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 October 20, 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 December 03, 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 December 03, 2001, the
additional registrant had the number of outstanding shares, shown on the
following table.
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)
2
LPA HOLDING CORP. AND SUBSIDIARIES
INDEX
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PART I. FINANCIAL INFORMATION
PAGE
----
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED):
Consolidated Balance Sheets 4
Consolidated Statements of Operations and Comprehensive 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 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16-17
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
LPA HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
ASSETS OCTOBER 20, JUNE 30,
2001 2001
Current assets:
Cash and cash equivalents $ 5,427 $ 5,078
Restricted cash investments 949 91
Receivables (net of allowance for doubtful
accounts of $917 and $537, respectively) 9,487 9,920
Prepaid supplies and expenses 13,108 9,821
Other current assets 980 55
--------- ---------
Total current assets 29,951 24,965
Property and equipment (net of accumulated
depreciation of $49,034 and $46,278, respectively) 57,670 59,024
Intangible assets (net of accumulated amortization
of $20,225 and $19,356, respectively) 55,493 56,361
Other assets 8,347 8,747
Deferred income taxes 17,603 16,276
--------- ---------
$ 169,064 $ 165,373
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Overdrafts due banks $ 5,136 $ 5,925
Accounts payable 5,976 5,707
Other current liabilities (Note 3) 40,045 34,385
--------- ---------
Total current liabilities 51,157 46,017
Long-term debt and capital lease obligations (Note 4) 197,770 194,648
Other long-term liabilities 5,530 7,060
Series A 12% redeemable preferred stock ($.01 par value
per share); 45,000 shares authorized, issued and
outstanding as of October 20, 2001 and June 30, 2001
at aggregate liquidation preference of $1,410.254
and $1,360.563 per share, respectively 57,457 54,941
Stockholders' deficit:
Class A Common Stock ($.01 par value per share);
950,000 shares authorized and 564,985 issued and
outstanding as of October 20, 2001 and June 30, 2001 6 6
Class B Common stock ($.01 par value per share);
20,000 shares authorized, issued and outstanding
as of October 20, 2001 and June 30, 2001
Common stock warrants 8,596 8,596
Other comprehensive income 310 331
Accumulated deficit (151,762) (146,226)
--------- ---------
Total stockholders' deficit (142,850) (137,293)
--------- ---------
$ 169,064 $ 165,373
========= =========
See notes to consolidated financial statements.
4
LPA HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
16 WEEKS ENDED
-----------------------------
OCTOBER 20, OCTOBER 21,
2001 2000
Revenues, net $117,307 $114,274
Operating expenses:
Salaries, wages and benefits 65,039 65,011
Facility lease expense 13,985 13,689
Depreciation and amortization 4,588 4,798
Provision for doubtful accounts 882 888
Other 30,785 28,118
-------- --------
Total operating expenses 115,279 112,504
-------- --------
Operating income 2,028 1,770
Interest income (85) (28)
Interest expense 6,638 7,441
-------- --------
Loss before income taxes (4,525) (5,643)
Benefit for income taxes (1,505) (1,976)
-------- --------
Net Loss (3,020) (3,667)
======== ========
Other comprehensive income (loss):
Other comprehensive loss (1,565)
Reclassification into operations 21 (157)
-------- --------
Total other comprehensive loss 21 (1,722)
-------- --------
Comprehensive loss $ (2,999) $ (5,389)
======== ========
See notes to consolidated financial statements.
5
LPA HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
16 WEEKS ENDED
-------------------------
OCTOBER 20, OCTOBER 21,
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,020) $(3,667)
Adjustments to reconcile net loss to net cash
from operating activities:
Amortization of transition adjustment
into operations (35) 264
Depreciation and amortization 4,881 5,140
Deferred income taxes (3,868) (2,910)
Changes in assets and liabilities:
Receivables 433 (1,361)
Prepaid supplies and expenses (3,287) 2,326
Accrued property and sales taxes 967 875
Accrued interest payable 4,540 5,503
Accounts payable and other current liabilities (26) (5,639)
Other changes in assets and liabilities, net 1,148 (196)
------- -------
Net cash from operating activities 1,733 335
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (2,568) (1,920)
Proceeds from sale of assets 2 183
------- -------
Net cash used for investing activities (2,566) (1,737)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt and capital lease obligations (371) (645)
Borrowings under the Revolving Credit Agreement 3,200 6,000
Increase (reduction) in overdrafts due banks (789) (797)
Decrease (increase) in restricted cash investments (858) (3,990)
------- -------
Net cash provided by financing activities 1,182 568
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 349 (834)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,078 4,008
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,427 $ 3,174
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 3,255 $ 1,332
Income taxes 83 94
Cash received during the period for:
Interest $ 85 $ 33
Income taxes 19
See notes to consolidated financial statements.
