UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 6, 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 May 20, 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 May 20, 2002, 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
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
PAGE
----
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED):
Condensed Consolidated Balance Sheets 4-5
Condensed Consolidated Statements of Operations and Comprehensive Operations 6
Condensed Consolidated Statements of Cash Flows 7
Notes to Condensed Consolidated Financial Statements 8-12
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
3
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)
- --------------------------------------------------------------------------------
ASSETS APRIL 6, JUNE 30,
2002 2001
Current assets
Cash and cash equivalents $ 11,634 $ 5,078
Restricted cash investments 2,864 91
Accounts and notes receivable
(net of allowance for doubtful accounts
of $787 and $537, respectively) 11,578 9,920
Prepaid supplies and expenses 13,318 9,821
Other current assets 863 55
-------- --------
Total current assets 40,257 24,965
Property and equipment (net of accumulated
depreciation of $54,429 and $46,278, respectively) 53,345 59,024
Intangible assets (net of accumulated amortization
of $21,493 and $19,356, respectively) 54,225 56,361
Other assets 9,066 8,747
Deferred income taxes 15,256 16,633
-------- --------
$172,149 $165,730
======== ========
(Continued)
4
LPA HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT APRIL 6, JUNE 30,
2002 2001
Current liabilities:
Overdrafts due banks $ 6,719 $ 5,925
Accounts payable 5,022 5,707
Other current liabilities (Note 3) 36,631 34,385
--------- ---------
Total current liabilities 48,372 46,017
Long-term debt and capital lease obligations (Note 4) 196,725 192,394
Other long-term liabilities 5,824 7,060
Series A 12% redeemable preferred stock ($.01 par value per share);
45,000 shares authorized, issued and outstanding as of
April 6, 2002 and June 30, 2001; aggregate liquidation
preference of $66.7 million and $61.2 million, respectively 61,380 54,941
Series B 5% convertible redeemable participating preferred stock
($.01 par value per share); 6,900,000 shares authorized, 2,644,865
issued and outstanding as of April 6, 2002; aggregate liquidation
preference of $5.9 million, and no shares authorized, issued and
outstanding as of June 30, 2001 4,689
Commitments and contingencies (Note 5)
Stockholders' deficit:
Class A Common Stock ($.01 par value per share); 14,980,000 and
950,000 shares authorized and 564,985 issued and outstanding as
of April 6, 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 April 6, 2002 and
June 30, 2001, respectively
Common stock warrants 9,819 8,596
Accumulated other comprehensive income 265 331
Accumulated deficit (154,931) (143,615)
--------- ---------
Total stockholders' deficit (144,841) (134,682)
--------- ---------
$ 172,149 $ 165,730
========= =========
(Concluded)
See notes to condensed consolidated financial statements
5
LPA HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE OPERATIONS (UNAUDITED)
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
12 WEEKS ENDED 40 WEEKS ENDED
--------------------------------------------------------
APRIL 7, APRIL 7,
2001 2001
APRIL 6, AS RESTATED, APRIL 6, AS RESTATED,
2002 SEE NOTE 8 2002 SEE NOTE 8
--------- ----------- --------- ------------
Revenues, net $ 93,598 $ 93,109 $ 296,624 $ 292,244
Operating expenses:
Salaries, wages and benefits 51,634 50,419 163,846 163,458
Facility lease expense 10,739 10,429 35,321 34,331
Depreciation and amortization 3,430 3,435 11,480 11,797
Provision for doubtful accounts 733 1,333 2,278 3,338
Other 22,234 19,855 73,814 68,035
--------- --------- --------- ---------
Total operating expenses 88,770 85,471 286,739 280,959
--------- --------- --------- ---------
Operating income 4,828 7,638 9,885 11,285
Interest income (40) (17) (141) (65)
Interest expense 4,495 5,675 16,488 16,159
--------- --------- --------- ---------
Income (loss) before income taxes 373 1,980 (6,462) (4,809)
Provision (benefit) for income taxes 418 1,052 (1,747) (1,241)
--------- --------- --------- ---------
Net income (loss) $ (45) $ 928 $ (4,715) $ (3,568)
========= ========= ========= =========
Other comprehensive income (loss):
Other comprehensive income 492
Reclassification into operations (21) (29) (66) (141)
--------- --------- --------- ---------
Total other comprehensive income (loss) (21) (29) (66) 351
--------- --------- --------- ---------
Comprehensive income (loss) $ (66) $ 899 $ (4,781) $ (3,217)
========= ========= ========= =========
See notes to condensed consolidated financial statements.
