1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Commission File No.
Ended October 23, 1999 333-56239-01
LPA HOLDING CORP.
(exact name of registrant as specified in its charter)
SEE TABLE OF ADDITIONAL REGISTRANTS
Delaware 48-1144353
(state or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
8717 WEST 110TH STREET, SUITE 300
OVERLAND PARK, KANSAS 66210
(address of principal executive office and zip code)
(913) 345-1250
(registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------
As of December 7, 1999, LPA Holding Corp. had outstanding 560,026 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 7, 1999, each of the
additional registrants had the number of outstanding shares which is shown on
the table below.
2
ADDITIONAL REGISTRANTS
Number of Shares
Jurisdiction of Commission IRS Employer of Common
Name Incorporation File Number Identification No. Stock Outstanding
- ---- ------------- ----------- ------------------ -----------------
La Petite Academy, Inc. Delaware 333-56239 43-1243221 1,000 shares of Common
Stock (par value, $.01 per
share)
LPA Services, Inc. Delaware 333-56239-02 74-2849053 1,000 shares of Common
Stock (par value, $.01 per
share)
2
3
LPA HOLDING CORP.
INDEX
PART I. FINANCIAL INFORMATION
PAGE
----
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED):
Consolidated Balance Sheets 4-5
Consolidated Statements of Operations 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14-15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17-19
3
4
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------
LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
OCTOBER 23, 1999 AND JULY 3,1999
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
ASSETS OCTOBER 23, JULY 3,
1999 1999
Current assets:
Cash and cash equivalents $ 4,881 $ 4,572
Restricted cash investments 974 1,218
Accounts and notes receivable, net 10,848 8,077
Prepaid food and supplies 8,614 7,884
Other prepaid expenses 3,545 5,850
Refundable income taxes 185 192
-------- --------
Total current assets 29,047 27,793
Property and equipment, at cost:
Land 6,120 6,120
Buildings and leasehold improvements 80,417 77,197
Equipment 22,893 20,451
Facilities under construction 3,280 15,261
-------- --------
112,710 119,029
Less accumulated depreciation 51,823 48,310
-------- --------
Net property and equipment 60,887 70,719
Other assets (Note 3) 70,735 61,780
Deferred income taxes 10,950 8,883
-------- --------
$171,619 $169,175
======== ========
4
5
LPA HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
OCTOBER 23, 1999 AND JULY 3,1999
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT OCTOBER 23, JULY 3,
1999 1999
Current liabilities:
Overdrafts due banks $ 3,803 $ 7,450
Accounts payable 10,460 7,972
Current reserve for closed schools 1,313 1,366
Current maturities of long-term debt and capital
lease obligations 2,301 2,187
Accrued salaries, wages and other payroll costs 12,310 11,903
Accrued insurance liabilities 2,550 2,389
Accrued property and sales taxes 4,945 3,749
Accrued interest payable 6,895 2,388
Other current liabilities 4,049 11,199
Current deferred income taxes 767 361
-------- --------
Total current liabilities 49,393 50,964
Long-term debt and capital lease obligations (Note 4) 197,567 187,999
Other long-term liabilities (Note 5) 8,647 11,085
Series A 12% redeemable preferred stock
($.01 par value per share);
30,000 shares authorized, issued and outstanding at 30,735 29,310
aggregate liquidation preference of $1,185.164 as of
October 23, 1999, and $1,143,444 as of July 3, 1999
Stockholders' deficit:
Class A common stock ($.01 par value per share); 6 6
950,000 shares authorized and 560,026 shares issued
and outstanding as of October 23, 1999 and July 3,
1999
Class B common stock ($.01 par value per share);
20,000 shares authorized, issued and outstanding as
of October 23, 1999 and July 3, 1999
Common stock warrants 5,645 5,645
Accumulated deficit (120,374) (115,834)
--------- ---------
Total stockholders' deficit (114,723) (110,183)
--------- ---------
$ 171,619 $ 169,175
========= =========
See notes to consolidated financial statements.
