UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED JUNE 28, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [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 January 11, 2003, the market value of the voting and non-voting common
equity of LPA Holding Corp. and La Petite Academy, Inc. held by non-affiliates
was zero.
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As of September 25, 2003, LPA Holding Corp. had outstanding 773,403 shares of
Class A Common Stock (par value, $0.01 per share) and 20,000 shares of Class B
Common Stock (par value, $0.01 per share). As of September 25, 2003, the
additional registrant had the number of outstanding shares, shown on the
following table.
ADDITIONAL REGISTRANT
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,
$0.01 per share)
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EXPLANATORY NOTE
LPA Holding Corp. and La Petite Academy (the "Registrants") are filing this
Amendment No. 1 on Form 10-K/A (the "Amendment No. 1") in response to management
determining, subsequent to filing of the Registrants' Form 10-K for the fiscal
year ended June 28, 2003 that was originally filed on September 25, 2003 (the
"Original 10-K Filing") that it had incorrectly accounted for the accretion of
the Series A 12% redeemable preferred stock. In connection with the adoption of
Statement of Financial Accounting Standards No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS
No. 150"), on June 29, 2003, the Company determined that it should have been
recognizing the accretion of the Series A 12% mandatorily redeemable preferred
stock using the effective interest method rather than the straight-line method.
Additionally, the Company determined that it should have classified the change
in bank overdrafts as a financing activity in the consolidated statements of
cash flows. Accordingly, this Amendment No. 1 reflects the following:
The restatement of the Registrants' consolidated balance sheets as of
June 28, 2003 and June 29, 2002 and consolidated statements of cash
flows and stockholders' deficit for the fiscal years ended June 28,
2003, June 29, 2002, and June 30, 2001 contained in Item 8 for the
adjustments noted above (as described more fully in Note 16 to the
consolidated financial statements).
The Company has corrected typographical and grammatical errors in the Original
10-K Filing and provided clarifying language to the Basis of Presentation
section in Note 2.
For the convenience of the reader, this Amendment No. 1 amends in its entirety
the Original 10-K Filing. This Amendment No. 1 continues to speak as of the date
of the Original 10-K Filing, and the Registrants have not updated the disclosure
contained herein to reflect any events that occurred at a later date. All
information contained in this Amendment No. 1 is subject to updating and
supplementing as provided in the Registrants' periodic reports filed with the
SEC subsequent to the date of the Original 10-K Filing.
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LPA HOLDING CORP.
INDEX
PAGE
----
PART I.
Item 1. Business 5
Item 2. Properties 12
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 29
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 54
Item 9A. Controls and Procedures 54
PART III.
Item 10. Directors and Executive Officers of the Registrant 56
Item 11. Executive Compensation 60
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 63
Item 13. Certain Relationships and Related Transactions 65
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 66
SIGNATURES 77
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PART I.
ITEM 1. BUSINESS
ORGANIZATION
Vestar/LPA Investment Corp. (Parent), a Delaware corporation, was formed in
1993 for the purpose of holding the capital stock of La Petite Holdings
Corp. (Holdings), a Delaware corporation. Holdings, which has no assets or
operations, was formed in 1993 for the purpose of holding the capital stock
of La Petite Acquisition Corp. (Acquisition). On July 23, 1993, as a result
of a series of transactions, Holdings acquired all the outstanding shares
of common stock, par value $0.01 (the Common Stock), of La Petite Academy,
Inc., a Delaware corporation (La Petite). The transaction was accounted for
as a purchase. On May 31, 1997, Holdings was merged with and into La
Petite, with La Petite as the surviving corporation. On August 28, 1997,
LPA Services, Inc. (Services), a wholly owned subsidiary of La Petite, was
incorporated to provide third party administrative services on insurance
claims to La Petite.
On March 17, 1998, LPA Investment LLC (LPA), a Delaware limited liability
company, and Parent, which was renamed LPA Holding Corp., 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 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. In the
Recapitalization, all of the then outstanding shares of preferred stock and
common stock of Parent (other than the shares of common stock retained by
Vestar/LPT Limited Partnership and management of La Petite) owned by the
existing stockholders of Parent (the Existing Stockholders) were converted
into cash. As part of the Recapitalization, LPA purchased $72.5 million
(less the value of options retained by management) of common stock of the
Parent and $30 million of Series A redeemable preferred stock (Series A
preferred stock) of Parent (collectively, the Equity Investment). In
addition, in connection with the purchase of Series A preferred stock of
Parent, LPA received warrants to purchase up to 6.0% of Parent's common
stock on a fully diluted basis. The Recapitalization was completed on May
11, 1998.
On July 21, 1999, La Petite acquired all the outstanding shares of Bright
Start, Inc. (Bright Start) for $10.4 million in cash and assumed
approximately $2.0 million in debt. Bright Start operated 43 preschools in
the states of Minnesota, Wisconsin, Nevada, and New Mexico.
On December 15, 1999, LPA acquired an additional $15.0 million of Parent's
Series A preferred stock and received warrants to purchase an additional 3%
of Parent's common stock on a fully-diluted basis at that time. The $15.0
million proceeds received by Parent were 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 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 Series B preferred stock of Parent and warrants
to purchase 562,500 shares of common stock of Parent 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 Series B preferred stock of
Parent. All of the proceeds received by Parent from the sale of Series B
preferred stock and warrants were contributed to La Petite and were used by
La Petite for general working capital and liquidity purposes.
Pursuant to a pre-emptive offer dated February 10, 2003, 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. Pursuant to such offer, Parent received commitments to purchase up
to $14.5 million of Series B preferred stock and issued warrants to
purchase 1,692,423 shares of
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common stock of Parent. In June 2003, Parent issued 341,766 shares of
Series B preferred stock for an aggregate purchase price of approximately
$0.7 million. The $0.7 million proceeds received by parent were contributed
to La Petite and were used by La Petite for working capital and liquidity
purposes.
As of September 25, 2003, LPA beneficially owns 92.5% of the common stock
of Parent on a fully diluted basis, $45 million of Series A preferred stock
of Parent and approximately $15.7 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.
Parent, consolidated with La Petite, Bright Start and Services, is referred
to herein as the Company.
BUSINESS DESCRIPTION
La Petite, founded in 1968, is the largest privately held and one of the
leading for-profit preschool educational facilities (commonly referred to
as Academies) in the United States based on the number of centers operated.
The Company provides center-based educational services and childcare to
children between the ages of six weeks and 12 years. Management believes
the Company differentiates itself through its superior educational
programs, which were developed and are regularly enhanced by its curriculum
department. The Company's focus on quality educational services allows it
to capitalize on the increased awareness of the benefits of premium
educational instruction for preschool and elementary school age children.
At its residential and employer-based Academies, the Company utilizes its
proprietary Journey(R) curriculum with the intent of maximizing a child's
cognitive and social development. The Company also operates Montessori
schools that employ the Montessori method of teaching, a classical approach
that features the programming of tasks with materials presented in a
sequence dictated by each child's capabilities.
As of June 28, 2003, the Company operated 648 Academies including 592
residential Academies, 27 employer-based Academies and 29 Montessori
schools located in 36 states and the District of Columbia. For the 52 weeks
ended June 28, 2003, the Company had an average attendance of approximately
70,900 full and part-time children.
CURRICULUM
Residential and Employer-Based Academies. La Petite Academy, utilizing both
internal and external educational experts, designed and developed
curriculum and program materials for each developmental age grouping
served.
All of La Petite's programs are developmentally appropriate, using an
integrated approach to learning and giving children opportunities to learn
through all of their senses while stimulating development and learning in
all areas. Children progress at their own pace, building skills and
abilities in a logical pattern. Each program includes a parent component,
built-in training, carefully selected age appropriate materials, equipment
assessment and activities, and a well-planned and developed environment.
Each program provides a balance of teacher-directed and child-directed
activities that address both the physical and intellectual development of
young children. Physical activities are designed to increase physical and
mental dexterity, specifically hand-eye and large and small muscle
coordination. Importance is also placed on creative and expressive
activities such as painting, crafts and music. Intellectual activities are
designed to promote language development, pre-reading, writing and thinking
skills, and imagination through role-playing, pretending and problem
solving.