6
LPA HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
40 WEEKS ENDED
-------------------------
APRIL 7,
2001
APRIL 6, AS RESTATED,
2002 SEE, NOTE 8
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,715) $ (3,568)
Adjustments to reconcile net loss to net cash from operating activities:
Amortization of transition adjustment into operations 864 692
Depreciation and amortization 12,344 12,653
Deferred income taxes (1,117) (1,106)
Changes in assets and liabilities:
Accounts and notes receivable (1,658) (3,991)
Prepaid supplies and expenses (3,497) (1,366)
Accrued property and sales taxes (733) (931)
Accrued interest payable 4,060 4,900
Accounts payable and other current liabilities (1,075) (4,879)
Other changes in assets and liabilities, net 307 (4,843)
-------- --------
Net cash provided by (used for) operating activities 4,780 (2,439)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (4,658) (6,913)
Proceeds from sale of assets 838 179
-------- --------
Net cash used for investing activities (3,820) (6,734)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt and capital lease obligations (978) (1,576)
Proceeds from issuance of preferred stock, net of costs 4,388
Borrowings under the Revolving Credit Agreement 4,164 13,000
Increase in overdrafts due banks 795 1,189
Increase in restricted cash investments (2,773) (3,089)
-------- --------
Net cash provided by financing activities 5,596 9,524
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,556 351
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,078 4,008
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,634 $ 4,359
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 11,624 $ 12,338
Income taxes 159 137
Cash received during the period for:
Interest $ 141 $ 72
Income taxes 3,082 43
See notes to condensed consolidated financial statements.
7
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 and
Note 9).
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 April 6, 2002, the Company operated 720 Academies including 653
residential Academies, 35 employer-based Academies and 32 Montessori schools
located in 36 states and the District of Columbia. For the 40 weeks ended
April 6, 2002, the Company had an average attendance of approximately 73,900
full and part-time children.
2. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include 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.
8
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)
APRIL 6, JUNE 30,
2002 2001
-------- --------
Current reserve for closed academies $ 871 $ 3,100
Current maturities of long-term debt and capital
lease obligations 1,050 1,255
Accrued salaries, wages and other payroll costs 16,626 15,495
Accrued insurance liabilities 2,408 2,359
Accrued property and sales taxes 2,635 3,368
Accrued interest payable 6,547 2,487
Other current liabilities 6,494 4,692
Current deferred income taxes 1,629
------- -------
$36,631 $34,385
======= =======
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
(in thousands of dollars)
APRIL 6, JUNE 30,
2002 2001
--------- ---------
Senior Notes, 10.0% due May 15, 2008,
net of discount $ 143,675 $ 142,746
Borrowings under credit agreement 53,664 50,250
Capital lease obligations 436 653
--------- ---------
197,775 193,649
Less current maturities of long-term debt and
capital lease obligation (1,050) (1,255)
--------- ---------
$ 196,725 $ 192,394
========= =========
9
At April 6, 2001, the Company was not in compliance with certain of the
financial covenants contained in the Credit Agreement for the quarterly
period ended April 6, 2002. On May 20, 2002, the Company obtained a limited
waiver of those financial covenants from the requisite lenders under the
Credit Agreement (see Note 9).
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 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
pre-emptive rights offer are required to purchased 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
10
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 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. 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 40 week periods ended April 7, 2001 have been
restated from the amounts previously reported. A summary of the significant
effects of the restatement is as follows:
For the 12 weeks ended: April 7, 2001
----------------------- ------------------------------
As previously As
reported restated
------------- ------------
Interest expense $ 5,444 $ 5,675
Income before income taxes 2,211 1,980
Provision for income taxes 1,146 1,052
Net income 1,065 928
Comprehensive income 899
For the 40 weeks ended: April 7, 2001
----------------------- ------------------------------
As previously As
reported restated
------------- ------------
Interest expense $ 15,466 $ 16,159
Loss before income taxes (4,116) (4,809)
Benefit for income taxes (960) (1,241)
Net loss (4,721) (3,568)
Comprehensive loss (3,217)
9. SUBSEQUENT EVENTS
At April 6, 2002, the Company was not in compliance with certain of the
financial covenants contained in the Credit Agreement for the quarterly
period ended April 6, 2002. On May 20, 2002, the Company obtained a limited
waiver of non-compliance with those financial covenants for such quarter
from the requisite lenders under the Credit Agreement. The limited waiver
provides that the lenders will not exercise their rights and remedies under
the Credit Agreement with respect to such financial covenant non-compliance
during the period through August 15, 2002. The Company also expects that it
will not be able to comply with certain of the financial covenants contained
in the Credit Agreement for the fourth quarter of fiscal 2002. The Company
expects to continue discussions with the lenders under the Credit Agreement
(a) to obtain a permanent waiver of the financial covenant non-compliance
for the quarterly period ending April 6, 2002 and (b) to amend its financial
covenants, commencing with the quarterly period ending on June 29, 2002,
based on the Company's current operating conditions and projections. There
can be no assurance that the Company will be able to obtain such permanent
waiver and/or amendment to the Credit Agreement. The failure to do so would
have a material adverse effect on the Company.
