UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
AMENDMENT NO. 1
TO
FORM 10-Q/A
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 12, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File No. 333-56239-01
LPA HOLDING CORP.
(exact name of registrant as specified in its charter)
SEE TABLE OF ADDITIONAL REGISTRANTS
Delaware 48-1144353
(State or other jurisdiction of (IRS employer identification number)
incorporation or organization)
8717 WEST 110TH STREET, SUITE 300
OVERLAND PARK, KS 66210
(Address of principal executive office and zip code)
(913) 345-1250
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of February 26, 2002, LPA Holding Corp. had outstanding 564,985 shares of
Class A Common Stock (par value, $.01 per share) and 20,000 shares of Class B
Common Stock (par value, $.01 per share). As of February 26, 2002, the
additional registrant had the number of outstanding shares, shown on the
following table.
ADDITIONAL REGISTRANTS
<Table>
<Caption>
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)
</Table>
2
EXPLANATORY NOTE
LPA Holding Corp. and La Petite Academy (the "Registrants") are filing this
Amendment No. 1 on Form 10-Q/A (the "Amendment No. 1") in response to comments
received from the Securities and Exchange Commission (the "SEC") regarding the
Registrants' Form 10-K for the fiscal year ended June 30, 2001 that was
originally filed on November 30, 2001 and the subsequent periodic reports filed
by the Registrants, including the Registrants' Form 10-Q for the quarterly
period ended January 12, 2002 that was originally filed on February 26, 2002
(the "Original 10-Q Filing"). This Amendment No. 1 is being filed in response to
the SEC's comments received in connection with a review of the Registrants'
Original 10-Q Filing, including management determining, subsequent to the
Original 10-Q Filing that it had incorrectly accounted for the transition
adjustment related to certain derivative interest rate instruments in connection
with the adoption of Statement of Financial Accounting Standards No. 133,
Accounting For Derivative Financial Instruments and Hedging Activities ("SFAS
No. 133") on July 2, 2000. Accordingly, this Amendment No. 1 reflects the
following:
(1) the restatement of the Registrants' unaudited condensed consolidated
financial statements for the 12 week and 28 week periods ended January 12, 2002
and January 31, 2001 contained in Item 1 related to the transition adjustment
recorded upon the adoption of SFAS No. 133 (as described more fully in Note 9 to
the unaudited condensed consolidated financial statements); and
(2) the corresponding disclosures related to such restatement in Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
For the convenience of the reader, this Amendment No. 1 amends and restates in
its entirety the Original 10-Q Filing, as amended by this Amendment No. 1. This
Amendment No. 1 continues to speak as of the date of the Original 10-Q Filing,
and the Registrants have not updated the disclosure contained herein to reflect
any events that occurred at a later date. All information contained in this
Amendment No. 1 is subject to updating and supplementing as provided in the
Registrants' periodic reports filed with the SEC subsequent to the date of the
Original 10-Q Filing.
3
LPA HOLDING CORP. AND SUBSIDIARIES
INDEX
<Table>
<Caption>
PART I. FINANCIAL INFORMATION
PAGE
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED):
Condensed Consolidated Balance Sheets 5-6
Condensed Consolidated Statements of Operations and Comprehensive Operations 7
Condensed Consolidated Statements of Cash Flows 8
Notes to Condensed Consolidated Financial Statements 9-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13-18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18-19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 21-22
</Table>
4
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
LPA HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands of dollars, except share and per share data)
- --------------------------------------------------------------------------------
<Table>
<Caption>
JANUARY 12, 2002 JUNE 30, 2001
AS RESTATED,
ASSETS SEE NOTE 9
Current assets:
Cash and cash equivalents $ 5,055 $ 5,078
Restricted cash investments 1,730 91