5
6
(continued)
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
SIXTEEN WEEKS ENDED OCTOBER 23, 1999 AND OCTOBER 24, 1998
(In thousands of dollars)
- --------------------------------------------------------------------------------
16 Weeks Ended
------------------------------
October 23, October 24,
1999 1998
Operating revenue $ 108,365 $ 96,743
Operating expenses:
Salaries, wages and benefits 60,110 51,428
Facility lease expense 14,422 12,205
Depreciation 4,246 4,160
Amortization of goodwill and other
intangibles 492 336
Other 27,672 24,632
------------ -----------
106,942 92,761
------------ -----------
Operating income 1,423 3,982
------------ -----------
Interest expense 6,236 6,014
Interest income (37) (80)
------------ -----------
Net interest costs 6,199 5,934
------------ -----------
Loss before income taxes (4,776) (1,952)
Benefit for income taxes (1,661) (562)
------------ -----------
Net loss $ (3,115) $ (1,390)
============ ===========
See notes to consolidated financial statements.
6
7
LPA HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIXTEEN WEEKS ENDED OCTOBER 23, 1999 AND OCTOBER 24, 1998
(IN THOUSANDS OF DOLLARS)
October 23, October 24,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,115) $ (1,390)
Adjustments to reconcile net loss to net cash from (used for)
operating activities
Depreciation and amortization 5,028 4,757
Deferred income taxes (1,661) (535)
Changes in assets and liabilities:
Accounts and notes receivable (2,468) (950)
Prepaid expenses and supplies 2,267 1,039
Accrued property and sales taxes 1,153 981
Accrued interest payable 4,507 4,428
Accounts payable and other accrued liabilities (4,944) 665
Other changes in assets and liabilities, net (1,650) 226
------------ -----------
Net cash from (used for) operating activities (883) 9,221
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Bright Start net of cash acquired (10,020)
Capital expenditures (15,186) (6,485)
Proceeds from sale of assets 22,390 4,166
------------ -----------
Net cash used for investing activities (2,816) (2,319)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt and capital lease obligations (10,589) (328)
Borrowings under the Revolving Credit Agreement 18,000
Deferred financing costs and stock offering expenses (175)
Reduction in bank overdrafts (3,647) (579)
Decrease (increase) in restricted cash investments 244 (844)
------------ -----------
Net cash from (used for) financing activities 4,008 (1,926)
------------ -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 309 4,976
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,572 4,820
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,881 $ 9,796
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 1,482 $ 1,338
Income taxes 1 4
Cash received during the period for:
Interest $ 34 $ 87
Income taxes 35 372
NON-CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations of $34,000 were incurred during the 16 weeks ended
October 23, 1999 and $291,000 during the 16 weeks ended October 24, 1998,
when the Company entered into leases for new computer equipment
See notes to consolidated financial statements.
7
8
LPA HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND MERGER
Vestar/LPA Investment Corp. (Investment), a privately-held Delaware
corporation, was formed in 1993 for the purpose of holding the capital
stock of La Petite Holdings Corp. (Holdings), a Delaware corporation.
Holdings was formed in 1993 for the purpose of holding the capital stock of
La Petite Acquisition Corp. (Acquisition). On July 23, 1993, as a result of
a series of transactions, Holdings acquired all the outstanding shares of
common stock, par value $.01 (the Common Stock), of La Petite Academy,
Inc., a Delaware corporation (La Petite). The transaction was accounted for
as a purchase and the excess of purchase price over the net assets acquired
is being amortized over 30 years. On May 31, 1997, Holdings was merged with
and into La Petite with La Petite as the surviving corporation. On August
28, 1997, LPA Services, Inc. (Services), a wholly owned subsidiary of La
Petite, was incorporated. Services provides third party administrative
services on insurance claims to La Petite.
