UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 19, 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)
130 SOUTH JEFFERSON STREET, SUITE 300
CHICAGO, IL 60661
(Address of principal executive office and zip code)
(312) 798-1200
(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 [ ] No [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of August 8, 2003, LPA Holding Corp. had outstanding 773,403 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 August 8, 2003, 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 100 shares of Common
Stock (par value, $.01 per
share)
2
LPA HOLDING CORP. AND SUBSIDIARIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED):
Condensed Consolidated Balance Sheets 4-5
Condensed Consolidated Statements of Operations and Comprehensive Loss 6
Condensed Consolidated Statements of Cash Flows 7
Notes to Condensed Consolidated Financial Statements 8-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14-20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20-21
ITEM 4. CONTROLS AND PROCEDURES 21-22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 23
SIGNATURES 24-27
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LPA HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
OCTOBER 19, JUNE 29,
2002 2002
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 14,629 $ 16,092
Restricted cash investments 6,314 3,516
Accounts and notes receivable, (net of allowance for
doubtful accounts of $1,088 and $914) 12,451 11,225
Supplies inventory 3,007 2,955
Other prepaid expenses 4,157 1,517
Refundable taxes 410 528
---------- ----------
Total current assets 40,968 35,833
Property and equipment, at cost:
Land 5,442 5,168
Buildings and leasehold improvements 71,796 74,137
Furniture and equipment 10,244 16,151
Construction in progress 2,794
---------- ----------
87,482 98,250
Less accumulated depreciation 43,246 52,189
---------- ----------
Property and equipment, net 44,236 46,061
Other assets (Note 3) 9,184 9,674
---------- ----------
Total assets $ 94,388 $ 91,568
========== ==========
(continued)
4
LPA HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
OCTOBER 19, JUNE 29,
2002 2002
---------- ----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Overdrafts due banks $ 4,632 $ 4,491
Accounts payable 11,174 8,069
Current maturities of long-term debt and capital lease 2,026 2,150
obligations (Note 4)
Accrued salaries, wages and other payroll costs 16,622 17,450
Accrued insurance liabilities 4,561 2,471
Accrued property and sales taxes 5,006 4,053
Accrued interest payable 6,798 2,119
Reserve for closed academies 2,362 1,833
Other current liabilities 12,696 8,754
---------- ----------
Total current liabilities 65,877 51,390
Long-term debt and capital lease obligations (Note 4) 198,419 196,963
Other long-term liabilities (Note 5) 9,544 11,220
Series A 12% redeemable preferred stock ($.01 par value per share);
45,000 shares authorized, issued and outstanding as of October 19, 66,211 63,397
2002 and June 29, 2002; aggregate liquidation preference of $71.0
million and $68.5 million, respectively
Series B 5% convertible redeemable participating preferred stock
($.01 par value per share); 6,900,000 shares authorized, 6,899,724 15,461 15,227
issued and outstanding as of October 19, 2002 and June 29 2002;
aggregate liquidation preference of $15.5 million and $15.2
million, respectively
Stockholders' deficit:
Class A common stock ($.01 par value per share); 14,980,000 shares 6 6
authorized and 564,985 shares issued and outstanding
Class B common stock ($.01 par value per share); 20,000 shares
authorized, issued and outstanding
Common stock warrants 8,596 8,596
Accumulated other comprehensive income 219 246
Accumulated deficit (269,945) (255,477)
---------- ----------
Total stockholders' deficit (261,124) (246,629)
---------- ----------
Total liabilities and stockholders' deficit $ 94,388 $ 91,568
========== ==========
(concluded)
See notes to condensed consolidated financial statements.
5
LPA HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS (UNAUDITED)
(IN THOUSANDS OF DOLLARS)
16 WEEKS 16 WEEKS
ENDED ENDED
OCTOBER 19, OCTOBER 20,
2002 2001
------------ ------------
Operating revenue $ 116,838 $ 114,398
Operating expenses:
Salaries, wages and benefits 66,032 65,100
Facility lease expense 13,961 13,882
Depreciation and amortization 3,235 4,541
Restructuring charges 1,248 1,160
Provision for doubtful accounts 838 1,052
Other 36,227 32,020
------------ ------------
Total operating expenses 121,541 117,755
------------ ------------
Operating loss (4,703) (3,357)
Interest expense 6,711 7,144
Interest income (74) (85)
------------ ------------
Net interest costs 6,637 7,059
------------ ------------
Loss before income taxes (11,340) (10,416)
Provision for income taxes 78
------------ ------------
Net loss (11,418) (10,416)
------------ ------------
Other comprehensive loss:
Amounts reclassified into operations (27) (27)
------------ ------------
Total other comprehensive loss (27) (27)
------------ ------------
Comprehensive loss $ (11,445) $ (10,443)
============ ============
See notes to condensed consolidated financial statements.
6
LPA HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands of dollars)
16 WEEKS ENDED
---------------------------
OCTOBER 19, OCTOBER 20,
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (11,418) $ (10,416)
Adjustments to reconcile net loss to net cash from operating
activities
Restructuring charges 1,248 1,160
Depreciation and amortization 3,235 4,541
Loss on sales and disposals of property and equipment 28 30
Other non-cash items 586 227
Changes in assets and liabilities:
Restricted cash investments (2,798) (745)
Accounts and notes receivable (1,226) 438
Supplies inventory (52) 823
Other prepaid expenses (2,640) (3,555)
Refundable taxes 118 240
Overdrafts due banks 141 (789)
Accounts payable 3,105 547
Accrued salaries, wages and other payroll costs 172 (700)
Accrued property and sales taxes 953 967
Accrued interest payable 4,679 4,670
Other current liabilities 3,942 3,859
Accrued insurance liabilities 567 234
Reserve for closed academies (816) (1,181)
Other changes in assets and liabilities, net (127) 689
----------- -----------
Net cash (used for) provided by operating activities (303) 1,039
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (2,035) (3,693)
Proceeds from sale of assets (2)
----------- -----------
Net cash used for investing activities (2,035) (3,695)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt and capital lease obligations (625) (499)
Net borrowings under the Revolving Credit Agreement 1,500 3,200
----------- -----------
Net cash provided by financing activities 875 2,701
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,463) 45
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 16,092 5,414
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,629 $ 5,459
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,344 $ 1,887
Income taxes 62 83
Non-cash investing and financing activities:
Capital lease obligations of $85 and $12 were incurred during the 16
weeks ended October 19, 2002 and October 20, 2001, respectively.
See notes to condensed consolidated financial statements.
7
LPA HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION
The consolidated financial statements presented herein include LPA Holding
Corp. (Parent), and its wholly owned subsidiary, La Petite Academy, Inc.
(La Petite), and La Petite's wholly owned subsidiaries: Bright Start Inc.
(Bright Start), and LPA Services, Inc. (Services). 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, 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). LPA is the direct parent company of Parent and an
indirect parent of La Petite. LPA is owned by an affiliate of J.P. Morgan
Partners LLC (JPMP) and by an entity controlled by Robert E. King, a
director of La Petite and Parent.
The Company offers educational, developmental and child care programs that
are available on a full-time or part-time basis, for children between six
weeks and twelve years old. The Company's schools are located in 37 states
and the District of Columbia, primarily in the southern, Atlantic coastal,
mid-western and western regions of the United States.
As of October 19, 2002, the Company operated 695 schools including 633
residential Academies, 30 employer-based schools and 32 Montessori schools.
For the 16 weeks ended October 19, 2002, the Company had an average
attendance of approximately 69,700 full and part-time children.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - In the opinion of management, the accompanying
unaudited condensed consolidated interim financial statements include all
adjustments necessary for their fair presentation in conformity with
accounting principles generally accepted in the United States of America
(GAAP). The results for the interim period are not necessarily indicative
of the results to be expected for the entire fiscal year.