Accounts and notes receivable (net of allowance for doubtful accounts
of $699 and $537, respectively) 10,866 9,920
Prepaid supplies and expenses 13,190 9,821
Other current assets 919 55
--------- --------
Total current assets 31,760 24,965
Property and equipment (net of accumulated depreciation of $51,844
and $46,278, respectively) 54,903 59,024
Intangible assets (net of accumulated amortization of $20,877 and
$19,356, respectively) 54,841 56,361
Other assets 9,028 8,747
Deferred income taxes 18,689 16,633
--------- --------
$169,221 $165,730
========= ========
</Table>
(Continued)
5
LPA HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands of dollars, except share and per share data)
- --------------------------------------------------------------------------------
<Table>
<Caption>
LIABILITIES AND STOCKHOLDERS' DEFICIT JANUARY 12, 2002 JUNE 30, 2001
AS RESTATED,
SEE NOTE 9
Current liabilities:
Overdrafts due banks $ 6,648 $ 5,925
Accounts payable 4,589 5,707
Other current liabilities (Note 3) 34,705 34,385
---------- ----------
Total current liabilities 45,942 46,017
Long-term debt and capital lease obligations (Note 4) 196,741 192,394
Other long-term liabilities 5,240 7,060
Series A 12% redeemable preferred stock ($.01 par value per share);
45,000 shares authorized, issued and outstanding as of
January 12, 2002 and June 30, 2001; aggregate liquidation
preference of $65.2 million and $61.2 million, respectively 59,363 54,941
Series B 5% convertible redeemable participating preferred stock
($.01 par value per share); 6,900,000 shares authorized, 2,644,865 issued
and outstanding as of January 12, 2002; aggregate liquidation preference of
$5.8 million, and no shares authorized, issued and outstanding as of June
30, 2001 4,586
Commitments and contingencies (Note 5)
Stockholders' deficit:
Class A Common Stock ($.01 par value per share); 14,980,000 and
950,000 shares authorized and 564,985 issued and outstanding as
of January 12, 2002 and June 30, 2001, respectively 6 6
Class B Common stock ($.01 par value per share); 20,000 shares authorized,
issued and outstanding as of January 12, 2002 and June 30, 2001,
respectively
Common stock warrants 9,819 8,596
Accumulated other comprehensive income 287 331
Accumulated deficit (152,763) (143,615)
---------- ----------
Total stockholders' deficit (142,651) (134,682)
---------- ----------
$ 169,221 $ 165,730
========== ==========
</Table>
(Concluded)
See notes to condensed consolidated financial statements.
6
LPA HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
(In thousands of dollars)
- --------------------------------------------------------------------------------
<Table>
<Caption>
12 WEEKS ENDED 28 WEEKS ENDED
---------------------------------------------------------------------------
JANUARY 12, JANUARY 13, JANUARY 12, JANUARY 13,
2002 2001 2002 2001
AS RESTATED, AS RESTATED, AS RESTATED, AS RESTATED,
SEE NOTE 9 SEE NOTE 9 SEE NOTE 9 SEE NOTE 9
Operating revenues $ 85,719 $ 84,861 $ 203,026 $ 199,135
Operating expenses:
Salaries, wages and benefits 47,173 48,028 112,212 113,039
Facility lease expense 10,597 10,213 24,582 23,902
Depreciation and amortization 3,462 3,564 8,050 8,362
Provision for doubtful accounts 663 1,117 1,545 2,005
Other 20,793 20,061 51,578 48,180
---------- ---------- ---------- ---------
Total operating expenses 82,688 82,983 197,967 195,488
---------- ---------- ---------- ---------
Operating income 3,031 1,878 5,059 3,647
Interest income (16) (20) (101) (48)
Interest expense 4,992 3,044 11,993 10,484
---------- ---------- ---------- ---------
Loss before income taxes (1,945) (1,146) (6,833) (6,789)
Benefit for income taxes (513) (210) (2,165) (2,293)
---------- ---------- ---------- ---------
Net loss (1,432) (936) (4,668) (4,496)
---------- ---------- ---------- ---------
Other comprehensive income (loss):
Other comprehensive income 492
Reclassification into operations (19) (48) (45) (112)
---------- ---------- ---------- ---------
Total other comprehensive income (loss) (19) (48) (45) 380
---------- ---------- ---------- ---------
Comprehensive loss $ (1,451) $ (984) $ (4,713) $ (4,116)
========== ========== ========== =========
</Table>
See notes to condensed consolidated financial statements.