6
LPA HOLDING CORP. AND SUBSIDIARIES
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 Corp. (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 (See Note 7). 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.
Parent, consolidated with La Petite, Bright Start and Services, is referred
to herein as the Company.
As of October 20, 2001, the Company operated 725 Academies including 661
residential Academies, 32 employer-based Academies and 32 Montessori
schools located in 36 states and the District of Columbia. For the 16 weeks
ended October 20, 2001, the Company had an average attendance of
approximately 72,000 full and part-time children.
2. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements include all 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 June 30, 2001.
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.
Certain reclassifications to prior year amounts have been made in order to
conform to the current year presentation.
7
3. OTHER CURRENT LIABILITIES (in thousands of dollars)
OCTOBER 20, 2001 JUNE 30, 2001
---------------- -------------
Current reserve for closed academies $3,024 $3,100
Current maturities of long-term debt and capital lease
obligations 974 1,255
Accrued salaries, wages and other payroll costs 14,734 15,495
Accrued insurance liabilities 3,276 2,359
Accrued property and sales taxes 4,335 3,368
Accrued interest payable 7,027 2,487
Other current liabilities 6,675 4,692
Current deferred income taxes 1,629
------- -------
$40,045 $34,385
======= =======
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (in thousands of dollars)
OCTOBER 20, 2001 JUNE 30, 2001
---------------- -------------
Senior Notes, 10.0% due May 15, 2008 $145,000 $145,000
Borrowings under credit agreement 53,200 50,250
Capital lease obligations 544 653
-------- --------
198,744 195,903
Less current maturities of long-term debt and capital lease
obligations (974) (1,255)
-------- --------
$197,770 $194,648
======== ========
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. NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards ("SFAS") No. 141, Business Combinations, No.
142, Goodwill and other Intangible Assets, No. 143, Accounting for Asset
Retirement Obligations, and No. 144, Accounting for the Impairment or
Disposal of Long Lived Assets. These Statements are effective on various
dates through the Company's 2002 and 2003 fiscal years. The Company has not
yet determined the impact of implementation of these Statements.
8
7. SUBSEQUENT EVENTS
On November 14, 2001, the Company and certain of its senior secured lenders
entered into Amendment No. 3 to Credit Agreement and Waiver (the
"Amendment"). The Amendment waived existing defaults in connection with the
failure to satisfy certain financial covenants for the quarterly periods
ended June 30, 2001 and September 30, 2001, and the failure to deliver
timely financial information to the senior secured lenders. Additionally,
the Amendment revised certain future financial covenants. The Company
expects to comply with the financial covenants contained in the Credit
Agreement, as amended, throughout fiscal year 2002. However, there can be
no assurance that the Company will be able to do so. The Amendment also
provided for specific waivers necessary to permit the issuance of a new
class of convertible preferred stock of the Company. In consideration for
the waiver and amendments, the Company is required to issue additional
equity of $15.0 million prior to May 14, 2002, with $3.4 million to be
issued prior to the effectiveness of the Amendment and an additional $0.825
million to be issued prior to December 31, 2001. As part of the Amendment,
JPMP agreed to guarantee a portion of the bank debt if LPA fails to satisfy
its commitment to purchase the new equity prior to May 14, 2002 or earlier
if the bank debt has been accelerated. The amount of such guaranty equals
the amount of LPA's unfunded commitment to purchase the new equity, as
adjusted from time to time.
The Company offered all of its stockholders the right to purchase up to
their respective pro rata amount of a newly created class of convertible
preferred stock and warrants to purchase common stock. The convertible
preferred stock is junior to the redeemable preferred stock of Parent in
terms of dividends, distributions, and rights upon liquidation. Up to $4.25
million of convertible preferred stock of Parent and warrants to purchase
562,500 shares of common stock were offered. At any time, or from time to
time, prior to May 14, 2002, as requested by Parent, the stockholders of
Parent participating in the offer are required to purchase the balance of
the convertible preferred stock being offered. All of the proceeds received
by Parent will be contributed to La Petite as common equity and will be
used by La Petite for general working capital and liquidity purposes.