Certain information normally included in financial statements prepared in
accordance with GAAP has been condensed or omitted. These financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's Form 10-K for
the fiscal year ended June 29, 2002.
The accompanying unaudited condensed consolidated interim financial
statements reflect certain previously reported restatements to the results
of operations as of and for the 16 weeks ended October 20, 2001, contained
in the Company's Quarterly Report on Form 10-Q/A for the period ended
October 20, 2001.
The restatements resulted from the Company's determination that certain
asset, liability, revenue and expense items were incorrectly reported or
recognized in previously issued quarterly and annual financial statements.
The correction of these errors resulted in a net increase in net loss of
approximately $7.2 million, on an after-tax basis, for the 16 weeks ended
October 20, 2001. For a further discussion of the restatements, see Notes 2
and 16 to the audited consolidated financial statements included at Item 8
of the Company's Annual Report on Form 10-K for the year ended June 29,
2002.
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 was not in compliance with certain of the financial and
informational covenants contained in an agreement (the Credit Agreement)
providing for a term loan facility and revolving credit agreement for the
first quarter of fiscal year 2003. The Company obtained limited waivers of
non-compliance with such financial and informational covenants from the
requisite lenders under the Credit Agreement through February 7, 2003. The
8
amendment to the Credit Agreement dated as of February 10, 2003,
permanently waived such defaults and among other things, revised and set as
applicable, financial covenant targets for fiscal years 2003 through 2006.
In the third and fourth quarters of fiscal year 2003, the Company was not
in compliance with certain of the informational covenants contained in the
Credit Agreement. The Company obtained limited waivers of non-compliance
with such informational covenants through July 31, 2003, and permanent
waivers of such non-compliance on July 31, 2003. For additional information
on the amendments to the Credit Agreement dated as of February 10, 2003 and
July 31, 2003, see Note 9-Subsequent Events.
Management is instituting and executing a series of plans and actions
designed to improve the Company's operating results and cash flows and to
strengthen the Company's financial position. These plans include cost
reductions resulting from continued academy closures, targeted reductions
in operating expenses and optimization of the Company's real estate
portfolio. The Company closed 25 schools in the first quarter of fiscal
year 2003. Subsequent to the end of the first quarter, the Company closed
an additional twelve schools in the second quarter, ten schools in the
third quarter and 25 schools in the fourth quarter of fiscal year 2003.
Management believes that implementation of its plans to improve operations
and cash flows, coupled with the amendment of the financial covenants
contained in the Credit Agreement and the additional contingent equity
commitments provided in connection with the February 10, 2003 amendment to
the Credit Agreement by LPA and the other stockholders of Parent, if
needed, will allow the Company to comply with its required financial
covenants, meet its obligations as they come due and provide adequate
liquidity to operate the business for the next twelve months. However,
there can be no assurance in this regard. Furthermore, there can be no
assurance that the Company's lenders will waive any future violations of
the Credit Agreement that may occur or agree to future amendments of the
Credit Agreement or that the Company can obtain additional funding from
Parent beyond that noted above or any other external source.
FISCAL YEAR END - The Company utilizes a 52 or 53-week fiscal year, ending
on the Saturday closest to June 30, that 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In June 2001, the Financial
Accounting Standards Board ("FASB") approved Statement of Financial
Standards ("SFAS") No. 141, "Business Combinations", and SFAS No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 141 requires business
combinations entered into after June 30, 2001 to be accounted for using the
purchase method of accounting. Specifically identifiable intangible assets
having finite lives acquired, other than goodwill, will be amortized over
their estimated useful economic life. SFAS No. 142 requires that goodwill
and indefinite lived intangible assets not be amortized, but instead be
tested for impairment at least annually. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001 for all goodwill and other
intangible assets recognized in an entity's statement of financial position
at that date, regardless of when those assets were initially recognized. As
of October 19, 2002, the net book value of the Company's goodwill was $0.
Therefore, the adoption of this standard has not had a material impact on
the Company's financial condition or results of operations.
Also, in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This Statement addresses financial accounting and
reporting for obligations associated with retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and (or) the normal
operation of long-lived assets, except for certain obligations of lessees.
The adoption of this standard has not had a material impact on the
Company's financial condition or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 modified the financial
accounting and reporting for long-lived assets to be disposed of by sale,
and it broadens the presentation of discontinued operations to include more
disposal transactions. Implementation of this Statement, which is effective
for the Company's 2003 fiscal year, has not had a material impact on the
Company's financial condition, results of operations, or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and supercedes Emerging Issues Task Force ("EITF")
Issue No. 94-3, "Liability Recognition
9
for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". SFAS No.
146 is effective for exit or disposal activities that are initiated after
December 31, 2002. Although the Statement may impact the timing of
recognizing a restructuring charge, the Company has determined that SFAS
No. 146 will not have a material effect on its financial condition, results
of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure: An amendment of FASB Statement No.
123". This Statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value-based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirement of SFAS No.123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. The disclosure provisions of SFAS No. 148 are applicable
for fiscal years ending after December 15, 2002. As of October 19, 2002,
the Company adopted the disclosure provision of SFAS No. 148.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires
certain guarantees to be recorded at fair value and requires a guarantor to
make significant new disclosures, even when the likelihood of making any
payments under the guarantee is remote. Generally, FIN 45 applies to
certain types of financial guarantees that contingently require the
guarantor to make payments to the guaranteed party based on changes in an
underlying that is related to an asset, a liability, or an equity security
of the guaranteed party; performance guarantees involving contracts which
require the guarantor to make payments to the guaranteed party based on
another entity's failure to perform under an obligating agreement;
indemnification agreements that contingently require the guarantor to make
payments to an indemnified party based on changes in an underlying that is
related to an asset, a liability, or an equity security of the indemnified
party; or indirect guarantees of the indebtedness of others. The initial
recognition and initial measurement provisions of FIN 45 are applicable on
a prospective basis to guarantees issued or modified after December 31,
2002. Disclosure requirements under FIN 45 are effective for financial
statements of interim or annual financial periods ending after December 15,
2002 and are applicable to all guarantees issued by the guarantor subject
to FIN 45's scope, including guarantees issued prior to FIN 45. The Company
has determined that FIN 45 will not have a material effect on its financial
condition, results of operations or cash flows.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an interpretation of ARB 51"
with the objective of improving financial reporting by companies involved
with variable interest entities. A variable interest entity is a
corporation, partnership, trust, or any other legal structure used for
business purposes that either (a) does not have equity investors with
voting rights, or (b) has equity investors that do not provide sufficient
financial resources for the entity to support its activities. Historically,
entities generally were not consolidated unless the entity was controlled
through voting interests. FIN 46 changes that by requiring a variable
interest entity to be consolidated by a company if that company is subject
to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual
returns or both. A company that consolidates a variable interest entity is
called the "primary beneficiary" of that entity. FIN 46 also requires
disclosures about variable interest entities that a company is not required
to consolidate but in which it has a significant variable interest. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements of
FIN 46 apply to existing entities in the first fiscal year or interim
period beginning after June 15, 2003. Also, certain disclosure requirements
apply to all financial statements issued after January 31, 2003, regardless
of when the variable interest entity was established. The Company does not
have any variable interest entities and therefore FIN 46 will not have an
impact on its financial condition, results of operations or cash flows.