For infants and toddlers, activities are planned for a variety of
developmental areas such as listening and talking, physical development,
creativity and learning from the world around them. As infants become
toddlers, more activities focus on nurturing their need for independence
and practicing small motor skills that help them learn to feed themselves,
walk and communicate with others. Songs,
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finger plays, art ideas, storytelling tips, building activities and many
activities to develop the bodies of toddlers through climbing, pushing and
pulling are included. These activities also build the foundation for social
skills such as how to get along with others and how to share.
The two-year-old curriculum includes fifty-two weeks worth of activities
that provide guidance and practice in developing all-important social and
emotional skills as well as emerging cognitive skills. An operational
manual provides guidance for environmental considerations, growth
information and classroom management techniques. Creativity and art
continue to be reinforced through drawing, gluing, dancing, singing and
other appropriate expressive activities.
For preschoolers, typically 3 and 4 year old children, the Journey(R)
curriculum was developed. The Journey(R) curriculum is designed to maximize
children's cognitive development and provide a positive learning experience
for the children. The Company believes the Journey(R) curriculum is
unsurpassed by the educational materials of any of the major childcare
providers or its other competitors, many of whom only provide curriculum
materials for a portion of the child's day. Journey covers the entire day.
Learning occurs throughout six Learning Centers that focus on different
skills and areas of development. In addition, Journey enables the children
to experience the world around them through geography, Spanish, mathematics
and sensorial activities.
Pre-kindergartners, typically children that will go to kindergarten the
following fall, have their own curriculum designed to ensure that they are
ready for more formal schooling at the elementary level. This 9-12 month
program includes an emphasis on reading readiness; literacy appreciation;
math; science; character education; other social and emotional development
areas and physical strength and skills. An important component of this
program utilizes Scholastic's Building Language for Literacy program, used
in all pre-kindergarten classrooms. Careful assessment and development of
individual children's portfolios provide necessary flexibility and
accountability on learning and developmental appropriateness.
The private kindergarten program provides a balanced educational approach
that rivals any school district's program. This program meets or exceeds
each state's requirements, where it is in place. Scholastic's Kindergarten
Place, Handwriting without Tears, AIMS Science Program and Everyday Math
along with LPA specific report cards, portfolios and character education
round out this program.
The Kids Station program and curriculum for school age children, typically
children ages 5 through 12, consists of ten fun stations with appropriate
activities in each. These stations range from Study Hall, for completing
homework to Recreation Station, for fun indoors games to Sports Port,
utilizing outdoor areas for sports and other related activities. Social
interactions with children of their own age and participation in enrichment
activities such as arts and crafts and fitness round out this
clubhouse-type program. Most locations also provide transportation to and
from local elementary schools.
Montessori Schools. Montessori is a non-traditional method of education
where children work and learn in a highly individualized environment.
Montessori materials, combined with our certified Montessori instructors,
create a learning environment in which children become energized to
explore, investigate and learn. Children work in mixed age group classrooms
with attractive, state-of-the-art Montessori materials that have been
designed to stimulate each child's interest in reading, mathematics,
geography and science. In addition to the Montessori method, some
Montessori schools provide enrolled children foreign language and computer
learning.
ACADEMY NETWORK
The Company operates three types of childcare centers: residential
Academies, employer-based Academies and Montessori schools. Academies
generally operate year round, five days a week and typically are open from
6:30 AM to 6:30 PM. A child may be enrolled in any of a variety of program
schedules from a full-time, five-day-per-week plan to as little as two or
three half-days a week. A child attending full-time typically spends
approximately nine hours a day, five days per week, at an
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Academy. The Kids Station program for children age's five to 12 provides
extended childcare before and after the elementary school day and
transportation to and from the elementary school.
Academy employees include Academy Directors, Assistant Directors (who are
generally teachers), full-time and part-time teachers, temporary and
substitute teachers, teachers' aides, and non-teaching staff. On average,
there are 15 to 20 employees per Academy. Each Academy is managed by an
Academy Director. An Academy Director implements company policies and
procedures, but has the autonomy to individualize local operations.
Responsibilities of Academy Directors include curriculum implementation,
the establishment of daily, weekly and monthly operating schedules,
staffing, marketing to develop and increase enrollment and control of
operating expenses. Personnel involved in operations as Academy Director
and above are compensated in part on the basis of the profitability and
level of parent and employee satisfaction of each Academy for which they
have managerial responsibility.
Academy Directors are supervised by 46 District Managers. District Managers
have an average of 13 years of experience with the Company, typically are
responsible for six to 30 Academies and report to one of four Divisional
Vice Presidents. District Managers visit their Academies regularly and are
in frequent contact to help make decisions and improvements to program
quality and profitability. The Divisional Vice Presidents have an average
of 17 years of experience with the Company.
Residential Academies. As of June 28, 2003, the Company operated 592
residential Academies. Residential Academies are typically located in
residential, middle income neighborhoods, and are usually one-story,
air-conditioned buildings located on three-quarters of an acre to one acre
of land. A typical Academy also has an adjacent playground designed to
accommodate the full age range of children attending the school. The latest
Academy design is approximately 12,800 square feet, built on a site of
approximately 1.5 acres, with an operating capacity of approximately 185
children and incorporates a closed classroom concept. The Company continues
to improve, modernize and renovate existing residential Academies to
improve efficiency and operations, to better compete, to respond to the
requests of parents and to support the Journey(R) curriculum.
Residential Academies generally have programs to care for children from
toddlers to 12 years old arranged in five age groups. In addition, over
half of the Academies offer childcare for infants, as young as six weeks
old. Teacher-student ratios vary depending on state requirements but
generally decrease with the older child groups.
Employer-Based Academies. As of June 28, 2003, the Company operated 27
employer-based Academies. These Academies utilize an operating model that
is very similar to residential Academies including collecting tuition fees
directly from the employee parent, however they are opened to support
businesses, government, hospitals and universities with large, single site
employee populations. Employer-based Academies are located on business
owner property and the business owner sponsors and usually supports the
Academy with free or reduced rent, utilities and custodial maintenance.
Employer-based Academies may be operated on a management fee basis, on a
profit and loss basis or a variation of the two. Most employer-based
Academies also allow community children to attend as a second priority to
the business owner employee's children, which helps to maximize the revenue
and profit opportunity at each employer-based Academy.
Montessori Schools. As of June 28, 2003, the Company operated 29 Montessori
schools. Montessori schools are typically located in upper-middle income
areas and feature brick facades and closed classrooms. The Montessori
schools typically have lower staff turnover, and their lead teachers are
certified Montessori instructors, many of whom are certified through the
Company's internal training program. In addition, unlike students at
residential Academies, Montessori students are enrolled for an entire
school year, pay tuition monthly in advance and pay higher tuition rates.
SEASONALITY
Historically, the Company's operating revenue has followed the seasonality
of a school year, declining during the summer months and the year-end
holiday period. The number of new children
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enrolling at the Academies is generally highest in September-October and
January-February; therefore, the Company attempts to concentrate its
marketing efforts immediately preceding these high enrollment periods.
Several Academies in certain geographic markets have a backlog of children
waiting to attend; however, this backlog is not material to the overall
attendance throughout the system.
NEW ACADEMY DEVELOPMENT
Recently, we have deferred new academy development and concentrated our
efforts on strengthening our current portfolio by diverting more attention
and efforts to capital improvements and stabilizing field operations.
However, the Company still intends to expand within existing markets and
enter new markets with Academies concentrated in clusters. We have
increased our research to aggressively seek out new "turn-key"
opportunities from existing local child-care operators or other users whose
facilities meet our needs. In existing markets, management believes it has
developed an effective selection process to identify attractive markets for
prospective Academy sites. In evaluating the suitability of a particular
location, the Company performs an extensive financial analysis of the
historical performance of all existing schools, which includes
consideration of each facility's structural condition, looking for a
positive trend within that market. Once this has been established, the
Company concentrates on the demographics of its target customer within a
two-mile radius of residential Academies. The Company targets Metropolitan
Statistical Areas with benchmark demographics which indicate parent
education levels and family incomes combined with high child population
growth, and considers the labor supply, cost of marketing and the likely
speed and ease of development of Academies in the area. When entering new
markets, in addition to the demographic study, a detailed analysis of any
competitors past and future exposure within the market is analyzed.
Newly constructed Academies are generally able to open approximately 36
weeks after the real estate contract is signed. Because a location's early
performance is critical in establishing its ongoing reputation, the Academy
staff is supported with a variety of special programs to help achieve quick
enrollment gains and development of a positive reputation. These programs
include special compensation for the Academy Director who opens the new
site and investment in local marketing prior to the opening.