Pursuant to the offer, on November 15, 2001 LPA acquired $3.4 million of
Parent's convertible preferred stock and received warrants to purchase
452,343 shares of common stock. The proceeds were contributed to La Petite
as common equity. In connection with such purchase, the banks waived their
right under the Credit Agreement to require that the proceeds be used to
repay amounts outstanding under the Credit Agreement. LPA also committed to
purchase the balance of the $11.6 million of convertible preferred stock
being offered and not otherwise purchased by the other stockholders of the
Company. After giving effect to the investment on November 15, 2001, LPA
beneficially owns approximately 90.0% of Parent's outstanding common stock
on a fully diluted basis.
In connection with the Amendment to the Credit Agreement and the $15.0
million of committed capital, management is continuing to review plans and
actions that will enable the Company to improve future operations. However,
there can be no assurance that the Company will be able to do so.
9
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 725 schools at the end of the first quarter of fiscal year
2002 as compared to 749 schools for the same period of fiscal year 2001. The net
decrease of 24 schools is a result of 35 closures and 11 openings. 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 16 weeks were as follows (in
thousands of dollars):
16 Weeks Ended
----------------------------------------------------------------------------------
October Percent October Percent
20, of 21, of
2001 Revenue 2000 Revenue
======== ====== ======== =======
Revenues, net $117,307 100.00% $114,274 100.00%
Operating expenses:
Salaries, wages and benefits 65,039 55.4 65,011 56.9
Facility lease expense 13,985 11.9 13,689 12.0
Depreciation and amortization 4,588 3.9 4,798 4.2
Provision for doubtful 882 0.7 888 0.8
Other 30,785 26.4 28,118 24.6
-------- ------- -------- -------
Total operating expenses 115,279 98.3 112,504 98.5
-------- ------- -------- -------
Operating income $ 2,028 1.7% $ 1,770 1.5%
======== ======= ======== =======
EBITDA (as defined) $ 6,616 5.6% $ 6,568 5.7%
======== ======= ======== =======
Operating revenue increased $3.0 million or 2.7% from the same period last year.
This revenue increase is a result of a $5.4 million increase at established
academies, a $1.0 million increase at new academies, offset by a reduction in
revenue from closed academies of $3.4 million. The revenue increase at
established academies is principally due to a 8.1% increase in the average
weekly FTE tuition rate offset by a decline in the FTE attendance of 4.5%. The
increase in the average weekly FTE tuition rate was principally due to selective
price increases that were put into
10
place in January 2001 and September 2001 based on geographic market conditions
and class capacity utilization. The decrease in FTE attendance was due to a 2.2%
decline at our established schools (schools which were open prior to the 2000
year) and a 87.7% decline in schools closed during the 2000 and 2001 years,
offset by a 22.2% increase at our new schools.
Salaries, wages, and benefits were virtually unchanged from the same period last
year. As a percentage of revenue, labor costs decreased to 55.4% from 56.9% in
the prior year. The changes 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 increased $0.3 million or 2.2% from the same period last
year. This increase was principally due to the increase of monthly lease
payments on certain academies where operating performance payments were
eliminated.
Depreciation and amortization decreased $0.2 million from the same period last
year. This decrease was mainly due to the closings that occurred in fiscal year
2001.
Other operating costs increased $2.6 million or 9.5% from the same period last
year. Other operating costs include repair and maintenance, utilities,
insurance, marketing, real estate taxes, food, supplies, transportation,
recruitment and training. The increase was due primarily to higher marketing,
insurance, utilities, property taxes, travel and meeting costs, offset by
decreases in food, repair and maintenance, and transportation costs. As a
percentage of revenue, other operating costs increased to 26.4% as compared to
24.6% during the same period last year.
As a result of the foregoing, the Company had operating income of $2.0 million,
an increase from last year of $0.3 million.
EBITDA is defined as net income before non-cash restructuring charges,
extraordinary items, net interest costs, income taxes, depreciation and
amortization. EBITDA was $6.7 million for the period ended October 21, 2001, an
increase of $.01 million from the prior year. The increase in EBITDA is
principally due to increased revenues offset by higher other operating expenses
including insurance, marketing, summer activity costs and management meeting
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. In addition, the Company believes that
certain investors find EBITDA to be a useful tool for measuring the ability of
the Company to service its debt. EBITDA is not necessarily a measure of the
Company's ability to fund its cash needs.