On May 14, 2002, LPA and the other stockholders of Parent who accepted
Parent's pre-emptive rights offer collectively purchased an additional $9.3
million of Series B preferred stock of Parent. All of the proceeds
11
received by Parent from the sale of Series B preferred stock were then
contributed to La Petite as common equity and will be used by La Petite for
general working capital and liquidity purposes. After giving effect to its
investment May 14, 2002, LPA beneficially owns approximately 96% of Parent's
outstanding common stock on a fully diluted basis.
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 8 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 720 schools at the end of the third quarter of fiscal year
2002 as compared to 744 schools for the same period of fiscal year 2001. The net
decrease of 24 schools is a result of 36 closures and 12 openings or additions.
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 April 6, 2002
and April 7, 2001 were as follows (in thousands of dollars):
12 WEEKS ENDED
---------------------------------------------------------------
APRIL 6, PERCENT OF APRIL 7, PERCENT OF CHANGE
2002 REVENUE 2001 REVENUE INC(DEC)
-------- ---------- -------- ---------- --------
Operating revenue $93,598 100.0% $93,109 100.0% $ 489
Operating expenses:
Salaries, wages and benefits 51,634 55.2 50,419 54.2 1,215
Facility lease expense 10,739 11.5 10,429 11.2 310
Depreciation and amortization 3,430 3.7 3,435 3.7 (5)
Provision for doubtful accounts 733 0.8 1,333 1.4 (600)
Other 22,234 23.8 19,855 21.4 2,379
------- ---- ------- ---- -------
Total operating expenses 88,770 95.0 85,471 91.9 3,299
------- ---- ------- ---- -------
Operating income $ 4,828 5.0% $ 7,638 8.1% $(2,810)
======= ==== ======= ==== =======
Operating revenue increased $0.5 million or 0.5% from the same period last year.
This revenue increase is a result of a $2.3 million increase at established
academies, a $1.0 million increase at new academies, offset by a reduction in
revenue from closed academies of $2.6 million and a $0.2 million decrease in
other revenue. 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
6.2%. The increase in the average weekly FTE tuition rate was principally due to
selective price increases that were put into place in September 2001 based on
geographic market conditions and class capacity
13
utilization. The decrease in FTE attendance was due to a 3.9% decline at our
established schools (schools which were open prior to the 2000 year) and a 97.1%
decline at closed schools, offset by a 30.4% increase at our new schools.
Salaries, wages, and benefits increased $1.2 million or 2.4% from the same
period last year. As a percentage of revenue, labor costs increased to 55.2%
from 54.2% in the prior year. The changes in salaries, wages, and benefits
includes an increase in labor costs of $0.9 million at established academies, an
increase in labor costs of $0.7 million at new academies, an increase in field
management and corporate administration labor costs of $0.3 million, increased
costs for benefits of $0.7 million, and a decrease in labor costs of $1.4
million at closed academies. The increase in labor costs at established schools
was mainly due to a 5.1% increase in average hourly wage rates offset by a 4.2%
decline in labor hours compared to the prior year.
Facility lease expense increased $0.3 million or 3.0% 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 were materially unchanged from the same period
last year.
Provision for doubtful accounts decreased $0.6 million from the same period last
year. The decrease is reflective of reductions in parent receivables, partially
offset by increases in third party receivables.
Other operating costs increased $2.4 million or 12.0% from the same period last
year. Other operating costs include repair and maintenance, utilities,
insurance, marketing, real estate taxes, food, supplies, transportation, data
processing, employment, management meetings and training. The increase was due
primarily to higher insurance, employment, transportation, management meetings,
and food costs, offset by decreases in data processing, utilities, and supplies
costs. As a percentage of revenue, other operating costs increased to 23.8% as
compared to 21.4% during the same period last year.