On March 17, 1998, LPA Investment LLC (the Investor), 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
Investment, which was renamed LPA Holding Corp. (Parent), entered into an
Agreement and Plan of Merger pursuant to which a wholly owned subsidiary of
the Investor was merged into Parent (the Recapitalization). In the
Recapitalization (i) all of the then outstanding shares of preferred stock
and common stock of Investment (other than the shares of common stock
retained by Vestar/LPT Limited Partnership and management of La Petite)
owned by the existing stockholders of Investment (the Existing
Stockholders) were converted into cash. As part of the Recapitalization,
the Investor purchased $72.5 million (less the value of options retained by
management) of common stock of the Parent (representing approximately 74.5%
of the common stock of Parent on a fully diluted basis) 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,
the Investor received warrants to purchase up to 6.0% of Parent's common
stock on a fully diluted basis (resulting in an aggregate fully diluted
ownership of 80.5% of the common stock of Parent).
The Recapitalization was completed May 11, 1998.
Parent, consolidated with La Petite and Services, is referred to herein as
the Company.
On July 21, 1999 the Company acquired all the outstanding shares of Bright
Start, Inc. (Bright Start). See note 7 to the consolidated financial
statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Reporting - The consolidated financial statements
included herein have been prepared by the Company, without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. It is suggested
that these consolidated financial statements be read in conjunction with
the consolidated financial statements and the notes thereto included in the
Annual Report of La Petite on Form 10-K for the fiscal year ended July 3,
1999.
The Company utilizes a 52-week fiscal year ending on the first Saturday in
July composed of 13 four-week periods. The first quarter contains four such
periods or 16 weeks and each remaining quarter contains 3 periods or 12
weeks.
The consolidated financial statements include the accounts of Investment
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
8
9
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 preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Certain reclassifications to prior year amounts have been made in order to
conform to the current year presentation.
3. OTHER ASSETS
(in thousands of dollars)
OCTOBER 23, 1999 JULY 3, 1999
Intangible assets:
Excess purchase price over net assets acquired $ 74,377 $ 64,277
Curriculum 1,497 1,497
Accumulated amortization (14,614) (13,746)
-------------- -------------
61,260 52,028
Deferred financing costs 8,423 8,423
Accumulated amortization (1,379) (1,088)
Other assets 2,431 2,417
-------------- -------------
$ 70,735 $ 61,780
============== =============
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
(in thousands of dollars)
OCTOBER 23, 1999 JULY 3, 1999
Senior Notes, 10.0% due May 15, 2008 $ 145,000 $ 145,000
Borrowings under credit agreement 53,000 43,250
Capital lease obligations 1,868 1,936
-------------- -------------
199,868 190,186
Less current maturities of long-term debt and capital lease obligations (2,301) (2,187)
-------------- -------------
$ 197,567 $ 187,999
============== =============
9
10
5. OTHER LONG-TERM LIABILITIES (in thousands of dollars)
(in thousands of dollars)
OCTOBER 23, 1999 JULY 3, 1999
Unfavorable lease, net of accumulated amortization $ 3,419 $ 3,800
Non-current reserve for closed schools 1,886 2,681
Long-term insurance liabilities 3,342 4,604
------- --------
$ 8,647 $ 11,085
======= ========
6. COMMITMENTS AND CONTINGENCIES
The Company has litigation pending which arose in the ordinary course of
business. Litigation is subject to many uncertainties and the outcome of
the individual matters is not presently determinable. It is management's
opinion that this litigation will not result in liabilities that would have
a material adverse effect on the Company's financial position or results of
operation.
7. ACQUISITIONS
On July 21, 1999 the Company acquired all the outstanding shares of Bright
Start, Inc. ("Bright Start") for $9.3 million in cash and assumed
approximately $2.0 million in debt. At the time of the acquisition, Bright
Start operated 43 preschools in the states of Minnesota, Wisconsin, Nevada,
and New Mexico with one new school under construction. For the year ended
August 31, 1998, Bright Start had operating revenue of $22.2 million and at
August 31, 1998 total assets were $5.1 million. The acquisition was
accounted for as a purchase, and accordingly, the purchase price has been
allocated to the fair value of net assets acquired and resulted in a
preliminary allocation to goodwill of $10.1 million which is being
amortized on a straight-line basis over 20 years. Such allocations are
preliminary in nature, pending the outcome of a detailed analysis being
performed by the Company of the assets and liabilities acquired. The
Company's financial statements reflect the results of operations during the
period subsequent to July 21, 1999. On a unaudited pro-forma basis assuming
the acquisition had occurred at the beginning of the respective periods,
the Company's operating revenue for the 16 weeks ended October 23, 1999 and
October 24, 1998 would have been $108.4 million and $103.5 million
respectively and the Company's net loss for the 16 weeks ended October 23,
1999 and October 24, 1998 would have been $3.1 million and $1.6 million
respectively.