Net interest expense decreased $0.9 million compared to the same period last
year. The decrease was principally due to lower interest rates and the
elimination of certain derivative investments held by the company during the
first quarter of last year offset by higher average borrowings under the
revolver. (See Item 3 for details on the elimination of certain derivative
investments held by the Company).
After adding back to pre-tax income permanent differences, the effective income
tax rate was approximately 41% for the current year compared to an effective
income tax rate of approximately 42.5% for last year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are from cash flows generated by
operations, borrowings on the revolving credit facility under the Credit
Agreement, and sale and leaseback financing for newly constructed schools and
capital contributions expected to be received from Parent in the amount of $11.6
million of convertible preferred stock to LPA pursuant to LPA's commitment. 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.
11
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 2002 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 20, 2001, there was $37.0 million outstanding on the term loan and $16.2
million outstanding on the Revolving Credit Facility. La Petite had outstanding
letters of credit in an aggregate amount equal to $7.8 million, and $1.0 million
was available for working capital purposes under the Revolving Credit Facility.
However as of October 20, 2001 the agent bank under the Credit agreement had
notified the Company that an event of default existed thereunder and that no
additional borrowings would be permitted (See Note 7). The Company's Credit
Agreement, Senior Notes and preferred stock contain certain covenants that limit
the ability of the Company to incur additional indebtedness, pay cash dividends
or make certain other restricted payments.
On November 14, 2001, Parent, La Petite and certain of its senior secured
lenders entered into an amendment to the Credit Agreement. The amendment waived
existing defaults of Parent and La Petite in connection with the failure to
satisfy certain financial covenants for the quarterly periods ended June 30,
2001 and September 30, 2001, and the failure to deliver timely financial
information to the senior secured lenders. Additionally, the amendment revised
certain financial covenant targets for fiscal years 2002, 2003 and 2004. The
Company expects to comply with the financial covenants contained in the Credit
Agreement, as amended, throughout fiscal year 2002. However, there can be no
assurance that the Company will be able to do so. The amendment also addressed
specific waivers necessary to permit the issuance of a new class of convertible
preferred stock of Parent. In consideration for the waiver and amendments,
Parent is required to issue additional equity equal to $15.0 million prior to
May 14, 2002, with $3.4 million to be issued prior to the effectiveness of the
amendment and an additional $0.825 million to be issued prior to December 31,
2001. Additionally, as part of the amendment, JPMP agreed to guaranty a portion
of the bank debt if LPA fails to satisfy its commitment to purchase the new
equity prior to May 14, 2002 or earlier if the bank debt has been accelerated.
The amount of such guaranty equals the amount of LPA's unfunded commitment to
purchase the new equity, as adjusted from time to time.
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 at that
time. 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.
Pursuant to a notice dated November 13, 2001, Parent offered all of its
stockholders the right to purchase up to their respective pro rata amount of a
newly created class of convertible preferred stock and warrants to purchase
common stock of Parent. The convertible preferred stock is junior to the
redeemable preferred stock of Parent in terms of dividends, distributions, and
rights upon liquidation. Up to $4.25 million of convertible preferred stock of
Parent and warrants to purchase 562,500 shares of common stock of Parent were
offered. Stockholders of Parent electing to participate in the offer were
required to commit to purchase a similar percentage of an additional aggregate
amount of convertible preferred stock equal to $10.75 million. At any time, or
from time to time, prior to May 14, 2002, as requested by Parent, the
stockholders of Parent participating in the preemptive rights offer are required
to purchase the balance of the convertible preferred stock being offered
thereby. All of the proceeds from the pre-emptive rights offer received by
Parent will be contributed to La Petite as common equity and will be used by La
Petite for general working capital and liquidity purposes.
Pursuant to the preemptive offer, on November 15, 2001 LPA acquired $3.4 million
of Parent's convertible preferred stock and received warrants to purchase
452,343 shares of common stock. The proceeds of that $3.4 million investment
were contributed to La Petite as common equity. In connection with such
purchase, the banks waived
12
their right under the Credit Agreement to require that the proceeds be used to
repay amounts outstanding under the Credit Agreement.