During the 2003 year, the Company opened one employer-based Academy, four
Journey-based Academies and one Journey-based Academy annex.
TUITION
Academy tuition depends upon a number of factors including, but not limited
to, location of an Academy, age of the child, full or part-time attendance,
utilization and competition. The Company also provides various tuition
discounts primarily consisting of sibling, staff, and Preferred Employer
Program. The Company adjusts tuition for Academy programs by child age
group and program schedule within each Academy based on utilization and
competitive factors. Parents also pay an annual registration fee, which is
reduced for families with more than one child attending an Academy. Tuition
and fees are payable weekly and in advance for most residential and
employer-based Academies and monthly and in advance for Montessori schools.
Other fees include activity fees for summer activities and supply fees for
Accelerated Pre-Kindergarten and Private Kindergarten programs. Management
estimates that state governments pay the tuition for approximately 25% of
the children under its care.
MARKETING AND ADVERTISING
The Company's advertising plans are multi-faceted and heavily dependent on
direct response programs, including consumer and business-to-business
direct mail, mass media, and electronic media. Additional training is
provided to Academy Directors as plans are rolled out throughout the
country, including enhanced phone and tour sales training and tools. An
additional emphasis is placed on expanding corporate partner relationships
and growing the Preferred Employer Program, not necessarily through new
companies, but through additional enrollment from currently
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participating corporations. The Preferred Employer Program allows the
Company to build quality relationships with large corporations by providing
preferred pricing for their employees who enroll their children at the
Company's Academies.
The WOW! program, which began its launch in January, provided clear and
tangible facility expectations for Academy Directors, with accountability
on the District Manager level. The purpose of this program was to insure
that the Academies were ready for the fall enrollment period, from a
facility/sales/marketing perspective. Five sections, rolled out
approximately one month apart and provided Academy Directors with a clear
list of minimum facility expectations, an overview, and Q & A for each
section. The project focused on: Curb Appeal and Common Areas,
Pre-Kindergarten, School age, Preschool, and Infants/Toddlers/Twos
classrooms. The WOW! assessments are now a component of the regularly
conducted academy operations reviews.
The Parent Advisory Liaison, (PAL) continues in many Academies across the
system and encourages increased parent participation and loyalty, forms
partnerships between staff and parents, and creates a forum for the
exchange of ideas between staff and parents for the benefit of children. To
further encourage retention, the La Petite Academy Service Guarantee was
implemented in July 2002. This guarantee simply states: (i) our education
professionals are committed to exceeding the customer's expectations and
(ii) for the Company's newly enrolled customers, after 90 days, if we do
not meet their expectations, the Company will guarantee to refund the
customer's last registration fee.
The VIP Referral Program continues to be highly successful in driving new
enrollments into the Academies. Through this program, current customers who
refer new customers are rewarded, and the new customer receives a discount
for enrolling.
INFORMATION SYSTEMS
The Company's financial and management-reporting systems are connected
through a Virtual Private Network (VPN) that connects all Academies, field
management and Support Center employees. Through the use of the Company's
point of sale software product, called ADMIN, and the implementation of the
VPN, information such as financial reporting, enrollments, pricing, labor,
receivables, and attendance are available at all levels of the
organization.
The Company continues to review its management information systems to
ensure the issuance of meaningful, specific performance measures, and the
production of timely and accurate operating and financial information.
This year the Company's primary accounting system was upgraded to the most
recent software release, providing improvements in function and processing.
Many reports and forms have been moved to the Company intranet to reduce
paperwork, streamline processing, and improve academy access.
Telecommunications services were reviewed this year, leading to significant
cost reductions through line elimination, vendor contract consolidation,
and better usage of dial-up ISP services.
COMPETITION
The United States preschool education and childcare industry is highly
fragmented and competitive. The Company's competition consists principally
of local nursery schools and childcare centers, some of which are
non-profit (including religious-affiliated centers), providers of services
that operate out of their homes and other for profit companies, which may
operate a number of centers. Local nursery schools and childcare centers
generally charge less for their services. Many religious-affiliated and
other non-profit childcare centers have no or lower rental costs than the
Company, may receive donations or other funding to cover operating expenses
and may utilize volunteers for staffing. Consequently, tuition rates at
these facilities are commonly lower than the Company's rates. Additionally,
fees for home-based care are normally lower than fees for center-based care
because providers of home care are not always required to satisfy the same
health, safety or operational regulations as our Academies. The competition
also consists of other large, national, for profit childcare companies that
may have more aggressive tuition discounting and other pricing policies
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than La Petite. The Company competes principally by offering trained and
qualified personnel, professionally planned educational and recreational
programs, well-equipped facilities and additional services such as
transportation. In addition, the Company offers a challenging and
sophisticated program that emphasizes the individual development of the
child. Based on focus group research, the majority of parents rank the
qualities of staff as the most important deciding factor in choosing a
childcare facility. Following teacher qualification were such items as
safety, cleanliness, programs, and curriculum. Price typically played a
minimal role in the decision process, assuming price was within a
reasonable variance. For some potential customers, the non-profit status of
certain competitors may be a significant factor in choosing a childcare
provider.
REGULATION AND GOVERNMENTAL INVOLVEMENT
Childcare centers are subject to numerous state and local regulations and
licensing requirements, and the Company has policies and procedures in
place in order to comply with such regulations and requirements. Although
state and local regulations vary from jurisdiction to jurisdiction,
government agencies generally review the ratio of staff to enrolled
children, the safety, fitness and adequacy of the buildings and equipment,
the dietary program, the daily curriculum, staff training, record keeping
and compliance with health and safety standards. In certain jurisdictions,
new legislation or regulations have been enacted or are being considered
which establish requirements for employee background checks or other
clearance procedures for new employees of childcare centers or vehicle
operators. In most jurisdictions, governmental agencies conduct scheduled
and unscheduled inspections of childcare centers, and licenses must be
renewed periodically. Failure by an Academy to comply with applicable
regulations can subject it to state sanctions, which might include the
Academy being placed on probation or, in more serious cases, suspension or
revocation of the Academy's license to operate and could also lead to
sanctions against other Academies located in the same jurisdiction. In
addition, this type of action could result in reputational damage extending
beyond that jurisdiction.
Management believes the Company is in compliance with all applicable
regulations and licensing requirements. However, there is no assurance that
a licensing authority will not determine a particular Academy to be in
violation of applicable regulations and take action against that Academy.
In addition, there may be unforeseen changes in regulations and licensing
requirements, such as changes in the required ratio of child center staff
personnel to enrolled children that could have material adverse effect on
our operations.
Certain tax incentives exist for childcare programs. Section 21 of the
Internal Revenue Code provides a federal income tax credit ranging from 20%
to 35% of certain childcare expenses for "qualifying individuals" (as
defined in the Code). The fees paid to the Company for childcare services
by eligible taxpayers qualify for the tax credit, subject to the
limitations of Section 21 of the Code.
Various state and federal programs provide childcare assistance to
low-income families. These programs are generally administered through
state and local agencies. Management estimates approximately 25% of
operating revenue is generated from such federal and state programs.
Although no federal license is required at this time, there are minimum
standards that must be met to qualify for participation in certain federal
subsidy programs. Many states utilize tiered reimbursement programs. These
programs have quality tiers that allow higher reimbursement for low-income
programs that meet the highest quality standards.
Government, at both the federal and state levels, is involved in actively
expanding the quality and availability of childcare services. Federal
support is delivered at the state level through government-operated
educational and financial assistance programs. Childcare services offered
directly by states include training for childcare providers and resource
and referral systems for parents seeking childcare. In addition, the state
of Georgia has an extensive Government-funded private sector preschool
program in which the Company participates. Other states are evaluating
preschool programs based upon the Georgia model.
The Federal Americans with Disabilities Act (the "Disabilities Act")
prohibits discrimination on the basis of disability in public
accommodations and employment. The Disabilities Act became effective
11
as to public accommodations in January 1992 and as to employment in July
1992. The Company has not experienced any material adverse impact under the
Disabilities Act.