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
10
11
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 24, 1998 and the end of the first quarter of fiscal year 2000,
the Company opened 27 new schools and acquired 43 schools through the Bright
Start acquisition. Fifteen schools were closed during the same period. As a
result, the Company operated 791 schools at the end of the first quarter of
fiscal year 2000, 55 more than at the end of the same quarter last year. The
closures resulted from management decisions to not renew the leases of certain
schools at lease expiration.
The Company's operating results for the 16 weeks ended October 23, 1999 include
pre-opening costs and operating losses associated with 27 new schools as
compared to the 16 weeks ended October 24, 1998, which only includes pre-opening
costs and operating losses associated with one new school. Pre-opening costs are
included in other operating costs, and cover all activities associated with
preparing a new school for opening other than capital development cost.
Pre-opening costs for 16 weeks ended October 23, 1999 were $0.5 million. New
schools also typically generate operating losses during the first year of
operation, until the schools achieve normalized occupancies. Included in
operating income and EBIDTA, were new school operating losses of $0.7 million
for the 16 weeks ended October 23, 1999. Pre-opening costs and new school
operating losses during the 16 weeks ended October 24, 1998 were less than $0.1
million.
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 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 23,
1999 and October 24, 1998 were as follows:
OCTOBER 23, PERCENT OF OCTOBER 24, PERCENT OF
1999 REVENUE 1998 REVENUE
Operating revenue $ 108,365 100.00% $ 96,743 100.00%
Operating expenses:
Salaries, wages and benefits 60,110 55.5 51,428 53.2
Facility lease payments 14,422 13.3 12,205 12.6
Depreciation 4,246 3.9 4,160 4.3
Amortization of goodwill
and other intangibles 492 0.5 336 0.3
Other 27,672 25.5 24,632 25.5
----------- ------ ----------- ------
Total operating expenses 106,942 98.7 92,761 95.9
----------- ------ ----------- ------
Operating income $ 1,423 1.30% $ 3,982 4.10%
=========== ====== =========== ======
EBITDA $ 6,161 5.70% $ 8,478 8.80%
=========== ====== =========== ======
Operating revenue increased $11.6 million or 12.0% during the 16 weeks ended
October 23, 1999 as compared to the 16 weeks ended October 24, 1998. The
increase in operating revenue includes Bright Start operating revenue of $7.0
million. Excluding Bright Start, operating revenue for schools opened one year
or more as of October 23, 1999 increased 2.0%; full time equivalent (FTE)
attendance decreased 2.6% and average weekly FTE tuition increased 4.7% during
the 16 weeks ended October 23, 1999 as compared to the 16 weeks ended October
24, 1998.
11
12
The increase in average weekly FTE tuition was principally due to selective
price increases which were put into place in the second quarter of fiscal year
1999, based on geographic market conditions and class capacity utilization. The
decline in FTE's occurred principally in the infant, toddler and school age
programs as the Company is concentrating its focus on enhancing and expanding
its pre-school program.
Salaries, wages, and benefits increased $8.7 million or 16.9% during the 16
weeks ended October 23, 1999 as compared to the 16 weeks ended October 24, 1998.