10
3. OTHER ASSETS
(in thousands of dollars)
OCTOBER 19, JUNE 29,
2002 2002
----------- ---------
Deferred financing costs $ 9,514 $ 9,514
Accumulated amortization (4,703) (4,342)
--------- ---------
4,811 5,172
Other assets (a) 4,373 4,502
--------- ---------
$ 9,184 $ 9,674
========= =========
(a) Other long-term assets consist primarily of properties held for sale,
which are valued at the fair market less costs to sell.
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
(in thousands of dollars)
OCTOBER 19, JUNE 29,
2002 2002
----------- --------
Senior Notes, 10.0% due May 15, 2008 $ 144,326 $ 143,954
Borrowings under Credit Agreement 54,664 53,414
Capital lease obligations 1,455 1,745
--------- ---------
200,445 199,113
Less current maturities of long-term debt
and capital lease obligations (2,026) (2,150)
--------- ---------
$ 198,419 $ 196,963
========= =========
At October 19, 2002, the Company was not in compliance with certain of the
financial covenants contained in the Credit Agreement. See Note 9 for
further information regarding the waiver of such default and other defaults
under the Credit Agreement and a description of subsequent amendments to
the financial covenants, maturity dates and certain other terms of the
Credit Agreement.
5. OTHER LONG-TERM LIABILITIES
(in thousands of dollars)
OCTOBER 19, JUNE 29,
2002 2002
----------- ----------
Unfavorable leases (a) $ 965 $ 1,111
Reserve for closed schools (b) 1,759 2,765
Deferred signing bonus (c) 1,000
Long-term insurance liabilities (d) 5,820 7,344
--------- ---------
$ 9,544 $ 11,220
========= =========
(a) In connection with the acquisitions of La Petite and Bright Start, a
liability for unfavorable operating leases was recorded and is being
amortized over the average remaining life of the leases.
(b) The reserve for closed schools includes the long-term liability
related primarily to leases for schools that were closed and are no
longer operated by the Company.
11
(c) The Company entered into an employment agreement with Judith A. Rogala
in January 2000 which included a signing incentive of $1.5 million,
vesting at 25% per year, payable on the fourth anniversary date of
employment.
(d) Long-term insurance liabilities reflect the Company's obligation for
incurred but not reported workers' compensation, auto and general
liability claims.
6. COMMITMENTS AND CONTINGENCIES
The Company is presently, and has been from time to time, subject to claims
and litigation arising in the ordinary course of business. Management
believes that none of the claims or litigation, of which it is aware, will
materially affect the Company's financial condition, liquidity, or results
of operations, although assurance cannot be given with respect to the
ultimate outcome of any such actions.
7 STOCK-BASED COMPENSATION
On August 26, 2002, the Company granted options to purchase 180,254 shares
of common stock of Parent at an exercise price of $0.01 to its then Chief
Operating Officer (subsequently promoted to Chief Executive Officer). On
August 26, 2002, the Company also granted options to purchase 270,381
shares of common stock of Parent at an exercise price of $0.01 to its Chief
Executive Officer. In return for the grant of new options, the Chief
Executive Officer forfeited all previous option grants.
The Company accounts for all options in accordance with APB Opinion No. 25,
which requires compensation cost to be recognized only on the excess, if
any, between the fair value of the stock at the date of grant and the
amount an employee must pay to acquire the stock. Under this method, no
compensation cost has been recognized for stock options granted.
The weighted average fair value at date of grant for options granted during
the 16 weeks ended October 19, 2002 was $0.00. Had compensation cost for
these options been recognized as prescribed by SFAS No. 123, "Accounting
for Stock-Based Compensation," it would not have had a material effect on
the Company's results of operations.
8. RESTRUCTURING CHARGES
The Company recognized restructuring charges of $2.5 million in the first
quarter of the 2003 fiscal year, in connection with the closure of 23
schools and $0.4 million in connection with the write-down to fair market
value of real estate properties held for disposal, offset by recoveries of
$1.6 million principally due to settlement of lease liabilities for less
than the recorded reserves. In the first quarter of the 2002 fiscal year,
the Company recognized a restructuring charge of $1.2 million in connection
with the closure of four schools. Included in the restructuring charges
were non-cash charges of $0.9 million and $0.4 million in the first quarter
fiscal years 2003 and 2002 respectively. The restructuring charges related
to the school closures consisted principally of the present value of rent,
real estate taxes, common area maintenance charges, and utilities, net of
anticipated sublease income, and the write-off of leasehold improvements. A
summary of the restructuring reserve activity is as follows, with dollars
in thousands:
Balance at June 29, 2002 $ 4,598
Reserves recorded in the first quarter of fiscal year 2003 2,877
Recoveries recorded in the first quarter of fiscal year 2003 (1,629)
Amount utilized in the first quarter of fiscal year 2003 (1,725)
----------
Balance at October 19, 2002 $ 4,121
==========
On the condensed consolidated balance sheet, the current portion of the
restructuring reserve is presented in the reserve for closed academies line
item, and the long-term portion is included in the other long-term
liabilities line item.
9. SUBSEQUENT EVENTS
The Company was not in compliance with certain of the financial and
informational covenants contained in the Credit Agreement for the third
quarter ended April 6, 2002 and the fourth quarter ended June 29, 2002.
Furthermore, following the restatement of the Company's financial
information for the fiscal years 1999, 2000
12
and 2001, the Company was not in compliance with certain of the financial
covenants for each of the quarters ending in fiscal years 1999, 2000 and
2001 and the first two quarters of fiscal year 2002. In addition, the
Company was not in compliance with certain of the financial and
informational covenants for the first quarter of fiscal year 2003. The
Company received limited waivers of non-compliance with the foregoing
financial and informational covenants through February 7, 2003. The
amendment to the Credit Agreement dated as of February 10, 2003,
permanently waived such defaults. In the third and fourth quarters of
fiscal year 2003, the Company was not in compliance with certain of the
informational covenants contained in the Credit Agreement. The Company
obtained limited waivers of non-compliance with such informational
covenants through July 31, 2003, and permanent waivers of such
non-compliance on July 31, 2003.
On February 10, 2003, Parent, La Petite and its senior secured lenders
entered into Amendment No. 5 to the Credit Agreement. The amendment waived
existing defaults of Parent and La Petite in connection with (a) the
failure to satisfy certain financial covenants for the quarterly periods
ended (i) during 1999, 2000, 2001 and 2002 and (ii) nearest to September
30, 2002 and December 31, 2002; (b) the failure to deliver timely financial
information to the senior secured lenders; (c) the failure to file certain
reports with the Securities and Exchange Commission; (d) the failure to
obtain the consent of the senior lenders prior to the disposition of
certain assets; and (e) the failure to deliver required documents to the
senior lenders prior to the disposition of other assets. Additionally, the
amendment extended the final maturity of the Credit Agreement by one year
to May 11, 2006, revised the amortization schedule to account for the
additional one-year extension and revised and set, as applicable, financial
covenant targets (such as maximum leverage ratio and minimum fixed charge
coverage ratio) for fiscal years 2003 through 2006. As a condition to the
effectiveness of Amendment No. 5, Parent was required to obtain contingent
equity commitments from its existing stockholders for an amount equal to
$14,500,000. Pursuant to Amendment No. 5, none of the proceeds, if any,
received by Parent as a result of the contingent equity commitments is
required to be used to prepay the term loans outstanding under the Credit
Agreement.
On July 31, 2003, Parent, La Petite and its senior secured lenders entered
into Amendment No. 6 to the Credit Agreement. The amendment permanently
waived existing third and fourth quarter defaults of Parent and La Petite
in connection with (a) the failure to deliver timely financial information
to the senior secured lenders; (b) the failure to deliver timely
information regarding purchases of material assets to the senior secured
lenders; and (c) the failure to file certain reports with the Securities
and Exchange Commission. Additionally, the amendment revised the definition
of Consolidated EBITDA in the Credit Agreement.