In September of 1998, the National Highway Transportation Safety
Administration (NHTSA) issued interpretative letters that modified its
interpretation of regulations governing the sale by automobile dealers of
vehicles intended to be used for the transportation of children to and from
school. These letters indicate that dealers may no longer sell
fifteen-passenger vans for this use, and that any vehicle designed to
transport eleven persons or more must meet federal school bus standards if
it is likely to be "used significantly" to transport children to and from
school or school-related events. The Company currently maintains a fleet of
approximately 1,275 fifteen-passenger vans and 120 school buses for use in
transportation of children which management believes are safe and effective
vehicles for that purpose. The Company's current fleet meets all necessary
federal, state, and local safety requirements. In accordance with the NHTSA
requirements, all new fleet additions or replacements must meet school bus
standards.
COMPLIANCE WITH ENVIRONMENTAL PROTECTION PROVISIONS
Compliance with federal, state and local laws and regulations governing
pollution and protection of the environment is not expected to have any
material effect upon the financial condition or results of operations of
the Company.
TRADEMARKS
A federally registered trademark in the United States is effective for ten
years subject only to a required filing and the continued use of the mark
by the registrant. A federally registered trademark provides the
presumption of ownership of the mark by the registrant in connection with
its goods or services and constitutes constructive notice throughout the
United States of such ownership. The Company has various registered
trademarks covering the name La Petite Academy, its logos, and a number of
other names, slogans and designs, including, but not limited to: La Petite
Journey, Parent's Partner, SuperStars and Montessori Unlimited(R). In
addition the Company has registered various trademarks in Japan, Taiwan and
the Peoples Republic of China. Management believes that the Company name
and logos are important to its operations and intends to continue to renew
the trademark registrations thereof.
INSURANCE AND CLAIMS ADMINISTRATION
The Company maintains an insurance program covering comprehensive general
liability, automotive liability, workers' compensation, property and
casualty, crime and directors and officers liability insurance. The
policies provide for a variety of coverage, are subject to various limits,
and include substantial deductibles or self-insured retention levels. The
Company believes its insurance program is appropriate given the nature of
its business and its claims history. However, claims may be asserted which
fall outside of, or are in excess of the limits of, the Company's
insurance, the effect of which could have a material adverse effect on the
Company.
EMPLOYEES
As of June 28, 2003, the Company employed approximately 12,800 Associates.
The Company's employees are not represented by any organized labor unions
or employee organizations and management believes relations with employees
are good.
ITEM 2. PROPERTIES
As of June 28, 2003, the Company operated 648 Academies, 567 of which were
leased under operating leases, 68 of which were owned and 13 of which were
operated in employer-owned centers. Most of these Academy leases have
15-year terms, some have 20-year terms, many have renewal options, and most
require the Company to pay utilities, maintenance, insurance and property
taxes. In
12
addition, some of the leases provide for contingent rentals, if the
Academy's operating revenue exceeds certain base levels. The Company also
leases administrative office space in the cities of Chicago, Illinois,
Overland Park, Kansas, Charlotte, North Carolina, and Burbank, California.
Because of different licensing requirements and design features, Academies
vary in size and licensed capacity. Academies typically contain 5,400, to
9,500 square feet in a one-story, air-conditioned building located on
three-quarters of an acre to one acre of land. Each Academy has an adjacent
playground designed to accommodate the full age range of children attending
the Academy. Licensed capacity for the same size building varies from state
to state.
The following table summarizes Academy openings and closings for the
indicated periods.
FISCAL YEAR 2003 2002 2001 2000 1999
----------- ---- ---- ---- ---- ----
Academies;
Open at Beginning of Period 715 734 752 743 736
Opened During Period 6 8 6 59 13
Closed During Period (73) (27) (24) (50) (6)
--- --- --- --- ---
Open at End of Period 648 715 734 752 743
=== === === === ===
During the 2003 year, the Company opened four Journey-based Academies, one
Journey-based Academy annex, and one employer-based Academy. During that
same period, the Company closed 73 schools. The closures resulted from
management's decision to close certain school locations where the
conditions no longer supported an economically viable operation.
The following table shows the number of locations operated by the Company
as of June 28, 2003:
Alabama (13) Indiana (13) Nevada (13) Tennessee (26)
Arizona (24) Iowa (5) New Jersey (2) Texas (97)
Arkansas (4) Kansas (19) New Mexico (19) Utah (4)
California (50) Kentucky (4) New York (1) Virginia (34)
Colorado (18) Louisiana (1) North Carolina (24) Washington, DC (1)
Connecticut (1) Maryland (15) Ohio (17) Washington (14)
Delaware (1) Minnesota (5) Oklahoma (21) Wisconsin (14)
Florida (78) Mississippi (2) Oregon (5)
Georgia (32) Missouri (23) Pennsylvania (5)
Illinois (19) Nebraska (8) South Carolina (16)
The leases have initial terms expiring as follows:
YEARS INITIAL LEASE TERMS EXPIRE NUMBER OF ACADEMIES
2004 103
2005 83
2006 93
2007 121
2008 67
2009 and later 100
---
567
---
At June 28, 2003, the Company leased 567 Academies from approximately 333
lessors. The Company has generally been successful when it has sought to
renew expiring Academy leases.
13
ITEM 3. LEGAL PROCEEDINGS
The Company has litigation pending which arose in the ordinary course of
its business. In management's opinion, no litigation in which the Company
currently is involved will result in liabilities that will have a material
adverse effect on its financial position, liquidity or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
14
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock of the Parent is not publicly traded. As of September 25,
2003, LPA owned 66.0% of the Parent's outstanding common stock, Vestar/LPT
Limited Partnership owned 2.7%, management owned 1.2% and former management
owned 30.1%.
No cash dividends were declared or paid on the Parent's common stock during
the 2003 and 2002 fiscal years. The Company's 10% Series B Senior Notes due
2008 (Senior Notes) and preferred stock (see Note 4 and Note 8 to the
consolidated financial statements) contain certain covenants that, among
other things, do not permit Parent to pay cash dividends on its common or
preferred stock now or in the immediate future.
As of September 25, 2003, there were 14 holders of record of Parent's
common stock.
Note 11 of the consolidated financial statements contains a description of
the stock based compensation plans of Parent, including the number of
securities available for future issuance under such plans and whether such
plans were approved by Parent's security holders.
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 the 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,
on February 10, 2003, Parent issued warrants to purchase 1,692,423 shares
of its class A common stock, pro rata to each Electing Stockholder. Each
warrant is convertible into one share of class A common stock of Parent at
an exercise price of $0.01 per share. In June 2003, in accordance with the
commitment under the terms of the Securities Purchase Agreement, LPA, as
one of the Electing Stockholders, purchased 341,766 shares of Series B
preferred stock of Parent at a purchase price of $2.174 per share. Each of
the foregoing transactions was exempt from the registration requirements of
the Securities Act of 1933 pursuant to Section 4(2) thereunder, as
transactions not involving any public offering. In each of such
transactions, no general solicitation was made, the securities sold are
subject to transfer restrictions, and the certificates evidencing such
securities contains an appropriate legend stating such securities have not
been registered under the Securities Act and may not be offered or sold
absent registration or pursuant to an exemption therefrom. No underwriters
were involved in connection with any of these sales of Parent's equity
securities.
15
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS OF DOLLARS)
The following selected financial data of the Company should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the other financial information included
elsewhere in this annual report on Form 10-K/A.