The increase in salaries, wages, and benefits includes Bright Start salaries,
wages, and benefits of $3.9 million and increased benefit costs of $0.6 million
related to benefit plan enhancements. Excluding Bright Start, salaries and wages
for schools opened one year or more as of October 23, 1999 increased 7.6%. This
increase was principally due to a 6.9% increase in average hourly wage rates and
a 2.6% increase in the number of labor hours per FTE. The 27 new schools, which
remain in the start up stage, experienced higher labor costs relative to revenue
as compared to established schools. As a percentage of revenue, labor costs were
55.5% for the 16 weeks ended October 23, 1999 as compared to 53.2% during the 16
weeks ended October 24, 1998.
Facility lease payments as a percentage of revenue, were 13.3% for the 16 weeks
ended October 23, 1999 as compared to 12.6% during the 16 weeks ended October
24, 1998. This increase was mainly due to higher relative lease costs associated
with the Bright Start schools and the 27 new schools.
Amortization of goodwill and other intangibles increased 46.4% during the 16
weeks ended October 23, 1999 as compared to the 16 weeks ended October 24, 1998,
due to the amortization of goodwill associated with the Bright Start
Acquisition.
Many of the Company's operating costs are relatively fixed and do not decline or
increase directly with small changes in attendance. Depreciation and other
operating costs, which includes repair and maintenance, utilities, insurance,
marketing, real estate taxes, food, supplies and transportation, excluding
pre-opening costs declined or remained unchanged as a percentage of revenue
during the 16 weeks ended October 23, 1999 as compared to the 16 weeks ended
October 24, 1998.
As a result of the foregoing, operating income was $1.4 million for the 16 weeks
ended October 23, 1999, as compared to $4.0 million during the 16 weeks ended
October 24, 1998. Earnings before interest, taxes, depreciation and amortization
(EBITDA) was $6.2 million for 16 weeks ended October 23, 1999, as compared to
$8.5 million during the 16 weeks ended October 24, 1998. Excluding pre-opening
costs and new school operating losses, EBIDTA would have been $7.4 million for
16 weeks ended October 23, 1999, as compared to $8.5 million during the 16 weeks
ended October 24, 1998.
Interest expense for the 16 weeks ended October 23, 1999 increased $0.2 million
as compared to the 16 weeks ended October 24, 1998. The increase was mainly due
to interest associated with higher borrowings under the Revolving Credit
Facility.
After adding back to pre-tax income permanent differences, the effective income
tax rate for the 16 weeks ended October 23, 1999 was approximately 41%, as
compared to 44% for the 16 weeks ended October 24, 1998.
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. See Note 1 of the Notes to Consolidated Financial Statements.
12
13
In connection with the Recapitalization, Parent and La Petite entered into the
Credit Agreement, 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 of 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. In addition, La
Petite has outstanding letters of credit in an aggregate amount equal to $4.0
million.
The Term Loan Facility is 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). The Term Loan Facility will terminate on May 11, 2005. The term
loan will amortize in an amount equal to $1.0 million per year in fiscal years
2000 through 2003, $7.8 million in fiscal year 2004, and $27.5 million in fiscal
year 2005. The Revolving Credit Facility will terminate on the same date. On
October 23, 1999, there was $39.0 million outstanding on the term loan, $14.0
million outstanding on the Revolving Credit Facility and $7.0 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 23,
1999 the Company was in compliance with the foregoing covenants.
On July 21, 1999 the Company acquired all the outstanding shares of Bright
Start, Inc. ("Bright Start") for $9.3 million in cash and assumed approximately
$2.0 million in debt. Bright Start operated 43 preschools in the states of
Minnesota, Wisconsin, Nevada, and New Mexico. For the year ended August 31,
1998, Bright Start had operating revenue of $22.2 million and at August 31, 1998
total assets were $5.1 million. See note 7 to the consolidated financial
statements.
Cash flows used for operating activities were $0.9 million during the 16 weeks
ended October 23, 1999 as compared to cash flows from operating activities of
$9.2 million during the 16 weeks ended October 24, 1998. The $10.1 million
decrease in cash flows from operations was mainly due to a 1.7 million increase
in net loss, an $8.8 million change in short term sale leaseback construction
funding, a $1.6 million reduction in insurance liabilities, offset by timing
differences in accounts payable and prepaid expenses.
