption date, the Company will reduce retained
earnings and increase additional paid-in capital to increase the value of the
Series C shares to their put value at the earliest redemption date. The amount
of this adjustment in 1998 was $30,936.
SERIES D PREFERRED STOCK
The Company had issued and outstanding 250,000 shares of Series D Preferred
Stock at $4.00 per share. The shares were convertible into voting common shares
of the Company at any time at the option of the shareholders on a one-for-one
basis. On March 31, 1998, the Series D Preferred Stock was converted into voting
common stock at the option of the shareholders in exchange for a new lower
conversion rate of 1.78 shares of common stock for each share of Series D
Preferred, or $2.25 per share. As a result of the conversion,
F-14
19
Bright Start, Inc.
Notes to Financial Statements
Years ended August 31, 1998 and 1997
6. PREFERRED STOCK (CONTINUED)
445,000 additional shares of common stock were issued and a preferred stock
dividend of $438,750 was recorded as a direct charge to retained earnings to
reflect the 195,000 additional shares issued over the contractual amount at the
new conversion price of $2.25 per share.
7. STOCK OPTIONS
The Company, in the years prior to 1994, issued incentive and non-qualified
stock options to directors and stockholders. In 1994, the Board of Directors
established a stock option plan under which 210,000 shares of Common Stock were
reserved for issuance to employees, officers and directors. In 1998, the Board
of Directors authorized an additional 75,000 shares of Common Stock to be
reserved for issuance under the Plan.
Non-qualified options are granted at a price approved by the Board of Directors.
Incentive stock options are granted at a price determined by the Board of
Directors which is required to be at least the fair market value of the Common
Stock of the Company on the date of grant. Stock options are exercisable in
increments defined by each agreement with the option holder and generally expire
ten years from the grant date.
The following table summarizes the options to purchase shares of the Company's
Common Stock under the Company's stock option plans:
SHARES AVAILABLE OPTIONS WEIGHTED
FOR GRANT OUTSTANDING AVERAGE PRICE PER
SHARE
--------------------------------------------------------------
Balance at August 31, 1996 32,500 226,418 1.11
Granted (7,000) 7,000 1.25
Exercised - (3,000) 1.00
Canceled 6,500 (6,500) 1.25
---------------------------------------
Balance at August 31, 1997 32,000 223,918 1.11
Reserved 75,000 -
Granted (84,000) 84,000 1.29
Exercised - (25,709) .63
Canceled 12,000 (12,000) 1.25
=======================================
Balance at August 31, 1998 35,000 270,209 $1.20
=======================================
F-15
20
Bright Start, Inc.
Notes to Financial Statements
Years ended August 31, 1998 and 1997
7. STOCK OPTIONS (CONTINUED)
The options are exercisable over a four-year vesting period and expire 10 years
after the grant date. At August 31, 1998 and 1997, options to purchase 170,834
and 169,168 shares of common stock are exercisable, respectively, at weighted
average exercise prices of $1.16 and $1.06, respectively. The weighted average
remaining contractual life of options outstanding at August 31, 1998 and 1997
was 6.96 and 6.78 years, respectively.
FASB Statement 123 requires that the pro forma impact on the Company's net loss
be disclosed as if the Company had accounted for its employee stock options
under the fair value method of Statement 123. The pro forma impact was not
material for 1998 and 1997.
8. OPERATING LEASES
The Company leases its facilities under operating leases. In addition to the
base rent, the majority of the leases provide for payment of various operating
costs. The leases expire on various dates to July 2017. Certain leases contain
options to renew. The Company also rents corporate office space in St. Paul,
Minnesota under terms of an operating lease agreement which expires in January
1999. The lease payments for the majority of the New Mexico Centers are secured
by the assets of those centers. Future minimum payments on the noncancelable
operating leases are as follows:
Year ending August 31:
1999 $ 3,618,971
2000 3,618,586
2001 3,565,102
2002 3,452,733
2003 3,313,597
Thereafter 19,481,169
Minimum lease payments for operating leases shown above do not include
contingent rentals which are based on increases in the Consumer Price Index.
Rent expensed for the years ended August 31, 1998 and 1997 was $3,779,290 and
$3,510,689, respectively. Of the 1998 amount, $940,300 was paid to New Vistas
Investment Corporation (NVIC), in which a current Board member has an ownership
interest. Also included in the 1998 rent expense is $365,080 paid to NVIBBR
Ltd., Co., which is a partner with NVIC.
F-16
21
Bright Start, Inc.