7
LPA HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands of dollars)
- --------------------------------------------------------------------------------
<Table>
<Caption>
28 WEEKS ENDED
------------------------------------
JANUARY 12, JANUARY 13,
2002 2001
AS RESTATED, AS RESTATED,
SEE NOTE 9 SEE NOTE 9
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,668) $ (4,496)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of transition adjustment into operations 599 462
Depreciation and amortization 8,584 8,960
Deferred income taxes (4,542) (1,898)
Changes in operating assets and liabilities:
Accounts and notes receivable (946) (2,122)
Prepaid supplies and expenses (3,369) 1,456
Accrued property and sales taxes (695) (791)
Accrued interest payable 535 1,014
Accounts payable and other current liabilities (142) (1,687)
Other changes in assets and liabilities, net 52 (4,235)
----------- ----------
Net cash used in operating activities (4,592) (3,337)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (3,052) (7,257)
Proceeds from sale of assets 350 186
----------- ----------
Net cash used in investing activities (2,702) (7,071)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt and capital lease obligations (677) (1,152)
Proceeds from issuance of preferred stock, net of costs 4,700
Borrowings under the Revolving Credit Agreement 4,164 15,000
Increase (reduction) in overdrafts due banks 723 (174)
Increase in restricted cash investments (1,639) (3,528)
----------- ----------
Net cash provided by financing activities 7,271 10,146
----------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (23) (262)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,078 4,008
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,055 $ 3,746
=========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 11,690 $ 10,615
Income taxes 118 113
Cash received during the period for:
Interest $ 101 $ 54
Income taxes 19
</Table>
See notes to condensed consolidated financial statements.
8
LPA HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED 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 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.
La Petite is owned by LPA Holding Corp. (Parent). Parent, consolidated with
La Petite, Bright Start and Services, is referred to herein as the Company.
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
Series A redeemable preferred stock (Series A) 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.
Pursuant to a pre-emptive offer 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 Series B convertible redeemable
participating preferred stock (Series B) and warrants to purchase common
stock of Parent. The Series B preferred stock is junior to the Series A
preferred stock of Parent in terms of dividends, distributions, and rights
upon liquidation. Up to $4.25 million of Series B 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 Series B preferred stock equal to $10.75 million.
Pursuant to the pre-emptive offer, Parent issued $3.4 million of Series B
preferred stock and 452,343 warrants on November 15, 2001. On December 21,
2001, Parent issued an additional $2.3 million of Series B preferred stock
and 110,158 warrants. At any time, or from time to time, prior to May 14,
2002, as requested by Parent, LPA and the stockholders who accepted
Parent's pre-emptive rights offer are required to purchase an additional
$9.3 million of Series B preferred stock of Parent. All of the proceeds
received by Parent from the sale of Series B preferred stock and warrants
have been and will be contributed to La Petite as common equity and will be
used by La Petite for general working capital and liquidity purposes (See
Note 7).
After giving effect to investments on November 15, 2001 and December 21,
2001, LPA beneficially owns approximately 92.5% of the common stock of
Parent on a fully diluted basis. 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.
As of January 12, 2002, the Company operated 721 Academies including 656
residential Academies, 33 employer-based Academies and 32 Montessori
schools located in 36 states and the District of Columbia. For the 12 weeks
ended January 12, 2002, 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 condensed
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.
9
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/A 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, including amounts recorded in
interest expense and income taxes related to the implementation of
Statement of Financial Accounting Standards No. 133 (SFAS No.133).
3 OTHER CURRENT LIABILITIES
(in thousands of dollars)
<Table>
<Caption>
JANUARY 12, JUNE 30,
2002 2001
----------- ---------
Current reserve for closed academies $ 2,504 $ 3,100
Current maturities of long-term debt and capital lease
obligations 1,056 1,255
Accrued salaries, wages and other payroll costs 14,923 15,495
Accrued insurance liabilities 2,624 2,359
Accrued property and sales taxes 2,673 3,368
Accrued interest payable 3,022 2,487
Other current liabilities 7,903 4,692
Current deferred income taxes 1,629
--------- ---------
$ 34,705 $ 34,385
========= =========
</Table>
4 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
(in thousands of dollars)
<Table>
<Caption>
JANUARY 12, JUNE 30,
2002 2001
----------- ---------
Senior Notes, 10.0% due May 15, 2008, net of discount $143,397 $142,746
Borrowings under credit agreement 53,914 50,250
Capital lease obligations 486 653
--------- ---------
197,797 193,649
Less current maturities of long-term debt and capital lease
obligations (1,056) (1,255)
--------- ---------
$196,741 $192,394
========= =========
</Table>
10
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
operations.
6. NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statements 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.
7. ISSUANCE OF SERIES B PREFERRED STOCK
Effective November 14, 2001, Parent, La Petite and certain of the 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 redeemable preferred stock of Parent. In
consideration for the waiver and amendments, Parent is required to issue
additional equity of $15.0 million prior to May 14, 2002. 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.
On November 14, 2001, Parent and LPA entered into a Purchase Agreement (the
"Purchase Agreement"). Pursuant to the Purchase Agreement, Parent offered
all of its stockholders the right to purchase up to their respective pro
rata amount of a newly created class of Series B convertible redeemable
preferred stock and warrants to purchase shares of Class A Common Stock. On
November 15, 2001, LPA acquired $3.4 million of Series B preferred stock
and 452,343 warrants of Parent. On December 21, 2001, LPA and the
stockholders who accepted the Parent's pre-emptive rights offer
collectively acquired an additional $2.3 million of Series B preferred
stock and 110,158 warrants of Parent. At any time, or from time to time,
prior to May 14, 2002, as requested by Parent, LPA and the stockholders who
accepted Parent's preemptive rights offer are required to purchase an
additional $9.3 million of Series B preferred stock of Parent. The Series B
preferred stock is junior to the Series A preferred stock of Parent in
terms of dividends, distributions, and rights upon liquidation. All of the
proceeds received by Parent from the sale of Series B preferred stock and
warrants have been and will be contributed to La Petite as common equity
and will be used by La Petite for general working capital and liquidity
purposes.
In connection with the above purchases (including the purchases with
respect to the capital commitments), the banks waived their right under the
Credit Agreement to require that the proceeds be used to repay amounts
outstanding under the Credit Agreement. After giving effect to its
investments on November 15, 2001 and
11
December 21, 2001, LPA beneficially owns approximately 92.5% of Parent's
outstanding common stock on a fully diluted basis.
In connection with the Amendment to the Credit Agreement, the $5.7 million
of investment's in 2001 and the $9.3 million of additional 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.
8. SUBSEQUENT EVENT
On December 19, 2001 the interest rate collar agreement on the term loan
was terminated effective as of January 28, 2002. Pursuant to the
termination, the Company was paid the counter party $0.7 million in
satisfaction of an accrued mark-to-market obligation under the interest
rate collar agreement. With the termination of the interest rate collar on
the term loan, the Company has no remaining derivative instruments.
9. RESTATEMENT
Subsequent to the issuance of the Company's fiscal 2001 financial
statements, the Company's management determined that it had incorrectly
accounted for the transition adjustment related to certain derivative
interest rate instruments in connection with the adoption of SFAS No. 133
on July 2, 2000. As a result, the accompanying condensed consolidated
financial statements for the 12 and 28 week periods ended January 12, 2002
and January 13, 2001 have been restated from the amounts previously
reported. A summary of the significant effects of the restatement is as
follows:
<Table>
<Caption>
As previously As
As of January 12, 2002: reported restated
----------------------- -------------- -----------
Noncurrent deferred income taxes $ 18,067 $ 18,689
Long-term debt and capital lease 198,344 196,741
obligations
Other comprehensive income 295 287
Accumulated deficit (154,996) (152,763)
</Table>
<Table>
<Caption>
For the 12 weeks ended: January 12, 2002 January 13, 2001
----------------------- -------------------------------- ----------------------------------
As previously As As previously As
reported restated reported restated
-------------- -------- -------------- -----------
Interest expense $ 4,719 $ 4,992 $ 2,846 $ 3,044
Loss before income taxes (1,672) (1,945) (948) (1,146)
Benefit for income taxes (402) (513) (130) (210)
Net loss (1,270) (1,432) (818) (936)
Comprehensive loss (1,254) (1,451) (984)
<Caption>
For the 28 weeks ended: January 12, 2002 January 13, 2001
----------------------- --------------------------------- --------------------------------
As previously As As previously As
reported restated reported restated
---------------- --------- -------------- ---------
Interest expense $ 11,357 $ 11,993 $ 12,656 $ 10,484
Loss before income taxes (6,197) (6,833) (8,961) (6,789)
Benefit for income taxes (1,907) (2,165) (3,175) (2,293)
Net loss (4,290) (4,668) (5,786) (4,496)
Comprehensive loss (4,253) (4,713) (4,116)
</Table>
12
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
condensed consolidated financial statements and the related notes thereto
included elsewhere in this document. The Management's Discussion and Analysis of
Financial Condition and Results of Operations presented below reflects certain
restatements to previously reported results of operations for these periods. See
Note 9 to the unaudited condensed consolidated financial statements for further
discussion of this matter.