52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 44 WEEKS
ENDED ENDED ENDED ENDED ENDED
JUNE 28, JUNE 29, JUNE 30, JULY 1, JULY 3,
2003 2002 2001 (a) 2000 1999 (a)
INCOME STATEMENT DATA
Revenue $ 390,165 $ 391,205 $ 384,924 $ 371,265 $ 281,307
Operating expenses, exclusive of
restructuring charges and asset
impairments 376,520 388,871 374,051 359,382 266,032
Restructuring charges (b) 4,908 3,208 2,455 7,705 110
Asset impairments (c) 3,057 57,436
--------- --------- --------- --------- ---------
Total operating expenses 384,485 449,515 376,506 367,087 266,142
--------- --------- --------- --------- ---------
Operating (loss) income 5,680 (58,310) 8,418 4,178 15,165
Interest expense (d) 21,509 21,902 20,487 20,880 16,144
Interest income (127) (204) (85) (163) (153)
--------- --------- --------- --------- ---------
Loss before income taxes (15,702) (80,008) (11,984) (16,539) (826)
Provision (benefit) for income
taxes 246 (3,236) 16,204 (5,453) 579
--------- --------- --------- --------- ---------
Net loss (15,948) (76,772) (28,188) (11,086) (1,405)
Other comprehensive income (loss):
Derivative adjustments, net 492
Amounts reclassified into operations (86) (85) (161)
--------- --------- --------- --------- ---------
Comprehensive loss $ (16,034) $ (76,857) $ (27,857) $ (11,086) $ (1,405)
========= ========= ========= ========= =========
BALANCE SHEET DATA (AT END OF PERIOD)
Total assets $ 78,089 $ 91,568 $ 148,665 $ 165,935 $ 171,927
Total long-term debt and capital lease
obligations 197,908 196,963 193,211 182,319 187,999
Preferred stock (as restated) (g) 86,117 75,649 52,623 45,833 28,600
Stockholders' deficit (as restated) (g) (269,411) (243,654) (158,771) (124,123) (110,885)
OTHER DATA
Cash flows from operating activities (as
restated) (g) (120) 4,401 3,450 3,464 10,802
Cash flows from investing activities (4,107) (8,791) (14,313) (7,828) (19,148)
Cash flows from financing activities (as
restated) (g) (2,339) 15,068 12,269 3,800 6,050
Depreciation and amortization 10,372 14,664 14,966 16,179 12,821
Capital expenditures 5,594 9,629 14,502 20,899 31,610
Proceeds from sale of assets 1,487 838 189 23,432 12,462
Ratio of earnings to fixed charges (e) (e) (e) (e) (e) (e)
Academies at end of period 648 715 734 752 743
FTE utilization during the period (f) 62% 63% 63% 63% 65%
a) On April 18, 2001, the Company changed its fiscal year end from the 52
or 53-week period ending on the first Saturday in July to the 52 or
53-week period ending on the Saturday closest to June 30. On June 10,
1999, the Company changed its fiscal year to be the period starting on
the first Saturday in July and ending
16
on the first Saturday of July of the subsequent year, resulting in a
44-week year for fiscal 1999 (see Note 2 to the consolidated financial
statements included in Item 8 of this report).
b) Restructuring charges resulted from management's decision to close
certain Academies located in areas where conditions no longer support
an economically viable operation and to restructure its operating
management to better serve the remaining Academies. These charges
consist principally of the present value of rent (net of anticipated
sublease income), real estate taxes, common area maintenance charges,
and utilities, the write-off of goodwill associated with closed
Academies, and the write-down of fixed assets to fair market value. See
Note 12 to the consolidated financial statements included in Item 8 of
this report for further discussion.
c) During the fourth quarter of fiscal 2003, the Company identified
conditions, including a projected current year operating loss as well
as negative cash flows in certain of the Company's schools, as
indications that the carrying amount of certain long-lived assets may
not be recoverable. In accordance with the Company's policy, management
assessed the recoverability of long-lived assets at these schools using
a cash flow projection based on the remaining useful lives of the
assets. Based on this projection, the cumulative cash flow over the
remaining depreciation or amortization period was insufficient to
recover the carrying value of the assets at certain of these schools.
As a result, the Company recognized impairment losses of $3.1 million
related to property and equipment in fiscal 2003. During the fourth
quarter of fiscal 2002, the Company recognized asset impairment losses
of $57.4 million. The Company identified conditions, including a
projected current year consolidated operating loss as well as negative
cash flows in certain of the Company's regional and division
operations, as an indication that the carrying amount of certain
long-lived assets, primarily goodwill, may not be recoverable. In
accordance with the Company's policy, management assessed the
recoverability of those long-lived assets using a cash flow projection
based on the remaining useful life. Based on this projection, the
cumulative cash flow over the remaining depreciation or amortization
period was insufficient to recover the carrying value of the assets. In
addition, the Company evaluated the carrying-value of its remaining
goodwill in accordance with Accounting Principles Board Opinion No. 17
and determined that the goodwill was fully impaired. As a result, the
Company recognized impairment losses of $57.4 million related to the
long-lived assets, of which $52.3 million related to goodwill and $5.1
million related to property and equipment in fiscal 2002.
d) Interest expense includes $1.2 million, $1.0 million, $1.1 million,
$1.1 million, and $0.8 million of amortization of deferred financing
costs for fiscal years 2003, 2002, 2001, 2000, and 1999, respectively.
e) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as income before income taxes and extraordinary
items, plus fixed charges. Fixed charges consists of interest expense
on all indebtedness, amortization of deferred financing costs, and
one-third of rental expense on operating leases representing that
portion of rental expense that the Company deemed to be attributable to
interest. For the 52 weeks ended June 28, 2003, June 29, 2002, June 30,
2001, July 1, 2000, and the 44 weeks ended July 3, 1999, earnings were
inadequate to cover fixed charges by $15.7 million, $80.0 million,
$12.0 million, $16.5 million and $0.8 million, respectively.
f) FTE Utilization is the ratio of full-time equivalent (FTE) students to
the total operating capacity for all of the Company's Academies. FTE
attendance is not a measure of the absolute number of students
attending the Company's Academies; rather, it 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 one-half of each day
is equivalent to 0.5 FTE.
g) The preferred stock and stockholders' deficit balances, as well as the
cash flows from operating and financing activities, have been restated
for all periods presented in the table. See Note 16 to the consolidated
financial statements included at Item 8 for detail on the restatement.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and the related notes thereto included in Item 8 of this
report.
On April 18, 2001, the Company changed its fiscal year end from the 52/53-week
period ending on the first Saturday in July to the 52/53-week period ending on
the Saturday closest to June 30 (See Note 2 of the consolidated financial
statements). The tables below present the results of the 52 weeks ended June 28,
2003, the results of the 52 weeks ended June 29, 2002, and the results of the 52
weeks ended June 30, 2001 (herein referred to as the 2003 year, the 2002 year,
and the 2001 year).
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.
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.
2003 COMPARED TO 2002 RESULTS (IN THOUSANDS OF DOLLARS)
52 WEEKS ENDED 52 WEEKS ENDED
JUNE 28, 2003 JUNE 29, 2002
------------------------ ------------------------
Percent of Percent of
Amount Revenue Amount Revenue
--------- --------- --------- ---------
Revenue $ 390,165 100.0% $ 391,205 100.0%
Operating expenses:
Salaries, wages and benefits 214,414 55.0 215,572 55.1
Facility lease expense 45,652 11.7 45,554 11.6
Depreciation and amortization 10,372 2.7 14,664 3.7
Restructuring charge 4,908 1.3 3,208 0.8
Asset impairments 3,057 0.8 57,436 14.7
Provision for doubtful accounts 2,802 0.7 2,951 0.8
Other 103,280 26.5 110,130 28.2
--------- ----- --------- -----
Total operating expenses 384,485 98.5 449,515 114.9
--------- ----- --------- -----
Operating income (loss) $ 5,680 1.5% $ (58,310) -14.9%
========= ===== ========= =====
During the 2003 year, the Company opened 6 new schools and closed 73 schools. As
a result, the Company operated 648 schools on June 28, 2003. The closures
resulted from management's decision to close certain school locations where the
conditions no longer supported an economically viable operation.
Operating revenue. Operating revenue decreased $1.0 million or 0.3% during the
2003 year as compared to the 2002 year. The operating revenue decrease is the
result of a $16.6 million reduction in operating revenue at closed schools
offset by a $12.9 million increase at established schools, a $2.4 million
increase at new schools and a $0.3 million increase in other revenue. Tuition
revenue at established schools increased 2.7% during the 2003 year as compared
to the 2002 year. The increase in tuition revenue reflects
18
an increase in the average weekly FTE tuition rates of 5.4% offset by a decrease
in full time equivalent (FTE) attendance of 2.7%.
The increase in average weekly FTE tuition rates was principally due to
selective price increases, which were put into place in September 2001 and
September 2002, based on geographic market conditions and class capacity
utilization. The 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. Salaries, wages and benefits decreased $1.2
million or 0.5% during the 2003 year as compared to the 2002 year. As a
percentage of revenue, labor costs were 55.0% for the 2003 year as compared to
55.1% for the 2002 year. The decrease in salaries, wages and benefits includes
reduced labor costs at closed schools of $9.3 million, and reduced bonus costs
of $0.6 million offset by increased labor costs at established schools of $5.3
million, increased labor costs at new schools of $1.3 million, increased field
management and corporate administration labor costs of $0.1 million, and
increased benefit costs of $2.0 million. The increase in labor costs at
established schools was mainly due to a 5.0% increase in average hourly wage
rates offset by a 1.9% decrease in labor hours. New schools experience higher
labor costs relative to revenue as compared to the established schools.