Notes to Financial Statements
Years ended August 31, 1998 and 1997
9. INCOME TAXES
At August 31, 1998, the Company has a cumulative net operating loss carryforward
of approximately $2,529,000 for income tax purposes that begins to expire in the
year 2004. These carryforwards are subject to the limitations of the Internal
Revenue Code Section 382 in the event of certain changes in the equity ownership
of the Company. The Company experienced ownership changes in 1992, 1994 and
1995. However, the Company does not believe that these ownership changes will
significantly limit its ability to use the existing net operating loss
carryforwards.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets are
as follows:
AUGUST 31
1998 1997
-------------------------------
Deferred tax liabilities:
Tax over book depreciation $ 244,000 $ 321,000
-------------------------------
Total deferred tax liabilities 244,000 321,000
Deferred tax assets:
Net operating loss carryforward 976,000 1,133,000
Goodwill 547,000 622,000
Other 46,000 37,000
-------------------------------
Total deferred tax assets 1,569,000 1,792,000
-------------------------------
Net deferred tax asset 1,325,000 1,471,000
Valuation allowance (1,325,000) (1,471,000)
===============================
$ - $ -
===============================
F-17
22
Bright Start, Inc.
Notes to Financial Statements
Years ended August 31, 1998 and 1997
10. COMMITMENTS
In connection with the purchase of the Wisconsin and certain Nevada centers, the
Company entered into non-competition and consulting agreements with the former
owners. The Wisconsin agreement requires quarterly payments of $12,500 through
May 1999, and the Nevada agreements require quarterly payments of $15,208
through July 1999. The amount expensed relating to these agreements for the
years ended August 31, 1998 and 1997 was $110,829.
The Company is also obligated under an agreement to pay a portion of profits to
the former owners from three school-age programs operated in Wisconsin public
schools. These payments will be made through May 1999 up to a maximum of
$350,000. The Company's obligation under this agreement for 1998 and 1997
totaled $47,035 and $43,870, respectively, which has been reflected as a
purchase price adjustment.
In connection with the 1995 New Mexico acquisition, the Company entered into
consulting agreements with three of the previous owners (Sellers) requiring
monthly payments of $10,581 including applicable gross receipts tax through
April 2000. The amount expensed relating to these agreements for the year ended
August 31, 1998 and 1997 was $126,975 and $122,547, respectively. The amounts
paid to a current board member as the result of these agreements were $63,488 in
1998 and $60,569 in 1997. The Sellers also have performance fee agreements
whereby the Company is obligated to pay 2% of gross revenue derived from new
centers placed in operation between December 31, 1994 and December 31, 1999,
with a maximum of $40,000 per center. The amount paid relating to these
agreements for the year ended August 31, 1998 and 1997 was $42,756 and $34,425,
respectively, and the amounts accrued relating to these agreements for the year
ended August 31, 1998 and 1997 was $7,040 and $14,876, respectively. The amounts
paid to a current board member as the result of these agreements were $25,296 in
1998 and $17,213 in 1997.
Also in connection with the 1995 New Mexico acquisition, the Company is
obligated, under a deferred consideration agreement, to pay a portion of
profits, as defined, from the existing centers to the Sellers. This agreement
expires in April 2002 and is limited to a maximum payout of $400,000. No amounts
were accrued under this agreement as of August 31, 1998.
F-18
23
Bright Start, Inc.
Notes to Financial Statements
Years ended August 31, 1998 and 1997
10. COMMITMENTS (CONTINUED)
Minimum annual payment requirements under the non-competition and consulting
agreements for the five years subsequent to 1998 and in the aggregate are:
1999 $230,328
2000 74,069
==================
$304,397
==================
11. NOTES PAYABLE - SHAREHOLDERS
During 1997, the Company issued $200,000 of unsecured promissory notes to
certain shareholders in exchange for cash. On March 31, 1998, $182,000 of the
notes, plus accrued interest, were converted into voting common stock at $2.25
per share. As a result of the conversion, 90,890 additional shares of common
stock were issued. The remaining $18,000 of shareholder notes plus accrued
interest were paid in July 1998.
F-19
24
(b) Pro Forma Financial Information
Set forth below are the unaudited pro forma combined balance sheet as of
July 3, 1999 and unaudited pro forma combined statement of operations of the
Company for the 44 weeks then ended.
LPA HOLDING CORP.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma financial information combines the historical
financial information of LPA Holding Corp. and subsidiaries (the "Company") and
Bright Start, Inc. ("Bright Start").
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, referred to herein as the "Acquisition." The Acquisition was
accounted for as a purchase, and accordingly, the purchase price has been
allocated to the fair value of net assets acquired, as well as normal closing
adjustments, and resulted in a preliminary allocation to goodwill of $10.1
million. Such allocations are preliminary in nature, pending the outcome of a
detailed analysis being performed by the Company of the assets and liabilities
acquired.