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 721 schools at the end of the second quarter of fiscal year
2002 as compared to 749 schools for the same period of fiscal year 2001. The net
decrease of 28 schools is a result of 38 closures and 10 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 12 weeks ended January 12,
2002 and January 13, 2001 were as follows (in thousands of dollars):
<Table>
<Caption>
12 WEEKS ENDED
-----------------------------------------------------------------------
JANUARY PERCENT JANUARY PERCENT CHANGE
12, OF 13, OF AMOUNT
2002 REVENUE 2001 REVENUE INC(DEC)
------------- ------------- ------------- ----------- ----------
Operating revenues $ 85,719 100.0% $ 84,861 100.0% $ 858
Operating expenses:
Salaries, wages and benefits 47,173 55.0 48,028 56.6 (855)
Facility lease expense 10,597 12.4 10,213 12.0 384
Depreciation and amortization 3,462 4.0 3,564 4.2 (102)
Provision for doubtful accounts 663 0.8 1,117 1.3 (454)
Other 20,793 24.3 20,061 23.7 732
-------- ------ -------- ----- ------
Total operating expenses 82,688 96.5 82,983 97.8 (295)
-------- ------ -------- ----- ------
Operating income $ 3,031 3.5% $ 1,878 2.2% $1,153
======== ====== ======== ===== ======
</Table>
Operating revenue increased $0.9 million or 1.0% from the same period
last year. This revenue increase is a result of a $1.9 million increase at
established academies, a $1.0 million increase at new academies, and a $0.2
million increase in other revenue, offset by a reduction in revenue from closed
academies of $2.2 million. The revenue increase is principally due to a 7.3%
increase in the average weekly FTE tuition rate offset by a decline in the FTE
attendance of 6.1%. The increase in the average weekly FTE tuition rate was
principally due to selective price
13
increases that were put into 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 4.0% decline at our established schools (schools which
were open prior to the 2000 year) and a 98.7% decline at closed schools, offset
by a 35.2% increase at our new schools.
Salaries, wages, and benefits decreased $0.9 million or 1.8% from the same
period last year. As a percentage of revenue, labor costs decreased to 55.0%
from 56.6% in the prior year. The changes in salaries, wages, and benefits
includes a decrease in labor costs of $0.2 million at established academies, an
increase in labor costs of $0.6 million at new academies, a decrease in field
management and corporate administration labor costs of $0.1 million, increased
costs for benefits of $0.3 million, and a decrease in labor costs of $1.5
million at closed academies. The decrease in labor costs at established schools
was mainly due to a 5.0% increase in average hourly wage rates offset by a 6.7%
decline in labor hours compared to the prior year.
Facility lease expense increased $0.4 million or 3.8% from the same period last
year. This increase was principally due to lease renewals on certain academies
which were completed during the spring and summer of last year.
Depreciation and amortization decreased $0.1 million from the same period last
year. This decrease was mainly due to the closings that occurred in fiscal year
2001.
Provision for doubtful accounts decreased $0.5 million from the same period last
year. The decrease is reflective of reductions in parent receivables offset
somewhat by increases in third party receivables.
Other operating costs increased $0.7 million or 3.6% 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, repair and maintenance, utilities, and meeting costs, offset by
decreases in food, supplies, and recruitment and training costs. As a percentage
of revenue, other operating costs increased to 24.3% as compared to 23.6% during
the same period last year.
As a result of the foregoing, the Company had operating income of $3.0 million,
an increase from last year of $1.2 million or 61.4%.
Interest expense increased $1.9 million compared to the same period last year.
The increase was principally due to prior year mark-to-market adjustments for
certain derivative investments held by the Company and higher average borrowings
under the revolver, offset by lower interest rates. (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 40% for the current year compared to an effective
income tax rate of approximately 41% for last year.