As a result of the foregoing, the Company had operating income of $4.8 million,
a decrease from last year of $2.8 million or 36.8%.
Interest expense decreased $1.2 million compared to the same period last year.
The decrease 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 both the current year and the prior year.
14
The Company's operating results for the comparative 40 weeks ended April 6, 2002
and April 7, 2001 were as follows (in thousands of dollars):
40 WEEKS ENDED
--------------------------------------------------------------
APRIL 6, PERCENT OF APRIL 7, PERCENT OF AMOUNT
2002 REVENUE 2001 REVENUE INC(DEC)
-------- ---------- -------- ---------- --------
Operating revenue $296,624 100.0% $292,244 100.0% $ 4,380
Operating expenses:
Salaries, wages and benefits 163,846 55.2 163,458 55.9 388
Facility lease expense 35,321 12.0 34,331 11.7 990
Depreciation and amortization 11,480 3.9 11,797 4.0 (317)
Provision for doubtful accounts 2,278 0.8 3,338 1.1 (1,060)
Other 73,814 24.9 68,035 23.3 5,779
-------- ----- -------- ----- --------
Total operating expenses 286,739 96.8 280,959 96.0 5,780
-------- ----- -------- ----- --------
Operating income $ 9,885 3.3% $ 11,285 3.9% $ (1,400)
======== ===== ======== ===== ========
Operating revenue increased $4.4 million or 1.5% from the same period last year.
This revenue increase is a result of a $10.0 million increase at established
academies, and a $3.1 million increase at new academies, offset by a reduction
in revenue from closed academies of $8.3 million and a $0.4 million decrease in
other revenue. The revenue is principally due to a 7.6% increase in the average
weekly FTE tuition rate offset by a decline in the FTE attendance of 5.5%. 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 3.1% decline at our established schools
(schools which were open prior to the 2000 year) and an 86.5% decline in closed
schools, offset by a 29.3% increase at our new schools.
Salaries, wages, and benefits increased $0.4 million or 0.2% from the same
period last year. As a percentage of revenue, labor costs decreased to 55.2%
from 55.9% in the prior year. The changes in salaries, wages, and benefits
includes an increase in labor costs of $2.3 million at established academies, an
increase in labor costs of $1.9 million at new academies, a decline in field
management costs, field bonuses and corporate administration labor costs of $0.1
million, increased costs for benefits of $1.1 million, and an incremental
decline in labor costs of $4.8 million at closed academies. The increase in
labor costs at established schools was mainly due to a 5.4% increase in average
hourly wage rates offset by a 4.6% decline in labor hours compared to the prior
year.
Facility lease expense increased $1.0 million or 2.9% 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 $0.3 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 $1.1 million from the same period last
year. The decrease is reflective of reductions in parent receivables, partially
offset by increases in third party receivables.
Other operating costs increased $5.8 million or 8.5% from the same period last
year. Other operating costs include repair and maintenance, utilities,
insurance, marketing, real estate taxes, food, supplies, transportation, data
processing, employment, management meetings and training. The increase was due
primarily to higher marketing, insurance and management meeting costs, offset by
decreases in food, supplies and training costs. As a percentage of revenue,
other operating costs increased to 24.9% as compared to 23.3% during the same
period last year.
15
As a result of the foregoing, the Company had operating income of $9.9 million,
a decrease from last year of $1.4 million or 12.4%.
Interest expense increased $0.3 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 46% 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 $8.3 million for the 12 weeks and $21.4 million for the 40 weeks ended April
6, 2002 as compared to $11.1 million and $23.1 million for the same periods of
fiscal year 2001. For the 12 weeks ended April 6, 2002, EBITDA as a percentage
of revenue decreased to 8.8% as compared to 11.9% for the same period last year.
For the 40 weeks ended April 6, 2002, EBITDA as a percentage of revenue
decreased to 7.2% as compared to 7.9% for the same period 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, sale and leaseback financing for newly constructed schools and
capital contributions 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 (see
Note 9). 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 $0.2 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 April 6, 2002, there was $36.5 million outstanding on
the term loan and $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.