Pursuant to the terms of the Securities Purchase Agreement dated February
10, 2003, entered into by Parent and its stockholders who have elected to
exercise their respective preemptive rights (the "Electing Stockholders"),
as amended by Amendment No. 1 to Securities Purchase Agreement dated July
31, 2003, Parent may issue up to 6,669,734 shares of its series B
convertible preferred stock. In connection with such prospective issuance,
Parent issued warrants to purchase 1,692,423 shares of its class A common
stock, pro rata to each Electing Stockholder. All of the proceeds received
by Parent from the issuance of the series B preferred stock, if any, will
be contributed to La Petite as common equity and will be used by La Petite
for general working capital and liquidity purposes.
The Electing Stockholders are only required to purchase shares of series B
preferred stock if (a) the fixed charge coverage ratio at the end of a
fiscal quarter (calculated in accordance with the terms of the Credit
Agreement) is less than the fixed charge coverage ratio target set forth in
the Credit Agreement with respect to such fiscal quarter (a "Fixed Charge
Purchase"), (b) from time to time, the cash account of Parent and its
subsidiaries is negative (as calculated in accordance with the provisions
of Amendment No. 1 to the Securities Purchase agreement) over a historical
4 or 5 week review period (a "Cash Shortfall Purchase"), or (c) (i) a
payment default shall occur and be continuing under the Credit Agreement or
(ii) following payment in full of the obligations under the Credit
Agreement, a payment default shall occur and be continuing under the
Indenture for the Senior Notes (a "Payment Default Purchase"). The
aggregate number of shares to be purchased, if any, by the Electing
Stockholders pursuant to a Fixed Charge Purchase shall be purchased within
ten business days following the date that Parent is required to deliver its
quarterly or annual, as applicable, financial information to the senior
lenders pursuant to the terms of the Credit Agreement, and shall equal the
quotient obtained by dividing (x) the amount of cash which would have been
needed to increase the Parent's consolidated EBITDAR (as defined in the
Credit Agreement) to an amount which would have satisfied the fixed charge
coverage ratio target set forth in the Credit Agreement by (y) 2.174. The
aggregate number of shares to be purchased, if any, by the Electing
Stockholders pursuant to a Cash Shortfall Purchase shall be made on the
tenth business day after the end of each review period, and shall equal (A)
the sum of (x) the cash deficit and (y) $500,000, divided by (B) 2.174,
less (C) the number of shares purchased pursuant to Cash Shortfall
Purchases and Fixed Charge Purchases during the applicable review period.
The aggregate number of shares to be purchased by the Electing Stockholders
pursuant to a Payment Default Purchase shall be purchased within five (5)
business days after notice of such default is delivered to the Electing
Stockholders and shall equal (A) the amount of funds necessary to cure the
payment default under the Credit Agreement or the Indenture for the Senior
Notes, as applicable, divided by (B) 2.174. The Electing
13
Stockholders have the right to purchase shares of series B preferred stock
at any time, in which case the aggregate number of shares of series B
preferred stock to be purchased by the Electing Stockholders with respect
to a particular fiscal quarter or review period, as applicable, shall be
reduced by the number of shares of series B preferred stock purchased prior
to the expiration of such fiscal quarter or review period. The obligation
of each Electing Stockholder to purchase shares of series B preferred stock
shall expire on the earlier of (a) the date the Electing Stockholders
purchase an aggregate of 6,669,734 shares of series B preferred stock; and
(b) the date the obligations (other than contingent obligations and
liabilities) of Parent and its subsidiaries under (i) the Credit Agreement
and (ii) the Indenture dated as of May 11, 1998, among the Corporation and
certain of its subsidiaries and PNC Bank, National Association as trustee
(as amended) are terminated.
LPA has committed to purchase, in accordance with the terms of the
Securities Purchase Agreement, 6,662,879 shares of the series B preferred
stock being offered and has received warrants to purchase 1,690,683 shares
of Parent's class A common stock in connection with such commitment. In
accordance with such commitment, in June 2003 LPA purchased 341,766 shares
of series B preferred stock. Further, in accordance with their commitment
to purchase shares of series B preferred stock in accordance with the terms
of the Securities Purchase Agreement, in July 2003 the Electing
Stockholders other than LPA purchased 570 shares of series B preferred
stock. Accordingly, the contingent equity commitment from the stockholders
of Parent has been reduced from $14,500,000 to $13,757,131.
The Company has undergone significant changes in executive management since
June 29, 2002. For example, on December 12, 2002, the Company promoted Gary
A. Graves from Chief Operating Officer to Chief Executive Officer and
President. Judith A. Rogala, the former President and Chief Executive
Officer of the Company had resigned to pursue other business opportunities
in her home state of California. The Company and Ms. Rogala have entered
into a Separation Agreement dated December 11, 2002.
Subsequent to the end of the first quarter, the Company closed twelve
schools in the second quarter, ten schools in the third quarter and 25
schools in the fourth quarter of fiscal year 2003.
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 report. The Management's Discussion and Analysis of
Financial Condition and Results of Operations presented below reflects certain
previously reported restatements to the results of operations for the 16 weeks
ended October 20, 2001 contained in the Company's Quarterly Report on Form
10-Q/A for the period ended October 20, 2001. For a discussion of the
restatements, see Notes 2 and 16 to the audited consolidated financial
statements included at Item 8 of the Company's Annual Report on Form 10-K for
the year ended June 29, 2002.
Historically, the Company's operating revenue has followed the seasonality of
the school year, declining during the summer months and the calendar year-end
holiday period. The number of new children enrolling at La Petite's educational
facilities (the schools) is generally highest in September-October and
January-February, generally referred to as the Fall and Winter enrollment
periods. As a result of this seasonality, results for one quarter are not
necessarily indicative of results for an entire year.
The Company operated 695 schools at the end of the first quarter of fiscal year
2003 as compared to 725 schools for the same period of fiscal year 2002. The net
decrease of 30 schools is a result of 37 closures and 7 openings or additions.
The closures resulted from management's decision to close certain school
locations where the conditions no longer supported an economically viable
operation.
New educational facilities (new schools), as defined by the Company, are
Academies opened within the current or previous fiscal year. These schools
typically generate operating losses until the Academies achieve normalized
occupancies. Established educational facilities (established schools), as
defined by the Company, are schools that were open prior to the start of the
previous fiscal year.
14
Full-time equivalent (FTE) attendance, as defined by the Company, is not a
measure of the absolute number of students attending the Company's schools, but
rather is an approximation of the full-time equivalent number of students based
on Company estimates and weighted averages. For example, a student attending
full-time is equivalent to one FTE, while a student attending only one-half of
each day is equivalent to 0.5 FTE. The 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 following table sets forth the Company's operating results for the
comparative 16 weeks ended October 19, 2002 and October 20, 2001, with amounts
presented in thousands of dollars and as percentages of revenue:
16 WEEKS ENDED 16 WEEKS ENDED
OCTOBER 19, 2002 OCTOBER 20, 2001
------------------------- -----------------------
PERCENT OF PERCENT OF
AMOUNT REVENUE AMOUNT REVENUE
----------- ----------- ---------- ----------
Operating revenue $ 116,838 100.0% $ 114,398 100.0%
Operating expenses:
Salaries, wages and benefits 66,032 56.5 65,100 56.9
Facility lease expense 13,961 11.9 13,882 12.1
Depreciation and amortization 3,235 2.8 4,541 4.0
Restructuring charge 1,248 1.1 1,160 1.0
Provision for doubtful accounts 838 0.7 1,052 0.9
Other 36,227 31.0 32,020 28.0
---------- ----- --------- -----
Total operating expenses 121,541 104.0 117,755 102.9
---------- ----- --------- -----
Operating loss $ (4,703) -4.0% $ (3,357) -2.9%
========== ===== ========= =====
Operating revenue increased $2.4 million or 2.1% from the same period last year.