14
The Company's operating results for the comparative 28 weeks ended January 12,
2002 and January 13, 2001 were as follows (in thousands of dollars):
<Table>
<Caption>
28 WEEKS ENDED
--------------------------------------------------------------------------
JANUARY PERCENT JANUARY PERCENT CHANGE
12, OF 13, OF AMOUNT
2002 REVENUE 2001 REVENUE INC(DEC)
---------- ------------ --------- ----------- ---------
Operating revenues $ 203,026 100.0% $199,135 100.0% $ 3,891
Operating expenses:
Salaries, wages and benefits 112,212 55.3 113,039 56.8 (827)
Facility lease expense 24,582 12.2 23,902 12.0 680
Depreciation and amortization 8,050 4.0 8,362 4.2 (312)
Provision for doubtful accounts 1,545 0.8 2,005 1.0 (460)
Other 51,578 25.4 48,180 24.2 3,398
--------- ----- -------- ----- -------
Total operating expenses 197,967 97.7 95,488 98.2 2,479
--------- ----- -------- ----- -------
Operating income $ 5,059 2.5% $ 3,647 1.8% $ 1,412
========= ===== ======== ===== =======
</Table>
Operating revenue increased $3.9 million or 2.0% from the same period last year.
This revenue increase is a result of a $7.4 million increase at established
academies, and a $2.0 million increase at new academies, offset by a reduction
in revenue from closed academies of $5.3 million and a $0.2 million decrease in
other revenue. The revenue is principally due to a 7.7% increase in the average
weekly FTE tuition rate offset by a decline in the FTE attendance of 5.2%. The
increase in the average weekly FTE tuition rate was principally due to selective
price increases that were put into 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 2.9% decline at our established schools
(schools which were open prior to the 2000 year) and a 89.0% decline in closed
schools, offset by a 28.0% increase at our new schools.
Salaries, wages, and benefits decreased $0.8 million or 0.7% from the same
period last year. As a percentage of revenue, labor costs decreased to 55.3%
from 56.8% in the prior year. The changes in salaries, wages, and benefits
includes an increase in labor costs of $1.3 million at established academies, an
increase in labor costs of $1.1 million at new academies, a decline in field
management costs, field bonuses and corporate administration labor costs of $0.3
million, increased costs for benefits of $0.3 million, and an incremental
decline in labor costs of $3.2 million at closed academies. The increase in
labor costs at established schools was mainly due to a 5.5% increase in average
hourly wage rates offset by a 4.9% decline in labor hours compared to the prior
year.
Facility lease expense increased $0.7 million or 2.8% from the same period last
year. This increase was principally due to the increase of monthly lease expense
on certain academies where operating performance payments were eliminated.
Depreciation and amortization decreased $0.3 million from the same period last
year. This decrease was mainly due to the closings that occurred in fiscal year
2001.
Provision for doubtful accounts decreased $0.5 million from the same period last
year. The decrease is reflective of reductions in parent receivables offset
somewhat by increases in third party receivables.
Other operating costs increased $3.4 million or 7.1% 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, recruitment and training, and
transportation
15
costs. As a percentage of revenue, other operating costs increased to 25.4% as
compared to 24.2% during the same period last year.
As a result of the foregoing, the Company had operating income of $5.1 million,
an increase from last year of $1.4 million or 38.7%.
Interest expense increased $1.5 million compared to the same period last year.
The increase was principally due to prior year mark-to-market adjustments for
certain derivative investments held by the Company and higher average borrowings
under the revolver, offset by lower interest rates.. (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% for last year.
EBITDA
EBITDA is being presented because management believes that certain investors
find EBITDA to be a useful tool for measuring the Company's ability to service
its debt. In addition, EBITDA is being presented because it is an important
measure that is used in the calculation of the covenants under the Company's
indenture and Credit Agreement. However, EBITDA is not necessarily a measure of
the Company's ability to fund its cash needs and should not be construed as
being more important than the GAAP financial information disclosed under
"-Results of Operations." EBITDA is not calculated under GAAP and therefore it
is not necessarily comparable to similarly titled measures reported by other
companies.