Cash flows used for investing activities were $2.8 million during the 16 weeks
ended October 23, 1999 as compared to cash flows used of $2.3 million during the
16 weeks ended October 24, 1998. The $0.5 million increase in cash flows used
for investing activities during the 16 weeks ended October 23, 1999 as compared
to the 16 weeks ended October 24, 1998 was principally due to $10.0 million used
for the Bright Start acquisition, an $8.4 million increase in new school
development, an $0.3 increase in maintenance capital expenditures, offset by an
$18.4 million increase in proceeds from new school sale lease-backs.
Cash flows from financing activities were $4.0 million during the 16 weeks ended
October 23, 1999 compared to cash flows used for financing activities of $1.9
million during the 16 weeks ended October 24, 1998. The $5.9 million increase in
cash flows from financing activities during the 16 weeks ended October 23, 1999
as compared to the 16 weeks ended October 24, 1998 was principally due to a $7.7
million increase in net borrowings related to the Bright Start acquisition and a
$1.1 million net decrease in restricted cash requirements, offset by a $3.1
million decrease in bank overdrafts related to the timing of monthly expense
payments. Restricted cash investments represents cash deposited in escrow
accounts as collateral for the self-insured portion of the Company's workers
compensation insurance coverage.
The Company opened fifteen new schools during the first quarter of fiscal year
2000. The opening of these schools along with the Bright Start acquisition
satisfies the Company's growth plans for fiscal year 2000. The cost to open a
new school ranges from $1.0 million to $1.5 million, of which approximately 85%
is typically financed through a sale 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 23, 1999 the Company had $3.3 million invested in new
school development in excess of amounts received to date as proceeds from sale
and leaseback transactions.
13
14
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 its capitalized cost over the term of
the lease. In addition, many of the Company's leases provide for either
contingent rentals if the school's operating revenue exceeds certain levels or a
percentage increase every five years. 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 23, 1999 and October
24, 1998 were $15.2 million, and $6.5 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 23, 1999 and October 24,
1998 were $3.5 million, and $3.2 million, respectively. For fiscal year 2000,
the Company expects total maintenance capital expenditures to be approximately
$10.0 million.
In addition to maintenance capital expenditures, the Company expends additional
funds to ensure that its facilities are in good working condition. Such funds
are expensed in the periods in which they are incurred. The amounts of such
expenses for the 16 weeks ended October 23, 1999 and October 24, 1998 were $3.5
million, and $3.4 million, respectively.
INFLATION AND GENERAL ECONOMIC CONDITIONS
During the past two years, a period of low inflation, the Company implemented
selective increases in tuition rates, based on geographic market conditions and
class capacity utilization. The Company did not experience a material decline in
attendance as a result of these increases.
On September 1, 1997, the Federal Minimum Wage increased from $4.75 to $5.15 per
hour. This increase did not materially impact the Company's operations. On
November 9, 1999 the U.S. Senate passed a bill that would increase the minimum
wage by $1.00 per hour over a three-year period. A similar bill is currently
pending in the U.S. House of Representatives.
There is no assurance that these bills will pass Congress or be enacted into
law.
During the 16 weeks ended October 23, 1999 the Company experienced inflationary
pressures on average wage rates, as hourly rates increased approximately 7%.
Management believes this is occurring industry wide and there is no assurance
that such wage rate increases can be recovered through future increases in
tuition.
MANAGEMENT INFORMATION SYSTEMS AND THE YEAR 2000
The arrival of the year 2000 is not expected to have an adverse impact on the
Company's computerized information systems and the cost of compliance has been
immaterial. The most important new system for the Company has been the
installation of its Academy Document and Information Network (ADMIN) system
nationwide. ADMIN was written using a calendar dating system that is not
sensitive to the year 2000 issue. For payroll processing, human resources
information, general ledger/financial reporting, accounts payable disbursements,
fixed assets record keeping and purchase order accounting, the Company utilizes
software under licensing arrangements for systems that have already been
upgraded and are currently year 2000 compliant. The costs of the upgrades were
included as part of the annual licensing fees. The Company is currently testing
and, if necessary, modifying its smaller applications to insure that any year
2000 issues are corrected on a timely basis.