This revenue increase was a result of a $4.7 million increase at established
schools and a $0.7 million increase at new schools, offset by a reduction in
revenue from closed schools of $3.0 million. The revenue increase is principally
due to a 6.1% increase in the average weekly FTE tuition rate offset by a
decline in the FTE attendance of 4.5%. The increase in the average weekly FTE
tuition rate was principally due to selective price increases that were put into
place based on geographic market conditions and class capacity utilization. The
4.5% decrease in FTE attendance was principally due to school closures and a
decline in FTE attendance at established schools, partially offset by increased
FTE attendance at new schools.
Salaries, wages, and benefits increased $0.9 million or 1.4% from the same
period last year. As a percentage of revenue, labor costs decreased slightly to
56.5% from 56.9% in the prior year. The increases in salaries, wages, and
benefits includes increased labor costs of $1.1 million at established schools,
increased labor costs of $0.4 million at new schools, increased field management
and corporate administration labor costs of $0.5 million, increased benefit
costs of $0.6 million, and $0.1 million increased bonus cost, offset by
decreased labor costs of $1.8 million at closed schools. The increase in labor
costs at established schools was mainly due to a 1.7% increase in average hourly
wage rates and a 0.5% increase in labor hours as compared to the same period in
the prior year.
Facility lease expense increased slightly from the same period last year. This
increase was principally due to lower rent credits in the first quarter of the
2003 fiscal year resulting from certain unfavorable lease liabilities becoming
fully amortized prior to the end of the first quarter of the 2003 fiscal year,
and reductions in sublease income offset by reductions in lease payments for
facilities with contingent rent provisions and for closed schools.
Depreciation and amortization decreased $1.3 million or 28.8% from the same
period last year. The decrease in depreciation and amortization principally
resulted from the reduction in carrying value of long-lived assets, including
goodwill, as a result of the impairment losses recognized in the fourth quarter
of the fiscal 2002 year.
15
The Company recognized restructuring charges of $2.5 million in the first
quarter of the 2003 fiscal year, in connection with the closure of 23 schools
and $0.3 million in connection with the write-down to fair market value of real
estate properties held for disposal, offset by recoveries of $1.6 million
principally due to settlement of lease liabilities for less than the recorded
reserves. In the first quarter of the 2002 fiscal year, the Company recognized a
restructuring charge of $1.2 million in connection with the closure of four
schools. The restructuring charges related to the school closures consisted
principally of the present value of rent (net of anticipated sublease income),
real estate taxes, common area maintenance charges, and utilities, along with
the write-off of leasehold improvements.
Provision for doubtful accounts decreased $0.2 million or 20.3% from the same
period last year. The decrease is principally the result of improved collection
efforts over the same period in the prior year.
Other operating costs increased $4.2 million or 13.1% from the same period last
year. Other operating costs include repairs and maintenance, utilities,
insurance, real estate taxes, food, transportation, marketing, supplies, travel,
professional fees, personnel, recruitment, training, bank overages and
shortages, and other miscellaneous costs. The increase was due primarily to
higher expenses in legal and professional fees, repairs and maintenance,
insurance, food, recruitment, personnel, and bank shortages, offset by decreases
in school activity costs, supplies, transportation, travel, and utilities. As a
percentage of revenue, other operating costs increased to 31.0% as compared to
28.0% in the same period in the prior year.
As a result of the foregoing, the Company had an operating loss of $4.7 million
in the first quarter of the 2003 fiscal year as compared to a $3.4 million loss
in the first quarter of the 2002 fiscal year.
Net interest expense decreased $0.4 million or 6.2% as 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. (See Item 3
for details on the elimination of certain derivative investments held by the
Company).
The provision for income taxes includes a state income tax provision. The
effective federal tax rate for the sixteen weeks ended October 19, 2002 and
October 20, 2001 was 0% due to the current period operating losses and the
Company's provision of a full valuation allowance against deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are from cash flows from operations,
borrowings on the revolving credit facility under the Credit Agreement, and
capital contributions received from Parent. The Company's principal uses of
funds are debt service requirements, capital expenditures and working capital
needs. 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, 2006. Payments due under the
amortization schedule for the term loan are $0.7 million in the remainder of
fiscal year 2003, $1.0 million in fiscal year and 2004, $5.5 million in fiscal
year 2005, and $28.8 million in fiscal year 2006. The term loan is also subject
to mandatory prepayment in the event of certain equity or debt issuances or
asset sales by the Company or any of its subsidiaries and in amounts equal to
specified percentages of excess cash flow (as defined). On October 19, 2002,
there was $36.0 million outstanding under the term loan and $18.7 million
outstanding under the Revolving Credit Facility. La Petite had outstanding
letters of credit in an aggregate amount of $5.9 million, and $0.4 million was
available for working capital purposes under the Revolving Credit Facility. The
Company's Credit Agreement, Senior Notes and preferred stock contain certain
covenants that limit the ability of the Company to incur additional
indebtedness, pay cash dividends or make certain other restricted payments.
On December 15, 1999, Parent issued $15.0 million of series A preferred stock
and warrants to purchase an additional 3.0% of the Parent's outstanding common
stock on a fully diluted basis at that time. The proceeds of that
16
investment were contributed to La Petite as common equity. In connection with
such purchase and contribution, the banks waived their right under the Credit
Agreement to require that such proceeds be used to repay amounts outstanding
under the Credit Agreement. The proceeds of such equity contribution were used
to repay borrowings under the revolving credit facility that were incurred to
finance the Bright Start acquisition.
On November 14, 2001, Parent, La Petite and certain of its senior secured
lenders entered into an amendment to the Credit Agreement. The amendment waived
existing defaults of Parent and La Petite in connection with the failure to
satisfy certain financial covenants for the quarterly periods ended June 30,
2001 and September 30, 2001, and the failure to deliver timely financial
information to the senior secured lenders. Additionally, the amendment revised
certain financial covenant targets for fiscal years 2002, 2003 and 2004. The
amendment also addressed specific waivers necessary to permit the issuance of a
new class of convertible redeemable participating preferred stock (series B
preferred stock) of Parent. In consideration for the waiver and amendments,
Parent was required to issue additional equity in the amount of $15.0 million in
a series of closings through May 14, 2002. In connection with such issuances,
the banks waived their right under the Credit Agreement to require that the
proceeds be used to repay amounts outstanding under the Credit Agreement.
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
series B preferred stock 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. Parent offered
and sold in the aggregate $15.0 million of its series B preferred stock and
issued warrants to purchase 562,500 shares of its common stock as follows: (a)
on November 15, 2001, Parent issued $3.4 million of series B preferred stock and
452,343 warrants, (b) on December 21, 2001, Parent issued $2.3 million of series
B preferred stock and 110,157 warrants and (c) on May 14, 2002, Parent issued an
additional $9.3 million of its series B preferred stock. All of the proceeds
were contributed to La Petite as common equity and were used by La Petite for
general working capital and liquidity purposes.
As of June 1, 2003, LPA beneficially owned 92.3% of the common stock of Parent
on a fully diluted basis, $45 million of series A preferred stock of Parent and
approximately $15.0 million of series B preferred stock of Parent. An affiliate
of JPMP owns a majority of the economic interests of LPA and an entity
controlled by Robert E. King, a director of La Petite and Parent, owns a
majority of the voting interests of LPA.