The unaudited Pro Forma Combined Balance Sheet combines the July 3, 1999
historical consolidated balance sheet of the Company and the historical balance
sheet of Bright Start. The balance sheets are combined on a pro forma basis as
if the Acquisition had been effective as of July 3, 1999, after giving effect to
various accounting adjustments for purchase accounting rules as well as the
financing of the transaction.
The unaudited Pro Forma Combined Statements of Operations present the combined
historical results of operations of the Company and Bright Start for the 44
weeks ended July 3, 1999 (44 weeks ended June 30, 1999 in the case of Bright
Start), as if the final closing of the Acquisition had been effective on the
first day of the period, after giving effect to various accounting adjustments.
On June 10, 1999, the Company changed its fiscal year to be the 52 or 53 week
period ending on the first Saturday in July. The historical statement of
operations for the Company were derived from the audited financial statements
for the 44 week transition period ended July 3, 1999. The historical statement
of operations for Bright Start were derived from the unaudited financial
statements for the 44 weeks ended June 30, 1999.
The unaudited pro forma combined financial information has been prepared using
the assumptions set forth in the Notes to Unaudited Pro Forma Financial
Information and should be read in conjunction with the Company's Consolidated
Financial Statements and notes thereto, which have been previously filed with
the Securities and Exchange Commission in the Company's Annual Report on Form
10-K for the 44-weeks ended July 3, 1999 and with the financial statements of
Bright Start and notes thereto filed herewith.
The unaudited pro forma combined financial information is intended for
informational purposes and is not necessarily indicative of the future financial
position or future results of operations of the Company after the Acquisition or
of the financial position or the results of operations of the Company that would
have actually occurred had the Acquisition been consummated at the beginning of
the periods presented.
F-20
25
LPA HOLDING CORP.
UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
(In thousands of dollars)
==============================================================================================================================
LA PETITE BRIGHT START
JULY 3, JUNE 30, PRO FORMA PRO FORMA
ASSETS 1999 1999 (a) ADJUSTMENTS COMBINED
----------- ------------ ------------ ------------
Current assets:
Cash and cash equivalents $ 4,572 $ 235 $ $ 4,807
Restricted cash investments 1,218 1,218
Accounts and notes receivable, net 8,077 610 (308) (a) 8,379
Prepaid food and supplies 7,884 389 (c) 8,273
Other prepaid expenses 5,850 302 6,152
Refundable income taxes 192 192
Current deferred income taxes
----------- ------------ ------------ ------------
Total current assets 27,793 1,147 81 29,021
Net Property and equipment 70,719 2,054 72,773
Goodwill 51,576 1,224 8,876 (e) 61,676
Other assets 10,204 117 (12) (f) 10,309
Deferred income taxes 8,883 8,883
----------- ------------ ------------ ------------
$ 169,175 $ 4,542 $ 8,945 $ 182,662
=========== ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Overdrafts due banks $ 7,450 $ $ $ 7,450
Accounts payable 7,972 111 8,083
Current reserve for closed academies 1,366 1,366
Current maturities of long-term debt and capital 6,187 322 (208) (d) 6,301
lease obligations
Accrued salaries, wages and other payroll costs 11,903 658 23 (d) 12,584
Accrued insurance liabilities 2,389 2,389
Accrued property and sales taxes 3,749 43 3,792
Accrued interest payable 2,388 28 (28) (d) 2,388
Other current liabilities 11,199 380 (219) (d) 11,360
Current deferred income taxes 361 361
----------- ------------ ------------ ------------
Total current liabilities 54,964 1,542 (432) 56,074
Long-term debt and capital lease obligations 183,999 1,915 10,462 (b) 196,376
Other long-term liabilities 11,085 12 (12) (a) 11,085
Series A 12% redeemable preferred stock 29,310 29,310
Stockholders' deficit:
Class A common stock 6 34 (34) (g) 6
Class B common stock
Common stock warrants 5,645 5,645
Additional paid-in-capital 5,996 (5,996) (g) 0
Accumulated deficit (115,834) (4,957) 4,957 (g) (115,834)
----------- ------------ ------------ ------------
Total stockholders' deficit (110,183) 1,073 (1,073) (110,183)
----------- ------------ ------------ ------------
$ 169,175 $ 4,542 $ 8,945 $ 182,662
=========== ============ ============ ============
See accompanying notes
F-21
26
LPA HOLDING CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(In thousands of dollars)
============================================================================================================================
LA PETITE BRIGHT START
44 WEEKS 44 WEEKS
ENDED ENDED PRO FORMA
JULY 3, JUNE 30, PRO FORMA COMBINED
1999 1999 (a) ADJUSTMENTS ADJUSTMENTS
----------- ------------ ------------ ------------
Operating revenue $ 281,072 $ 18,929 $ $ 300,001
Operating expenses:
Salaries, wages and benefits 150,052 10,336 160,388
Facility lease expense 34,717 3,190 37,907
Depreciation 10,911 506 11,417
Amortization of goodwill and other
intangibles 925 38 389 (h) 1,352
Other 68,277 4,484 (773) (i) 71,988
----------- ------------ ------------ ------------
264,882 18,554 (384) 283,052
----------- ------------ ------------ ------------
Operating income 16,190 375 384 16,949
----------- ------------ ------------ ------------
Interest expense 16,145 69 835 (j) 17,049
Interest income (153) (9) (162)
----------- ------------ ------------ ------------
Net interest costs 15,992 60 835 16,887
----------- ------------ ------------ ------------
Income before income taxes 198 315 (451) 62
Provision (benefit) for income taxes 995 1 (183) (k) 813
----------- ------------ ------------ ------------
Net income (loss) $ (797) $ 314 $ (268) $ (751)
=========== ============ ============ ============
See accompanying notes
F-22
27
LPA HOLDING CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(a) Certain amounts reported in the financial statements of Bright Start have
been reclassified to conform to the Company's financial statement
classifications and presentations.