EBITDA is defined as income before non-cash restructuring charges, extraordinary
items, net interest costs, income taxes, depreciation and amortization. EBITDA
was $6.5 million for the 12 weeks and $13.1 million for the 28 weeks ended
January 12, 2002 as compared to $5.4 million and $12.0 million for the same
periods of fiscal year 2001. EBITDA as a percentage of revenue improved to 7.6%
in the second quarter of fiscal 2002 as compared to 6.4% in the second quarter
of fiscal 2001. The increase in EBITDA in the second quarter of fiscal 2002 is
principally due to increased revenues, reduced labor costs and a reduction in
the provision for doubtful accounts, offset by higher other operating expenses
including marketing, insurance, utilities, property taxes, travel and meeting
costs.
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, sale and leaseback financing for newly constructed schools and
capital contributions expected to be received from Parent in the amount of $9.3
million of convertible preferred stock pursuant to the capital commitment of LPA
and the other stockholders of Parent who have exercised their pre-emptive
rights. The Company's principal uses of liquidity are to meet its debt service
requirements, finance its capital expenditures and provide working capital. The
Company incurred substantial indebtedness in connection with the
Recapitalization.
Parent and La Petite have entered into the Credit Agreement, as amended,
consisting of the $40 million Term Loan Facility and the $25 million Revolving
Credit Facility. Parent and La Petite borrowed the entire $40 million available
under the Term Loan Facility in connection with the Recapitalization. The
borrowings under the Credit Agreement, together with the proceeds from the sale
of the Senior Notes and the Equity Investment, were used to consummate the
Recapitalization and to pay the related fees and expenses.
The Credit Agreement will terminate on May 11, 2005. The term loan amortizes in
an amount equal to $0.5 million in the remainder of fiscal year 2002, $1.0
million in fiscal year 2003, $7.8 million in fiscal year 2004, and $27.5 million
in fiscal year 2005. The term loan is also subject to mandatory prepayment in
the event of certain equity or debt issuances or asset sales by the Company or
any of its subsidiaries and in amounts equal to specified percentages of excess
cash flow (as defined). On January 12, 2002, there was $36.8 million outstanding
on the term loan and
16
$17.2 million outstanding on the Revolving Credit Facility. La Petite had
outstanding letters of credit in an aggregate amount equal to $7.8 million, and
no additional funds were available for borrowing 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, pay cash dividends or make certain other restricted
payments.
Effective 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 Series B
convertible preferred stock of Parent. In consideration for the waiver and
amendments, Parent was required to issue additional equity equal to $15.0
million prior to May 14, 2002. 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 November 14, 2001, Parent and LPA entered into a Purchase Agreement. Pursuant
to the Purchase Agreement, 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 shares of Class A Common
Stock of Parent. On November 15, 2001, LPA acquired $3.4 million of convertible
preferred stock and 452,343 warrants of Parent. On December 21, 2001, LPA and
the stockholders who accepted Parent's pre-emptive rights offer collectively
acquired $2.3 million of convertible preferred stock and 110,158 warrants of
Parent. At any time, or from time to time, prior to May 14, 2002, as requested
by Parent, LPA and the other stockholders of Parent participating in the
pre-emptive rights offer are required to purchase an additional $9.3 million of
convertible preferred stock. If Parent has not requested that LPA and the
participating stockholders fund their 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 and such
stockholders. All of the proceeds received by Parent from the sale of the
convertible preferred stock and warrants have been and will be contributed to La
Petite as common equity and will be used by La Petite for general working
capital and liquidity purposes.
In connection with the above purchases (including the purchase with respect to
the capital commitments), the banks waived their right under the Credit
Agreement to require that the proceeds be used to repay amounts outstanding
under the Credit Agreement. After giving effect to its investments on November
15, 2001, and December 21, 2001, LPA beneficially owns approximately 92.5% of
Holdings' outstanding common stock on a fully diluted basis.
In connection with the Amendment to the Credit Agreement, the $5.7 million of
investments in 2001 and the $9.3 million of additional 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 used for operating activities were $4.6 million during the 28 weeks
ended January 12, 2002 as compared to cash flows used for operating activities
of $3.3 million during the same period in fiscal year 2001. The $1.3 million
decrease in operating cash flow is principally due to a $4.0 million timing
difference in prepaid rent at the end of fiscal year 2001 versus fiscal year
2000, a $2.6 million change in deferred income taxes, a $0.5 million increase in
prepaid food and supplies, a $0.5 million decease in accrued interest expense, a
$0.4 million decrease in depreciation and amortization and a $0.2 million
increase in net loss, offset by a $1.2 million decrease in accounts and notes
receivable, a $1.5 million increase in accounts payable, and a $4.3 million
change in other assets and liabilities.