The Company was not in compliance with certain of the financial and
informational covenants for numerous periods, including the first quarter of
fiscal year 2003. The Company received limited waivers of noncompliance with the
foregoing financial and informational covenants through February 7, 2003. The
amendment to the Credit Agreement dated as of February 10, 2003 permanently
waived such defaults. In the third and fourth quarters of fiscal year 2003, the
Company was not in compliance with certain of the informational covenants
contained in the Credit Agreement. The Company obtained limited waivers of
non-compliance with such informational covenants through July 31, 2003, and
permanent waivers of such non-compliance on July 31, 2003.
On February 10, 2003, Parent, La Petite and its senior secured lenders entered
into Amendment No. 5 to the Credit Agreement. The amendment waived existing
defaults of Parent and La Petite in connection with (a) the failure to satisfy
certain financial covenants for the quarterly periods ended (i) during 1999,
2000, 2001, and 2002 and (ii) nearest to September 30, 2002, and December 31,
2002; (b) the failure to deliver timely financial information to the senior
secured lenders; (c) the failure to file reports with the Securities and
Exchange Commission; (d) the failure to obtain the consent of the senior lenders
prior to the disposition of certain assets; and (e) the failure to deliver
required documents to the senior lenders prior to the disposition of other
assets. Additionally, the amendment extended the final maturity of the Credit
Agreement by one year to May 11, 2006, revised the amortization schedule to
account for the additional one-year extension and revised and set, as
applicable, financial covenant targets (such as maximum leverage ratio and
minimum fixed charge coverage ratio) for fiscal years 2003 through 2006. As a
condition to the effectiveness of Amendment No. 5, Parent was required to obtain
contingent equity commitments from its existing stockholders for an amount equal
to $14,500,000. Pursuant to Amendment No. 5, none of the proceeds, if any,
received by Parent as a result of the contingent equity commitments is required
to be used to prepay the term loans outstanding under the Credit Agreement.
On July 31, 2003, Parent, La Petite and its senior secured lenders entered into
Amendment No. 6 to the Credit Agreement. The amendment permanently waived
existing third and fourth quarter defaults of Parent and La Petite in connection
with (a)
17
the failure to deliver timely financial information to the senior secured
lenders; (b) the failure to deliver timely information regarding purchases of
material assets to the senior secured lenders; and (c) the failure to file
certain reports with the Securities and Exchange Commission. Additionally, the
amendment revised the definition of Consolidated EBITDA in the Credit Agreement.
Pursuant to the terms of the Securities Purchase Agreement dated February 10,
2003, entered into by Parent and its stockholders who have elected to exercise
their respective preemptive rights (the "Electing Stockholders"), as amended by
Amendment No. 1 to Securities Purchase Agreement dated July 31, 2003, Parent may
issue up to 6,669,734 shares of its series B convertible preferred stock. In
connection with such prospective issuance, Parent issued warrants to purchase
1,692,423 shares of its class A common stock, pro rata to each Electing
Stockholder. All of the proceeds received by Parent from the issuance of the
series B preferred stock, if any, will be contributed to La Petite as common
equity and will be used by La Petite for general working capital and liquidity
purposes.
The Electing Stockholders are only required to purchase shares of series B
preferred stock if (a) the fixed charge coverage ratio at the end of a fiscal
quarter (calculated in accordance with the terms of the Credit Agreement) is
less than the fixed charge coverage ratio target set forth in the Credit
Agreement with respect to such fiscal quarter(a "Fixed Charge Purchase"), (b)
from time to time, the cash account of Parent and its subsidiaries is negative
(as calculated in accordance with the provisions of Amendment No. 1 to the
Securities Purchase agreement) over a historical 4 or 5 week review period (a
"Cash Shortfall Purchase"), or (c) (i) a payment default shall occur and be
continuing under the Credit Agreement or (ii) following payment in full of the
obligations under the Credit Agreement, a payment default shall occur and be
continuing under the Indenture for the Senior Notes (a "Payment Default
Purchase"). The aggregate number of shares to be purchased, if any, by the
Electing Stockholders pursuant to a Fixed Charge Purchase shall be purchased
within ten business days following the date that Parent is required to deliver
its quarterly or annual, as applicable, financial information to the senior
lenders pursuant to the terms of the Credit Agreement, and shall equal the
quotient obtained by dividing (x) the amount of cash which would have been
needed to increase the Parent's consolidated EBITDAR (as defined in the Credit
Agreement) to an amount which would have satisfied the fixed charge coverage
ratio target set forth in the Credit Agreement by (y) 2.174. The aggregate
number of shares to be purchased, if any, by the Electing Stockholders pursuant
to a Cash Shortfall Purchase shall be made on the tenth business day after the
end of each review period, and shall equal (A) the sum of (x) the cash deficit
and (y) $500,000, divided by (B) 2.174, less (C) the number of shares purchased
pursuant to Cash Shortfall Purchases and Fixed Charge Purchases during the
applicable review period. The aggregate number of shares to be purchased by the
Electing Stockholders pursuant to a Payment Default Purchase shall be purchased
within five (5) business days after notice of such default is delivered to the
Electing Stockholders and shall equal (A) the amount of funds necessary to cure
the payment default under the Credit Agreement or the Indenture for the Senior
Notes, as applicable, divided by (B) 2.174. The Electing Stockholders have the
right to purchase shares of series B preferred stock at any time, in which case
the aggregate number of shares of series B preferred stock to be purchased by
the Electing Stockholders with respect to a particular fiscal quarter or review
period, as applicable, shall be reduced by the number of shares of series B
preferred stock purchased prior to the expiration of such fiscal quarter or
review period. The obligation of each Electing Stockholder to purchase shares of
series B preferred stock shall expire on the earlier of (a) the date the
Electing Stockholders purchase an aggregate of 6,669,734 shares of series B
preferred stock; and (b) the date the obligations (other than contingent
obligations and liabilities) of Parent and its subsidiaries under (i) the Credit
Agreement and (ii) the Indenture dated as of May 11, 1998, among the Corporation
and certain of its subsidiaries and PNC Bank, National Association as trustee
(as amended) are terminated.
LPA has committed to purchase, in accordance with the terms of the Securities
Purchase Agreement, 6,662,879 shares of the series B preferred stock being
offered and has received warrants to purchase 1,690,683 shares of Parent's class
A common stock in connection with such commitment. In accordance with such
commitment, in June 2003 LPA purchased 341,766 shares of series B preferred
stock. Further, in accordance with their commitment to purchase shares of series
B preferred stock in accordance with the terms of the Securities Purchase
Agreement, in July 2003 the Electing Stockholders other than LPA purchased 570
shares of series B preferred stock. Accordingly, the contingent equity
commitment from the stockholders of Parent has been reduced from $14,500,000 to
$13,757,131.
Management is instituting and executing a series of plans and actions designed
to improve the Company's operating results and cash flows and to strengthen the
Company's financial position. These plans include cost reductions resulting from
continued academy closures, targeted reductions in operating expenses and
optimization of the Company's real estate portfolio. The Company closed 25
schools in the first quarter of fiscal year 2003. Subsequent to the end of the
first quarter, the company closed an additional twelve schools in the second
quarter, ten schools in the third quarter and 26 schools in the fourth quarter
of fiscal year 2003.
Management believes that implementation of its plans to improve operations and
cash flows, coupled with the amendment of the financial covenants contained in
the Credit Agreement and the additional contingent equity commitments provided
by LPA and other stockholders of Parent, if needed, will allow the Company to
comply with its required financial covenants, meet its obligations as they come
due and provide adequate liquidity to operate the
18
business for the next twelve months. However, there can be no assurance in this
regard. Furthermore, there can be no assurance that the Company's lenders will
waive any future violations of the Credit Agreement that may occur or agree to
future amendments of the Credit Agreement or that the Company can obtain
additional funding from Parent beyond that as noted above or any other external
source.