Facility lease expense. Facility lease expense increased $0.1 million or 0.2%
during the 2003 year as compared to the 2002 year. The increase in facility
lease expense was mainly due to lower rent credits in the 2003 year resulting
from certain unfavorable lease liabilities becoming fully amortized prior to the
end of the third quarter of the 2003 year offset by reductions in lease payments
for facilities with contingent rent provisions and lease payments for closed
schools.
Depreciation and amortization. Depreciation expense decreased $4.3 million or
29.3% during the 2003 year as compared to the 2002 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 2002 year.
Restructuring charges. The Company recognized restructuring charges of $7.4
million in the 2003 year in connection with the closure of 73 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 $2.9 million principally
due to settlement of lease liabilities for less than the recorded reserves. In
the 2002 year, the Company recognized a restructuring charge of $3.2 million in
connection with the closure of seven Academies and one divisional office. 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 fixed assets.
Asset impairments. During the fourth quarter of fiscal 2003, the Company
identified conditions, including a projected current year operating loss as well
as negative cash flows in certain of the Company's schools, as indications that
the carrying amount of certain long-lived assets may not be recoverable. In
accordance with the Company's policy, management assessed the recoverability of
long-lived assets at these schools using a cash flow projection based on the
remaining useful lives of the assets. Based on this projection, the cumulative
cash flow over the remaining depreciation or amortization period was
insufficient to recover the carrying value of the assets at certain of these
schools. As a result, the Company recognized impairment losses of $3.1 million
related to property and equipment in the 2003 year. During the fourth quarter of
fiscal 2002, the Company recognized impairment losses of $57.4 million. The
Company identified conditions, including a projected current year consolidated
operating loss as well as negative cash flows in certain of the Company's
regional and divisional operations, as indications that the carrying amount of
certain long-lived assets, primarily goodwill, may not be recoverable. In
accordance with the Company's policy, management assessed the recoverability of
those long-lived assets using a cash flow projection based on the remaining
useful life. Based on this projection, the cumulative cash flow over the
remaining depreciation or amortization period was insufficient to recover the
carrying value of the assets. In addition, the Company evaluated the enterprise
value of its remaining goodwill in accordance with Accounting Principles Board
Opinion No. 17 and determined that the goodwill was fully impaired. As a result,
the
19
Company recognized impairment losses of $57.4 million related to the long-lived
assets, of which $52.3 million related to goodwill and $5.1 million related to
property and equipment in the 2002 year.
Provision for doubtful accounts. The provision for doubtful accounts decreased
$0.1 million or 5.0% during the 2003 year as compared to the 2002 year. The
decrease in the provision for doubtful accounts is principally the result of
improved collection efforts over the prior year.
Other operating costs. Other operating costs decreased $6.9 million or 6.2%
during the 2003 year as compared to the 2002 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 decrease was due primarily to decreases in supplies, marketing,
special projects, school activity costs, personnel, transportation, travel, and
utilities, offset by higher expenses in legal and professional fees, repairs and
maintenance, insurance, food, bank charges and shortages, and miscellaneous
expenses. As a percentage of revenue, other operating costs decreased to 26.5%
in the 2003 year as compared to 28.2% in the 2002 year.
Operating income. As a result of the foregoing, operating income was $5.7
million for the 2003 year as compared to an operating loss of $58.3 million for
the 2002 year.
Interest expense. Net interest expense decreased $0.3 million or 1.5% during the
2003 year as compared to the 2002 year. The decrease was principally due to a
nonrecurring $0.8 million mark-to-market adjustment for derivative instruments
in the 2002 year, offset by a $0.1 million increase resulting from additional
borrowing, and a $0.2 million increase in debt fees, and a $0.2 million increase
in interest expense related to servicing the reserve for closed schools.
Income tax rate. The 2003 year income tax expense was $0.2 million, or 2% of the
$15.7 million pretax loss compared with the 2002 tax benefit of $3.2 million, or
4% of the pretax loss. Due to a change in certain federal tax laws during the
2002 year, the Company filed for and received a refund of income taxes paid in
prior years. Excluding the impact of this refund, the effective tax rate was 0%
in the 2003 and 2002 years due to the loss before income taxes in both years and
the Company's provision of a full valuation allowance against deferred tax
assets created in the 2003 and 2002 years.
2002 COMPARED TO 2001 RESULTS (IN THOUSANDS OF DOLLARS)
52 WEEKS ENDED 52 WEEKS ENDED
JUNE 29, 2002 JUNE 30, 2001
------------------------- ------------------------
Percent of Percent of
Amount Revenue Amount Revenue
---------- --------- --------- ---------
Revenue $ 391,205 100.0% $ 384,924 100.0%
Operating expenses:
Salaries, wages and benefits 215,572 55.1 216,297 56.2
Facility lease expense 45,554 11.6 44,815 11.6
Depreciation and amortization 14,664 3.7 14,966 3.9
Restructuring charges 3,208 0.8 2,455 0.6
Asset impairments 57,436 14.7 0 0.0
Provision for doubtful accounts 2,951 0.8 4,665 1.2
Other 110,130 28.2 93,308 24.2
---------- ----- --------- -----
Total operating expenses 449,515 114.9 376,506 97.8
---------- ----- --------- -----
Operating income (loss) $ (58,310) -14.9% $ 8,418 2.2%
========== ===== ========= =====
During the 2002 year, the Company opened 8 new schools and closed 27 schools. As
a result, the Company operated 715 schools on June 29, 2002. Thirteen of the
closures resulted from management's
20
decision to close certain schools located in areas where conditions no longer
supported economically viable operations, and the remaining 14 closures were due
to management's decision not to renew the leases or contracts of certain
schools.
Operating revenue. Operating revenue increased $6.3 million or 1.6% during the
2002 year as compared to the 2001 year. The operating revenue increase is the
result of a $14.5 million increase at established schools (schools which were
open prior to the 2001 year), and a $2.6 million increase at new schools, most
of which were opened in the first half of the 2002 year, offset by $10.8 million
of reduced operating revenue at closed schools. Tuition revenue increased 1.6%
during the 2002 year as compared to the 2001 year. The increase in tuition
revenue reflects an increase in the average weekly FTE tuition rates of 7.4%
offset by a decrease in full time equivalent (FTE) attendance of 5.3%.
The increase in average weekly FTE tuition rates was principally due to
selective price increases, which were put into place in September 2000 and
September 2001, based on geographic market conditions and class capacity
utilization. The decrease in FTE attendance was due to a 2.9% decline at
established schools and an 85.8% decline in schools closed during 2001 and 2002,
offset by a 275.8% increase at our new schools.
Salaries, wages and benefits. Salaries, wages and benefits decreased $0.7
million or 0.3% during the 2002 year as compared to the 2001 year. As a
percentage of revenue, labor costs were 55.1% for the 2002 year as compared to
56.2% for the 2001 year. The decrease in salaries, wages and benefits includes
reduced labor costs at closed schools of $6.4 million, and reduced bonus costs
of $0.4 million offset by increased labor costs at established schools of $2.2
million, increased labor costs at new schools of $1.9 million, increased field
management and corporate administration labor costs of $1.5 million, and
increased benefit costs of $0.5 million. The increase in labor costs at
established schools was mainly due to a 4.3% increase in average hourly wage
rates offset by a 3.3% decrease in labor hours. New schools experience higher
labor costs relative to revenue as compared to the established schools.
Facility lease expense. Facility lease expense increased $0.7 million or 1.6%
during the 2002 year as compared to the 2001 year. The increase in facility
lease expense was mainly due to a $0.8 million decrease in sublease income and a
$0.2 million increase related to the new corporate office, offset by a $0.3
million reduction in lease payments for facilities with contingent rent
provisions.
Depreciation and amortization. Depreciation expense decreased $0.3 million or
2.0% during the 2002 year as compared to the 2001 year. This decrease was mainly
due to asset write-offs resulting from the 2001 year school closings that
occurred mainly in the fourth quarter.
Restructuring charges. The Company recognized a restructuring charge of $3.2
million in the 2002 year in connection with the closure of seven Academies and
one divisional office. All of those Academies and the divisional office were
closed during the 2002 year. In the 2001 year, the Company recognized a
restructuring charge of $2.5 million in connection with the closure of 15
Academies and two regional offices. Nine of the 15 Academies and both regional
offices closed in the 2001 year, while the remainder closed in the 2002 year.