LPA also committed to purchase the balance of the $11.6 million of convertible
preferred stock being offered and not otherwise purchased by the other
stockholders of Parent. Prior to December 31, 2001, LPA is required to purchase
an amount of convertible preferred stock equal to the difference between $0.8
million and the value of the amount of the convertible preferred stock purchased
by other stockholders in connection with the preemptive offer. After December
31, 2001, the balance of the convertible preferred stock of Parent to be
purchased by LPA will, as applicable, be purchased at any time, or from time to
time, prior to May 14, 2002 at the request of Parent. If Parent has not
requested that LPA fund its commitment to purchase the balance of the
convertible preferred stock prior to May 14, 2002, LPA has the right to cause
Parent to issue the balance of the convertible preferred stock to LPA. After
giving effect to the investment on November 15, 2001, LPA beneficially owns
approximately 90.0% of Holdings' outstanding common stock on a fully diluted
basis.
In connection with the Amendment to the Credit Agreement and the $15.0 million
of committed capital, management is continuing to review plans and actions that
will enable the Company to improve future operations. However, there can be no
assurance that the Company will be able to do so.
Cash flows from operating activities were $1.7 million during the 16 weeks ended
October 20, 2001 as compared to cash flows from operating activities of $0.3
million during the same period in fiscal year 2001. The $1.4 million increase in
operating cash flow is principally due a $5.6 million increase in accounts
payable and other current liabilities, a $1.8 million decrease in accounts
receivable and a $1.3 million change in other assets and liabilities, offset by
a $5.6 million increase in prepaid expenses and supplies, a $1.1 million
increase in deferred taxes and a decrease in accrued interest of $1.0 million.
Cash flows used for investing activities were $2.6 million during the 16 weeks
ended October 20, 2001, as compared to cash flows used of $1.7 million during
the 16 weeks ended October 21, 2000. The $0.8 million increase in cash flows
used for investing activities was principally due to an increase of $0.6 million
for maintenance and development.
Cash flows from financing activities were $1.2 million during the 16 weeks ended
October 20, 2001, compared to cash flows from financing activities of $0.6
million during the same period of fiscal year 2001. The $0.6 million increase in
cash flows from financing activities was principally due to a $3.1 million
decrease in restricted cash investments; a decrease in debt and capital lease
payments of $0.3 million, offset by an decrease in borrowings on the revolver.
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 Company opened four new corporate sites and two school additions during the
16 weeks ended October 20, 2001. 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 October 20, 2001, the Company had $2.5 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 20, 2001 and October
21, 2000, were $2.6 million, and $1.7 million, respectively. The increase in
total capital expenditures is a result of increased spending on the maintenance
and 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
13
capital expenditures for the 16 weeks ended October 20, 2001 and October 21,
2000 were $2.3 million and $1.9 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 20, 2001 and October 21, 2000, were $3.7
million and $4.0 million, respectively.
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 $37.0 million at October 20, 2001 and the revolving credit
facility under the Credit Agreement 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") not to be less than an amount equal to
2.50% per annum, 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 amortizes in an amount equal to $1.0 million in fiscal year 2002 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 in amounts equal to 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 essentially 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 counter party to terminate the interest rate swap on the Senior Notes. The
termination agreement required the Company to pay the counter party $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 is
recognized as an adjustment to interest expense. As of October 20, 2001, the
notional value of such derivatives was $18.5 million.
A 1% increase in the applicable index rate, after giving effect to the interest
rate collar, would result in an interest expense increase of $0.3 million per
year. A 1% decrease in the applicable index rate, after giving effect to the
interest rate collars, would result in an interest expense decrease of $0.3
million per year.
******
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PART II - OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS.
The Company has litigation pending which arose in the ordinary course of
business. In management's opinion, none of such litigation in which the Company
is currently involved will result in liabilities that will have a material
adverse effect on its financial condition or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits required by Item 601 of Regulation S-K:
None
b. Reports on Form 8-K:
On September 4, 2001 the Company filed a current report on Form 8-K
reporting that it was in default under its Credit Agreement and
announcing its preliminary results for the fiscal year ended June 30,
2001.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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SIGNATURE
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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, 2001 /s/ Jeffrey J. Fletcher
------------------------
By: Jeffrey J. Fletcher
Chief Financial Officer and duly
authorized representative of the registrant
16
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, 2001 /s/ Jeffrey J. Fletcher
------------------------
By: Jeffrey J. Fletcher
Chief Financial Officer and duly authorized
representative of the registrant
17