Cash flows used by operating activities were $0.3 million during the sixteen
weeks ended October 19, 2002 compared to cash flows generated from operating
activities of $1.0 million for the sixteen weeks ended October 20, 2001. The
$1.3 million decrease in cash flows from operations was mainly due to a $1.9
million increase in net losses, net of non-cash charges, and increased
restricted cash investments of $2.0 million, partially offset by decreased
working capital amounts of $2.6 million. Restricted cash investments represent
cash deposited in an escrow account as security for the self-insured portion of
the Company's workers compensation, general liability and automobile insurance
coverage.
Cash flows used for investing activities were $2.0 million during the sixteen
weeks ended October 19, 2002 as compared to cash flows used of $3.7 million
during the same period ended on October 20, 2001. The $1.7 million decrease in
cash flows used for investing activities was due to decreased capital
expenditures.
Cash flows from financing activities were $0.9 million during the sixteen weeks
ended October 19, 2002, compared to cash flows from financing activities of $2.7
million during the same period ended October 20, 2001. The $1.8 million decrease
in cash flows from financing activities was principally due to decreased
revolver borrowings.
During the 16 weeks ended October 19, 2002, the Company opened one new
Journey-based school, three Journey-based school annexes and one employer-based
school. Employer-based schools are generally operated in facilities provided by
the employer. The cost to open a new Journey school ranges from $1.0 million to
$2.0 million.
Total capital expenditures for the sixteen weeks ended October 19, 2002 and
October 20, 2001 were $2.0 million and $3.7 million, respectively. The decrease
in total capital expenditures is a result of decreased spending on maintenance
and the development of new schools. The Company views all capital expenditures,
other than those incurred in connection with the development of new schools, to
be maintenance capital expenditure. Maintenance capital expenditures for the
sixteen weeks ended October 19, 2002 and October 20, 2001 were $2.0 million and
$3.6 million, respectively.
In addition to maintenance capital expenditures, the Company expends additional
funds to repair and maintain its facilities in good working condition. Such
funds are expensed in the periods in which they are incurred. The amounts of
such expenses for the sixteen weeks ended October 19, 2002 and October 20, 2001
were $4.8 million and $3.8 million, respectively.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires that management make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Predicting future events is inherently an
imprecise activity and as such requires the use of judgment. Actual results may
vary from estimates in amounts that may be material to the financial statements.
See "Cautionary Statement Concerning Forward Looking Statements."
For a description of the Company's significant accounting policies, see "Item 8.
Financial Statements and Supplementary Data, Note 3. Summary of Significant
Accounting Policies", included in the Company's Annual Report on Form 10-K for
the year ended June 29, 2002
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Under the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995, the Company cautions investors that any forward-looking statements or
projections made by the Company, including those made in this document, are
subject to risks and uncertainties that may cause actual results to differ
materially from those projected or discussed in these forward looking
statements.
19
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this report contain forward-looking statements
that are based on management's current expectations, estimates and projections.
Words such as "expects," "projects," "may," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," variations of these words and similar
expressions are intended to identify these forward-looking statements. Certain
factors, including but not limited to those listed below, may cause actual
results to differ materially from current expectations, estimates, projections
and from past results.
- Economic factors, including changes in the rate of inflation,
business conditions and interest rates.
- Operational factors, including the Company's ability to open and
profitably operate Academies and the Company's ability to satisfy
its obligations and to comply with the covenants contained in the
Credit Agreement and the indenture.
- Demand factors, including general fluctuations in demand for
child care services and seasonal fluctuations.
- Competitive factors, including: (a) pricing pressures primarily
from local nursery schools and child care centers and other
large, national for-profit child care companies, (b) the hiring
and retention of trained and qualified personnel, (c) the ability
to maintain well-equipped facilities and (d) any adverse
publicity concerning alleged child abuse at the Company's child
care centers or at its Academies.
- Governmental action including: (a) new laws, regulations and
judicial decisions related to state and local regulations and
licensing requirements, (b) changes in the Federal assistance and
funding of child care services and (c) changes in the tax laws
relating to La Petite's operations.
- Changes in accounting standards promulgated by the Financial
Accounting Standards Board, the Securities and Exchange
Commission or the American Institute of Certified Public
Accountants.
- Changes in costs or expenses, changes in tax rates, the effects
of acquisitions, dispositions or other events occurring in
connection with evolving business strategies.
- Management's ability to implement plans designed to improve the
Company's operating results, cash flows and financial position
and to improve the disclosure controls and procedures of the
Company.
No assurance can be made that any expectation, estimate or projection contained
in a forward-looking statement can be achieved. Readers are cautioned not to
place undue reliance on such statements, which speak only as of the date made.
The Company undertakes no obligation to release publicly any revisions to
forward-looking statements as the result of subsequent events or developments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative financial instruments were utilized by the Company in the management
of its interest rate exposures. The Company does not use derivative financial
instruments for trading or speculative purposes.
Indebtedness as of October 19, 2002 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 $36.0 million at October 19, 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 up to $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 4.25% for LIBOR loans and 3.25%
for ABR loans. The Senior Notes will mature in May 2008 and the Credit Agreement
will mature in May 2006. Payments due under the term loan are $0.7 million in
the remainder of fiscal year 2003, $1.0 million in fiscal year 2004, $5.5
million in fiscal year 2005 and $28.8 million in fiscal year 2006. 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). A 1% increase or
decrease in the applicable index rate would result in a corresponding interest
expense increase or decrease of $0.5 million per year.
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 covered the LIBOR interest rate
20
portion of the term loan, effectively setting maximum and minimum interest rates
of 9.5% and 7.9%, respectively. 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 $0.8 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, effective January 28, 2002, the Company has no remaining derivative
instruments.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a set of disclosure controls and procedures (the
"Disclosure Controls") that are designed to ensure that information required to
be disclosed in the reports and filed under the Securities Exchange Act of 1934,
as amended ("Exchange Act"), is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms. The Company's
Disclosure Controls include, without limitation, those components of internal
controls over financial reporting ("Internal Controls") that provide reasonable
assurances that transactions are recorded as necessary to permit preparation of
the Company's financial statements in accordance with generally accepted
accounting principles.
Within the 90 days prior to the date of this Quarterly Report on Form 10-Q, the
Company evaluated the effectiveness of the design and operation of its
Disclosure Controls pursuant to Rule 15d-15 of the Exchange Act. This evaluation
("Controls Evaluation") was done under the supervision and with the
participation of management, including the Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO"). This evaluation resulted in the identification
of certain material weaknesses in the Company's Internal Controls primarily
related to: (a) the lack of timely preparation and accuracy of account
reconciliations, (b) a lack of consistent understanding and compliance with
Company's policies and procedures, and (c) the lack of stable financial
management and accounting staff. These weaknesses contributed to Company's
inability to complete the preparation of its Quarterly Report on Form 10-Q for
the quarters ended October 19, 2002, January 11, 2003, and April 5, 2003 within
the Exchange Act's prescribed time.
While the Company is in the process of implementing a more efficient and
reliable system of Disclosure Controls, the Company has, on an immediate basis,
instituted interim compensating controls and procedures to ensure that
information required to be disclosed in this Quarterly Report on Form 10-Q has
been recorded, processed, summarized and reported to its senior management.