The restructuring charges consisted principally of the present value of rent
(net of anticipated sublease income), real estate taxes, common area maintenance
charges, and utilities, the write-off of goodwill associated with closed
Academies, and the write-down of fixed assets to fair market value.
Asset impairments. During the fourth quarter of fiscal 2002, the Company
recognized impairment losses of $57.4 million. The Company identified
conditions, including a projected current year consolidated operating loss as
well as negative cash flows in certain of the Company's regional and divisional
operations, as indications that the carrying amount of certain long-lived
assets, primarily goodwill, may not be recoverable. In accordance with the
Company's policy, management assessed the recoverability of those long-lived
assets using a cash flow projection based on the remaining useful life. Based on
this projection, the cumulative cash flow over the remaining depreciation or
amortization period was insufficient to recover the carrying value of the
assets. In addition, the Company evaluated the carrying value of its remaining
goodwill in accordance with Accounting Principles Board Opinion No. 17 and
determined that the goodwill was fully impaired. As a result, the Company
recognized impairment losses of $57.4 million related to the
21
long-lived assets, of which $52.3 million related to goodwill and $5.1 million
related to property and equipment.
Provision for doubtful accounts. The provision for doubtful accounts decreased
$1.7 million or 36.7% during the 2002 year as compared to the 2001 year. The
decrease in the provision for doubtful accounts is principally the result of
improved collection efforts over the prior year.
Other operating costs. Other operating costs increased $16.8 million or 18.0%
during the 2002 year as compared to the 2001 year. Other operating costs include
repair and maintenance, utilities, insurance, real estate taxes, food,
transportation, marketing, supplies, travel, professional fees, recruitment,
training and other miscellaneous costs. In the 2002 year, supply costs increased
$2.7 million due to a change in estimates related to the determination of supply
inventories on hand. The other increases were due primarily to higher expenses
in utilities, insurance, marketing, travel, bank charges and shortages, school
activity costs, management meetings, professional fees, and recruitment costs,
offset by decreases in training, postage, data processing and printing costs. As
a percentage of revenue, other operating costs increased to 28.2% in the 2002
year as compared to 24.2% in the 2001 year.
Operating income. As a result of the foregoing, the operating loss was $58.3
million for the 2002 year as compared to operating income of $8.4 million for
the 2001 year. The decrease was principally due to the change in estimate
related to the determination of supply inventories on hand and higher other
operating costs offset by higher revenue.
Interest expense. Net interest expense increased $1.3 million or 6.4% during the
2002 year as compared to the 2001 year. The increase was principally due to a
nonrecurring $2.1 million mark-to-market credit adjustment for derivative
instruments in the 2001 year, a $0.2 million increase resulting from additional
borrowing, and a $0.3 million increase in debt fees, offset by $1.2 million in
accretion of the fair value discount to the carrying value of the Senior Notes
and a $0.1 million increase in interest income.
Income tax rate. The 2002 year income tax benefit was $3.2 million, or 4% of
pretax loss compared with the 2001 year income tax expense of $16.2 million or
135% of the $12.0 million pretax loss. Due to a change in certain federal tax
laws during fiscal 2002, the Company was able to file for and receive a refund
of income taxes paid in prior years. This refund of approximately $3.2 million
was recorded as a benefit in the current year. Excluding the impact of this
refund, the effective tax rate in fiscal 2002 was 0% due to the current period
operating loss and the Company's provision of a full valuation allowance against
deferred tax assets created in the current year. The principal factors impacting
the effective income tax rate in the 2001 year were state income taxes,
nondeductible goodwill amortization, write-off of goodwill related to closed
schools, and the creation of $20.9 million deferred tax asset valuation
allowance.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are from cash flows from operations,
borrowings on the revolving credit facility under an agreement entered into on
May 11, 1998, providing for a term loan facility and a revolving credit
agreement (the Credit Agreement), and capital contributions received from LPA.
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 $1.0 million in fiscal year 2004,
$5.5 million in fiscal year 2005, and $28.0 million in fiscal year 2006. The
term loan is also subject to mandatory prepayment in the event of certain equity
or
22
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 June
28, 2003, there was $34.5 million outstanding under the term loan and $19.1
million outstanding under the Revolving Credit Facility. La Petite had
outstanding letters of credit in an aggregate amount of $5.9 million, and $0.0
million was available for working capital purposes under the Revolving Credit
Facility. The Company's Credit Agreement, Senior Notes and preferred stock
contain certain covenants that limit the ability of the Company to incur
additional indebtedness, pay cash dividends or make certain other restricted
payments.
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 and each of the quarterly periods in fiscal years 1999 through
2002. The Company received limited waivers of noncompliance with the foregoing
financial and informational covenants through February 7, 2003. Amendment No. 5
to the Credit Agreement dated as of February 10, 2003 permanently waived such
defaults.
On February 10, 2003, Parent, La Petite and its senior secured lenders entered
into Amendment No. 5 to the Credit Agreement. The amendment waived the existing
defaults for the first quarter of fiscal year 2003 as well as existing defaults
in fiscal years 1999 through 2002 of Parent and La Petite, 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. See Notes 4 and 8 to the consolidated financial statements
included at Item 8 of this report for further information.
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. Amendment No. 6 to the Credit
Agreement dated as of July 31, 2003, permanently waived such defaults.
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 fiscal 2003 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, Amendment No. 6 revised the definition of Consolidated EBITDA in
the Credit Agreement. See Notes 4 and 8 to the consolidated financial statements
included at Item 8 of this report for further information.
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 the Securities Purchase Agreement dated July 31, 2003, Parent
may issue up to 6,669,734 shares of its Series B convertible preferred stock.
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, at September 25, 2003 the
contingent equity commitment from the stockholders of Parent has been reduced
from $14.5 million to $13.8 million. See Note 8 to the consolidated financial
statements included at Item 8 of this report for further information.
As of September 25, 2003, LPA beneficially owned 92.5% of the common stock of
Parent on a fully diluted basis, $45 million of Series A preferred stock of
Parent and approximately $15.7 million of Series B
23
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.
Cash flows used for operating activities were $0.1 million during the 2003 year
compared to cash flows provided by operating activities of $4.4 million during
the 2002 year. The $4.5 million decrease in cash flows from operations was
mainly due to increased restricted cash investments of $1.3 million and
increased working capital amounts of $8.2 million, offset by a $5.0 million
decrease in net losses, net of non-cash charges. Restricted cash investments
represent cash deposited in an escrow account as security for the self-insured
portion of the Company's workers compensation and automobile insurance coverage.
Cash flows used for investing activities were $4.1 million during the 2003 year
as compared to $8.8 million during the 2002 year. The $4.7 million decrease was
due to a $4.0 million decrease in capital expenditures and a $0.7 million
increase in proceeds from sale of assets.
Cash flows used for financing activities were $2.3 million during the 2003 year
compared to cash flows from financing activities of $15.1 million during the
2002 year. The $17.4 million decrease in cash flows for financing activities was
due to a $2.2 million decrease in net borrowings under the revolving credit
agreement, a $1.2 million increase in repayments of debt and capital lease
obligations, and a $14.3 million decrease in proceeds from the issuance of
redeemable preferred stock and warrants, offset by a $0.3 million decrease in
deferred financing costs.
Cash flows from operating activities were $4.4 million during the 2002 year as
compared to $3.5 million during the 2001 year. The $0.9 million increase in cash
flows from operations was due to $8.3 million in decreased working capital
amounts offset by increased restricted cash investments of $3.6 million and $3.8
million increase in net losses, net of non-cash charges. Restricted cash
investments represent cash deposited in an escrow account as security for the
self-insured portion of the Company's workers compensation and automobile
insurance coverage.
Cash flows used for investing activities were $8.8 million during the 2002 year
as compared to $14.3 million during the 2001 year. The $5.5 million decrease was
due to a $4.9 million decrease in capital expenditures and a $0.6 million
increase in proceeds from sale of assets.
Cash flows from financing activities were $15.1 million during the 2002 year
compared to $12.3 million during the 2001 year. The $2.8 million increase in
cash flows from financing activities was principally due to a $15.0 million
increase in proceeds from the issuance of Series B preferred stock and warrants
partially offset by an $8.8 million reduction in net borrowings under the
revolving credit agreement, a $0.7 million increase in deferred financing costs
and a $2.7 million increase in bank overdrafts related to the timing of monthly
expense payments. During the 2003 year, the Company opened four
Residential-based Academies, one Residential-based Academy annex, and one
Employer-based Academy. Employer-based Academies are generally operated in
facilities provided by the employer.