Cash flows used for investing activities were $2.7 million during the 28 weeks
ended January 12, 2002, as compared to cash flows used of $7.1 million during
the same period in fiscal year 2001. The $4.4 million decrease in cash flows
used for investing activities was principally due to a decrease of $3.8 million
for maintenance capital expenditures.
17
Cash flows from financing activities were $7.3 million during the 28 weeks ended
January 12, 2002, compared to cash flows from financing activities of $10.1
million during the same period of fiscal year 2001. The $2.8 million decrease in
cash flows from financing activities was principally due to a $10.8 million
decrease in borrowings on the revolver, offset by $4.7 million in proceeds, net
of costs, from the issuance of preferred stock, a $1.9 million decrease in
restricted cash investments; a decrease in debt and capital lease payments of
$0.5 million, and a $0.9 million increase in overdrafts due banks. Restricted
cash investments represents cash deposited in escrow accounts to be utilized for
the expected claim payout under the Company's workers compensation insurance
coverage.
The cost to open a new school ranges from $1.0 million to $1.5 million, of which
approximately 85% is typically financed through a sale and leaseback
transaction. Alternatively, the school may be constructed on a build to suit
basis, which reduces the working capital requirements during the construction
process. The Company intends to explore other efficient real estate financing
transactions in the future as needed. As of January 12, 2002, the Company had
$1.5 million invested in new school development. No new schools were opened in
the second quarter of fiscal year 2002.
Purchasers of schools in sale and leaseback transactions have included insurance
companies, bank trust departments, pension funds, real estate investment trusts
and individuals. The leases are operating leases and generally have terms of 15
to 20 years with one or two five-year renewal options. Most of these
transactions are structured with an annual rental designed to provide the
owner/lessor with a fixed cash return on their capitalized cost over the term of
the lease. In addition, many of the Company's leases provide for contingent
rentals if the school's operating revenue exceeds certain levels. Although the
Company expects sale and leaseback transactions to continue to finance its
expansion, no assurance can be given that such funding will always be available.
Total capital expenditures for the 28 weeks ended January 12, 2002 and January
13, 2001, were $3.1 million, and $7.3 million, respectively. The decrease in
total capital expenditures is a result of reduced spending on maintenance
capital expenditures. 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 accounted for
all of the capital expenditures for the 12 weeks ended January 12, 2002 and
January 13, 2001.
In addition to maintenance capital expenditures, the Company expends additional
funds to ensure that its facilities are in good working condition. Such funds
are expensed in the periods in which they are incurred. The amounts of such
expenses for the 28 weeks ended January 12, 2002 and January 13, 2001, were $6.4
million and $6.6 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 $36.7 million at January 12, 2002 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 $0.5 million in the remainder of fiscal
year 2002, $1.0 million in fiscal year 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%. The interest rate collar agreements were terminated on January 28, 2002.
(See Note 8)
18
To reduce interest expense on the $145 million Senior Notes, the Company entered
into an interest rate swap transaction and an interest rate 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 interest rate 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 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 January 12, 2002, the
notional value of such derivatives was $18.4 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 $0.2 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 $0.5
million per year.
******
19
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS.
The Company has litigation pending which arose in the ordinary course of
business. In management's opinion, none of such litigation in which the Company
is currently involved will result in liabilities that will have a material
adverse effect on its financial condition or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits required by Item 601 of Regulation S-K:
None
b. Reports on Form 8-K:
On November 16, 2001, the Company filed a Current Report on Form 8-K reporting
that it had entered into an amendment and waiver to its credit agreement and
that LPA had acquired $3.4 million of Series B convertible preferred stock and
warrants of Parent.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
20
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 April 18, 2002 /s/ Michael L. Goldberg
-------------------------------------
By: Michael L. Goldberg
Chief Financial Officer and duly authorized
representative of the registrant
21
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 April 18, 2002 /s/ Michael L. Goldberg
--------------------------------------
By: Michael L. Goldberg
Chief Financial Officer and duly authorized
representative of the registrant
22