These interim compensating controls and procedures include, but are not
necessarily limited to, (i) communicating a tone from senior management
regarding the proper conduct in these matters, (ii) strengthening the financial
management organization and reporting process, (iii) requiring stricter account
reconciliation compliance, (iv) improving accounting policies and procedures,
(v) temporarily supplementing the Company's existing staff with additional
contractor-based support to collect and analyze the information necessary to
prepare the Company's financial statements, related disclosures and other
information contained in the Company's SEC periodic reporting, (vi) increasing
financial field audits of academies, (vii) increasing divisional financial staff
accountability to ensure field adherence to financial policies and internal
controls and (viii) commencing a comprehensive, team-based process to further
assess and enhance the efficiency and effectiveness of the Company's Disclosure
Controls, including establishing an informal Disclosure Committee comprised of
internal and external professionals with financial, legal and operational
expertise.
Beyond instituting interim measures, the Company is committed to continuing the
process of identifying, evaluating and implementing corrective actions where
required to improve the effectiveness of its Disclosure Controls on an overall
basis. This has included instituting improved processes and procedures as they
relate to such critical functions as account reconciliations and the monthly
closing process; improving the quality and oversight of the accounting staff;
enhancing field level controls; developing metrics to monitor and identify
accounting and operational issues and transferring knowledge from outside
contractors to the Company's financial staff.
The Company's Disclosure Controls, including the Company's Internal Controls,
are designed to provide a reasonable level of assurance that the stated
objectives are met. The Company's management, including the CEO and CFO, does
not expect that the Company's Disclosure Controls or Internal Controls will
prevent all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent
21
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
Based upon the Controls Evaluation, the CEO and CFO have concluded that, to the
best of their knowledge and after giving effect to the interim compensating
controls and procedures discussed above, the Disclosure Controls are effective,
at a reasonable level of assurance, to ensure that information required to be
disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported,
during the period in which the Company's periodic reports are being prepared.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal controls,
subsequent to the date of their evaluation, other than the continuing impact of
the corrective actions discussed above.
******
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is presently, and has been from time to time, subject to claims and
litigation arising in the ordinary course of business. Management believes that
none of the claims or litigation, of which it is aware, will materially affect
the Company's financial condition or results of operations, although assurance
cannot be given with respect to the ultimate outcome of any such actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On August 26, 2002, through Written Consent in Lieu of Meeting of the
Stockholders, LPA Investment LLC, as holder of more than 66% of the common stock
of LPA Holding Corp., approved the Employment Agreement between La Petite
Academy, Inc. and Gary Graves. Also, on August 26, 2002, through Written Consent
in Lieu of Meeting of the Stockholders, LPA Holding Corp., as the sole
stockholder of La Petite Academy, Inc., approved the Employment Agreement
between La Petite Academy and Gary Graves. Except for the stockholders that
executed these Written Consents, no other stockholders were solicited and
accordingly, no votes against or withheld were received on the foregoing matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits required by Item 601 of Regulation S-K:
99.1 Section 906 certification of Chief Executive Officer
99.2 Section 906 certification of Chief Financial Officer
b. Reports on Form 8-K:
On August 21, 2002, the Company filed a Current Report on Form 8-K
reporting that it had received a limited waiver of non-compliance from
its lenders under the Credit Agreement through September 30, 2002.
On September 16, 2002, the Company filed a Current Report on Form 8-K
reporting that it expected to take a material charge to earnings for
fiscal 2002 and that the Company's audit committee was conducting an
internal review.
On October 2, 2002, the Company filed a Current Report on Form 8-K
reporting that it had received another limited waiver of non-compliance
from its lenders under the Credit Agreement through November 1, 2002.
ITEMS 2, 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
23
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 August 13, 2003 /s/ Michael F. Czlonka
------------------------------------
By: Michael F. Czlonka
Chief Financial Officer and duly authorized
representative of the registrant
24
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 August 13, 2003 /s/ Michael F. Czlonka
-----------------------------
By: Michael F. Czlonka
Chief Financial Officer and duly authorized
representative of the registrant
25
CERTIFICATIONS
I, Gary A. Graves, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LPA
Holding Corp. and La Petite Academy, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the LPA
Holding Corp. and La Petite Academy, Inc. as of, and for, the
periods presented in this quarterly report;
4. LPA Holding Corp.'s and La Petite Academy, Inc.'s other
certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for LPA Holding Corp.
and La Petite Academy, Inc. and have:
a) Designed such disclosure controls and procedures
to ensure that material information relating to
the registrants, including consolidated
subsidiaries, is made known to us by others
within those entities, particularly during the
period in which this quarterly report is being
prepared;
b) Evaluated the effectiveness of LPA Holding Corp.
and La Petite Academy, Inc.'s disclosure
controls and procedures as of a date within 90
days prior to the filing date of this quarterly
report (the "Evaluation Date");
c) Presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on our
evaluation as of the Evaluation Date; and
5. LPA Holding Corp.'s and La Petite Academy, Inc.'s other
certifying officer and I have disclosed, based on our most
recent evaluation, to LPA Holding Corp.'s and La Petite
Academy, Inc.'s auditors and the audit committee of LPA
Holding Corp.'s and La Petite Academy, Inc.'s board of
directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or
operation of internal controls which could
adversely affect LPA Holding Corp. and La Petite
Academy, Inc.'s ability to record, process,
summarize and report financial data and have
identified for LPA Holding Corp.'s and La Petite
Academy, Inc.'s auditors any material weaknesses
in internal controls; and
b) Any fraud, whether or not material, that
involves management or other employees who have
a significant role in LPA Holding Corp.'s and La
Petite Academy, Inc.'s internal controls; and
6. LPA Holding Corp.'s and La Petite Academy, Inc.'s other
certifying officer and I have indicated in this quarterly
report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
August 13, 2003
/s/ Gary A. Graves
- -------------------------------
By: Gary A. Graves
Chief Executive Officer
26
CERTIFICATIONS
I, Michael F. Czlonka, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LPA
Holding Corp. and La Petite Academy, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the LPA
Holding Corp. and La Petite Academy, Inc. as of, and for, the
periods presented in this quarterly report;
4. LPA Holding Corp.'s and La Petite Academy, Inc.'s other
certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for LPA Holding Corp.
and La Petite Academy, Inc. and have:
a) Designed such disclosure controls and procedures
to ensure that material information relating to
the registrants, including consolidated
subsidiaries, is made known to us by others
within those entities, particularly during the
period in which this quarterly report is being
prepared;
b) Evaluated the effectiveness of LPA Holding Corp.
and La Petite Academy, Inc.'s disclosure
controls and procedures as of a date within 90
days prior to the filing date of this quarterly
report (the "Evaluation Date");
c) Presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on our
evaluation as of the Evaluation Date; and
5. LPA Holding Corp.'s and La Petite Academy, Inc.'s other
certifying officer and I have disclosed, based on our most
recent evaluation, to LPA Holding Corp.'s and La Petite
Academy, Inc.'s auditors and the audit committee of LPA
Holding Corp.'s and La Petite Academy, Inc.'s board of
directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or
operation of internal controls which could
adversely affect LPA Holding Corp. and La Petite
Academy, Inc.'s ability to record, process,
summarize and report financial data and have
identified for LPA Holding Corp.'s and La Petite
Academy, Inc.'s auditors any material weaknesses
in internal controls; and
b) Any fraud, whether or not material, that
involves management or other employees who have
a significant role in LPA Holding Corp.'s and La
Petite Academy, Inc.'s internal controls; and
6. LPA Holding Corp.'s and La Petite Academy, Inc.'s other
certifying officer and I have indicated in this quarterly
report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
August 13, 2003
/s/ Michael F. Czlonka
- ---------------------------
By: Michael F. Czlonka
Chief Financial Officer
27