16
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
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. On May 14, 2002, LPA and the other stockholders of Parent who accepted
Parent's pre-emptive rights offer collectively acquired $9.3 million of
convertible preferred stock of Parent (see Note 9). All of the proceeds received
by Parent from the sale of the convertible preferred stock and warrants have
been contributed to La Petite as common equity 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, December 21, 2001 and May 14, 2002, LPA beneficially owns
approximately 96% 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 investments in 2002, 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.
At April 6, 2002, the Company was not in compliance with certain of the
financial covenants contained in the Credit Agreement for the quarterly period
ended April 6, 2002. On May 20, 2002, the Company obtained a limited waiver of
non-compliance with those financial covenants for such quarter from the
requisite lenders under the Credit Agreement. The limited waiver provides that
the lenders will not exercise their rights and remedies under the Credit
Agreement with respect to such financial covenant non-compliance during the
period through August 15, 2002. The Company also expects that it will not be
able to comply with certain of the financial covenants contained in the Credit
Agreement for the fourth quarter of fiscal 2002. The Company expects to continue
discussions with the lenders under the Credit Agreement (a) to obtain a
permanent waiver of the financial covenant non-compliance for the quarterly
period ending April 6, 2002 and (b) to amend its financial covenants, commencing
with the quarterly period ending on June 29, 2002, based on the Company's
current operating conditions and projections. There can be no assurance that the
Company will be able to obtain such permanent waiver and/or amendment to the
Credit Agreement. The failure to do so would have a material adverse effect on
the Company.
Cash flows from operating activities were $4.8 million during the 40 weeks ended
April 6, 2002 as compared to cash flows used for operating activities of $2.4
million during the same period in fiscal year 2001. The $7.2 million increase in
operating cash flow is principally due to a $2.5 million change in accrued
income taxes, a $2.6 change in derivatives, a $3.3 million decrease in accounts
payable, a $ 2.3 million decrease in accounts and notes receivable, and a $1.7
million change in other prepaid items, offset by a $4.0 million timing
difference in prepaid rent at the beginning of fiscal year 2002 versus fiscal
year 2001 and a $1.1 million increase in net loss.
Cash flows used for investing activities were $3.8 million during the 40 weeks
ended April 6, 2002, as compared to cash flows used of $6.7 million during the
same period in fiscal year 2001. The $2.9 million decrease in cash flows used
for investing activities was principally due to a decrease of $2.3 million for
maintenance capital expenditures and $0.5 decrease in expenditures for computer
equipment.
17
Cash flows from financing activities were $5.6 million during the 40 weeks ended
April 6, 2002, compared to cash flows from financing activities of $9.5 million
during the same period of fiscal year 2001. The $3.9 million decrease in cash
flows from financing activities was principally due to a $8.8 million decrease
in borrowings on the revolver and a $0.4 million decrease in overdrafts due
banks offset by $4.4 million in proceeds, net of costs, from the issuance of
preferred stock, a $0.3 million decrease in restricted cash investments, a
decrease in debt and capital lease payments of $0.6 million. 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. Purchasers of schools in sale and
leaseback transactions have included insurance companies, bank trust
departments, pension funds, real estate investment trusts and individuals. The
leases are operating leases and generally have terms of 15 to 20 years with one
or two five-year renewal options. Most of these transactions are structured with
an annual rental designed to provide the owner/lessor with a fixed cash return
on their capitalized cost over the term of the lease. In addition, many of the
Company's leases provide for contingent rentals if the school's operating
revenue exceeds certain levels. Although the Company expects sale and leaseback
transactions to continue to finance its expansion, no assurance can be given
that such funding will always be available.
Total capital expenditures for the 40 weeks ended April 6, 2002 and April 7,
2001, were $4.7 million, and $6.9 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 40 weeks ended April 6, 2002 and April 7, 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 40 weeks ended April 6, 2002 and April 7, 2001, were $9.7
million and $9.7 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 $36.5 million at April 6, 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 $0.2 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%. 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 paid the counter party $0.7 million in satisfaction of an accrued
mark-to-market obligation under the interest rate collar agreement.
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 was
recognized as an adjustment to interest expense. With the termination of the
interest rate collar on the term loan, effective January 28, 2002, the Company
has no remaining derivative instruments.
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 $0.2
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:
None
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.
PA HOLDING CORP.
Dated May 20, 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 May 20, 2002 /s/ Michael L. Goldberg
-------------------------------------------
By: Michael L. Goldberg
Chief Financial Officer and duly authorized
representative of the registrant
22