The Company has not assessed the year 2000 readiness of its major suppliers or
third-party funding agencies. Due to the general uncertainty inherent in
addressing year 2000 readiness, the most likely worst case year 2000 scenario
and the impact it may have on the Company is uncertain. In the event that major
suppliers of curriculum material are unable to fulfill purchase orders for
supplies, school Directors will need to buy necessary supplies from local
retailers. This could have adverse cost consequences to the Company, but on the
assumption that the banking
15
15
system continues to function, should not have a material impact on operations.
The Company also provides preschool and child-care services for children that
are funded by various state and local government agencies. In the event that any
such agency was unable to timely reimburse the Company for such services, it
would have an adverse impact on the Company's cash flow. Such impact is not
expected to be material and the Company generally has the option to discontinue
providing such services for nonpayment.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On May 11, 1998, the Company recapitalized, providing for (a) Series B Senior
Notes in the aggregate principal amount of $145 million, (b) a Term Loan
Facility in the aggregate principal amount of $40 million and (c) a Revolving
Credit Facility providing for revolving loans to the Company in an aggregate
principal amount (including swingline loans and the aggregate stated amount of
letters of credit) of $25 million. Borrowings under the Senior notes bear
interest at 10% per annum. Borrowings under the Credit Agreement bear interest
at a rate per annum equal (at the Company's option) to: (a) an adjusted London
inter-bank offered rate ("LIBOR") plus a percentage based on the Company's
financial performance; or (b) a rate known as the average banking rate ("ABR")
equal to the highest of The Chase Manhattan Bank's published prime rate, a
certificate of deposit rate plus 1% or the federal funds effective rate plus 1/2
of 1%, plus, in each case a percentage based on the Company's financial
performance. The borrowing margins applicable to the Credit Agreement are
initially 3.25% for LIBOR loans and 2.25% for ABR loans. The Senior Notes will
mature in May 2008 and the Credit Agreement will mature in May 2005. The term
loan will amortize in an amount equal to $1.0 million per year in fiscal years
2000 through 2003, $7.8 million in fiscal year 2004, and $27.5 million in fiscal
year 2005.
To reduce the impact of interest rate changes on the Term Loan Facility, the
company entered into interest rate collar agreements. The collar agreements
cover the LIBOR interest rate portion of the Term Loan Facility, effectively
setting maximum and minimum interest rates.
To reduce interest expense on the $145 million Series B Senior Notes, the
Company entered into an interest rate swap transaction with an imbedded collar.
The fixed rate debt was exchanged for a variable rate arrangement based on LIBOR
plus a fixed percentage. The imbedded collar covers the LIBOR portion of
variable rate swap, effectively setting maximum and minimum interest rates.
There were no initial costs associated with either the swap or the interest rate
collar agreements as the floor and ceiling cap rates were priced to offset each
other. Any differential paid or received based on the swap/collar agreements are
recognized as an adjustment to interest expense. As of October 23, 1999, the
notional value of such derivatives was $184.0 million with an unrealized loss of
$2.0 million. A 1% change in an applicable index rate, after giving effect to
the interest rate collars and swap agreement, would result in an interest
expense increase of $1.9 million per year.
******
15
16
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:
On December 7, 1999, the Company filed a current report on Form 8-K
announcing the acquisition of Bright Start, Inc.
16
17
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 7, 1999 /s/ Joan K. Singleton
By: Joan K. Singleton
Senior Vice President, Chief Financial
Officer and duly authorized representative
of the registrant
17
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LA PETITE, ACADEMY, INC.
Dated December 7, 1999 /s/ Joan K. Singleton
By: Joan K. Singleton
Senior Vice President, Chief Financial
Officer and duly authorized representative
of the registrant
18
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LPA HOLDING CORP.
Dated December 7, 1999 /s/ Joan K. Singleton
By: Joan K. Singleton
Senior Vice President, Chief Financial
Officer and duly authorized representative
of the registrant
19