(b) The pro forma adjustments to long-term debt include (in thousands):
Borrowings on revolving credit facility $ 12,214
Elimination of existing long-term debt of Bright Start (1,752)
--------
$ 10,462
========
(c) To record supply and food inventory not previously capitalized by Bright
Start.
(d) To record elimination of various Bright Start accruals, debt and accrued
interest, as well as to record various reclassifications and accruals
including transaction costs.
(e) To record goodwill associated with the Acquisition (in thousands):
Goodwill associated with purchase $ 10,100
Eliminate historical goodwill of Bright Start (1,224)
--------
$ 8,876
========
(f) To eliminate historical acquisition costs from pro forma balance sheet.
(g) To eliminate Bright Start equity from pro forma balance sheet.
(h) To reflect the Company's pro forma amortization related to the portion of
the Bright Start purchase price allocated to goodwill, as well as the
elimination of Bright Start's historical amortization. Goodwill is being
amortized for pro forma purposes using the straight-line method over a
20-year period.
(i) To eliminate home office overhead expenses, including salaries, as a result
of closing the corporate offices.
(j) To reflect interest expense related to the financing of the acquisition at
an average rate of interest and repayment of certain existing indebtedness
as discussed in note (b) above.
(k) To adjust income taxes for the effects of the above pro forma adjustments
at a statutory rate of 40.6%.
F-23
28
(c) Exhibits
Exhibit
Number Description of Exhibits
2.1* Agreement and Plan of Merger dated June 30, 1999 by and between La Petite
Academy, Inc., LPA Acquisition Co., Inc. and Bright Start, Inc.
23.1 Consent of Ernst & Young LLP
99.1 Press Release dated July 21, 1999.
- -----------------
* The exhibits and schedules to this Agreement and Plan of Merger are not
included with this filing. The Company will provide these exhibits and schedules
upon the request of the Securities and Exchange Commission.
-3-
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 hereunto duly authorized.
LPA HOLDING CORP.
A Delaware corporation
Date: December 7, 1999 /s/ Joan K. Singleton
--------------------------------
By: Joan K. Singleton
Senior Vice-President, Chief Financial
Officer and duly authorized
representative of the registrant
-4-
30
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.,
A Delaware corporation
Date: December 7, 1999 /s/ Joan K. Singleton
------------------------------
By: Joan K. Singleton
Senior Vice-President, Chief Financial
Officer and duly authorized
representative of the registrant
-5-
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 hereunto duly authorized.
LPA SERVICES, INC.
A Delaware corporation
Date: December 7, 1999 /s/ Joan K. Singleton
-----------------------------------------
By: Joan K. Singleton
Senior Vice-President, Chief Financial
Officer and duly authorized
representative of the registrant
-6-
32
EXHIBIT INDEX
Exhibit
Number Description of Exhibits
2.1* Agreement and Plan of Merger dated June 30, 1999 by and between La Petite
Academy, Inc., LPA Acquisition Co., Inc. and Bright Start, Inc.
23.1 Consent of Ernst & Young LLP
99.1 Press Release dated July 21, 1999.
- --------------------
* The exhibits and schedules to this Agreement and Plan of Merger are not
included with this filing. The Company will provide these exhibits and schedules
upon the request of the Securities and Exchange Commission.