Total capital expenditures for the 52 weeks ended June 28, 2003 and June 29,
2002 were $5.6 million and $9.6 million, respectively. The Company views all
capital expenditures, other than those incurred in connection with the
development of new schools, to be maintenance capital expenditures. Maintenance
capital expenditures for the 52 weeks ended June 28, 2003 and June 29, 2002 were
$5.6 million and $8.4 million, respectively. For fiscal year 2004, the Company
expects total maintenance capital expenditures to be approximately $8.5 million.
In addition to maintenance capital expenditures, the Company expends additional
funds to ensure that its facilities are in good working condition. Such funds
are expensed in the periods in which they are incurred. The amounts of such
expenses for the 52 weeks ended June 28, 2003 and June 29, 2002 were $15.1
million and $13.0 million, respectively.
The Company has certain contractual obligations and commercial commitments.
Contractual obligations are those that will require cash payments in accordance
with the term of a contract, such as borrowing or lease agreements. Commercial
commitments represent obligations for cash performance in the event of
24
demands by third parties or other contingent events, such as lines of credit.
Our contractual obligations and commercial commitments at June 28, 2003 were as
follows, in thousands of dollars:
Fiscal Year
--------------------------------------------------------------------------------------
Total 2004 2005 2006 2007 2008 Thereafter
----- ---- ---- ---- ---- ---- ----------
Long-term debt $179,494 $ 1,000 $ 5,500 $27,994 $ 145,000
Revolving credit
facility 19,094 19,094
Capital lease
obligations 1,819 1,499 318 2
Operating leases 186,198 41,332 34,506 29,603 20,325 14,279 46,153
Letters of credit 5,905 5,905
Severance
agreement(a) 905 200 200 200 200 105
-------- -------- ------- ------- ------- --------- ----------
$392,510 $ 49,736 $40,324 $76,693 $20,325 $ 159,279 $ 46,153
======== ======== ======= ======= ======= ========= ==========
(a) Commitments under a Separation Agreement the Company's former Chief
Executive Officer and President entered into on December 11, 2002.
Over each of the past three years, the Company has experienced significant
losses before taxes. In addition, the Company had a working capital deficit and
a stockholders' deficit as of June 28, 2003. These losses resulted in repeated
instances where the Company was not in compliance with its financial covenants
and required multiple equity investments by LPA and other electing stockholders
to enable it to meet is financial obligations as they came due and provide
adequate liquidity to operate the business. Management has instituted a series
of plans and actions designed to improve the Company's operating results and
cash flow and to strengthen the Company's financial position. These plans
included cost reductions resulting from continued academy closures and personnel
reductions, as well as targeted reductions in certain overhead costs and
optimization of the Company's real estate portfolio. Management is continuing to
identify opportunities to maximize revenue and reduce costs and believes that
implementation of 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 up to $13.8 million provided by LPA and
certain of the other stockholders of Parent, 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. There also can be no assurance that the Company can obtain additional
funding from Parent beyond that as noted above or any other external source.
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 our significant accounting policies, see "Item 8. Financial
Statements and Supplementary Data, Note 2. Summary of Significant Accounting
Policies." The following accounting estimates and related policies are
considered critical to the preparation of our financial statements due to the
business judgment and estimation processes involved in their application.
Revenue recognition. Tuition revenues, net of discounts, and other revenues are
recognized as services are performed. Certain fees may be received in advance of
services being rendered, in which case the fee
25
revenue is deferred and recognized over the appropriate time period. Our net
revenues meet the criteria of SAB No. 101, including the existence of an
arrangement, the rendering of services, a determinable fee and probable
collection.
Accounts receivable. Our accounts receivable are comprised primarily of tuition
due from governmental agencies, parents and employers. Accounts receivable are
presented at estimated net realizable value. We use estimates in determining the
collectibility of our accounts receivable and must rely on our evaluation of
historical trends, governmental funding levels, specific customer issues and
current economic trends to arrive at appropriate allowances. Material
differences may result in the amount and timing of bad debt expense if actual
experience differs significantly from management estimates.
Long-lived assets. Under the requirements of Statement of Financial Accounting
Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, we assess the potential impairment of property and equipment
whenever events or change in circumstances indicate that the carrying value may
not be recoverable. An asset's value is impaired if our estimate of the
aggregate future cash flows, undiscounted and without interest charges, to be
generated by the asset are less than the carrying value of the asset. Such
estimates consider factors such as expected future operating income and
historical trends, as well as the effects of demand and competition. To the
extent impairment has occurred, the loss will be measured as the excess of the
carrying amount of the asset over the fair value of the asset. Such estimates
require the use of judgment and numerous subjective assumptions, which, if
actual experience varies, could result in material differences in the
requirements for impairment charges. Impairment charges of $3.1 million were
recorded in fiscal 2003 and were shown separately as asset impairment expense in
the financial statements.
Self-insurance obligations. The Company self-insures a portion of its general
liability, workers' compensation, auto, property and employee medical insurance
programs. The Company purchases stop loss coverage at varying levels in order to
mitigate its potential future losses. The nature of these liabilities, which may
not fully manifest themselves for several years, requires significant judgment.
The Company estimates the obligations for liabilities incurred but not yet
reported or paid based on available claims data and historical trends and
experience, as well as future projections of ultimate losses, expenses, premiums
and administrative costs. The accrued obligations for these self-insurance
programs were $15.1 million and $11.6 million at June 28, 2003 and June 29,
2002, respectively, see "Item 8. Financial Statements and Supplementary Data,
Note 2. Summary of Significant Accounting Policies, Self-insurance Programs."
Our internal estimates are reviewed annually by a third party actuary. While we
believe that the amounts accrued for these obligations are sufficient, any
significant increase in the number of claims and costs associated with claims
made under these programs could have a material adverse effect on our financial
position, cash flows or results of operations.
Income taxes. Accounting for income taxes requires the Company to estimate its
income taxes in each jurisdiction in which it operates. Due to differences in
the recognition of items included in income for accounting and tax purposes,
temporary differences arise which are recorded as deferred tax assets or
liabilities. The Company estimates the likelihood of recovery of these assets,
which is dependent on future levels of profitability and enacted tax rates. The
Company determined that, based on cumulative historical pretax losses, it was
more likely than not that the deferred tax assets as of June 28, 2003 and June
29, 2002 would not be realized. Therefore, the Company recorded a valuation
allowance to fully reserve those deferred tax assets at both fiscal 2003 and
2002 year-end. The provision for income taxes at June 28, 2003 and June 29, 2002
includes $6.3 million and $6.3 million, respectively to record these valuation
allowances.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("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 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 has
26
impacted the timing of recognizing a restructuring charge, the Company has
determined that SFAS No. 146 did 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 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 the issuance of FIN 45. Because the Company has no
guarantees, the Company believes that the adoption of the recognition provisions
of FIN 45 will not have a material effect on its financial condition, results of
operations or cash flows.
In January 2003, the FASB issued FASB 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
relationships with variable interest entities and therefore does not believe
that the adoption of FIN 46 will not have an impact on its financial condition,
results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". The statement
improves the accounting for certain financial instruments that, under previous
guidance, issuers could account for as equity. The new statement requires that
certain instruments be classified as liabilities in statements of financial
position. Most of the guidance in SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The
27
Company has determined that SFAS No. 150 will impact the classification of its
Series A preferred stock and will require that accrued dividends and accretion
related to these shares be classified as interest expense rather than a charge
to accumulated deficit.
SEASONALITY
See "Item 1. Business -Seasonality."
GOVERNMENTAL LAWS AND REGULATIONS
See "Item 1. Business -Regulation and Government Involvement."
INFLATION AND GENERAL ECONOMIC CONDITION
During the past three years (a period of low inflation) the Company implemented
selective increases in tuition rates based on geographic market conditions and
class capacity utilization. During the 2003 year, the Company experienced
inflationary pressures on average wage rates, as hourly rates increased
approximately 5.0%. Management believes this is occurring industry wide and
there is no assurance that such wage rate increases can be recovered through
future increases in tuition. A sustained recession with high unemployment may
have a material adverse effect on the Company's operations.
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.
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 childcare
services and seasonal fluctuations.
- Competitive factors, including: (a) pricing pressures primarily from
local nursery schools and childcare centers and other large, national
for-profit childcare 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 childcare 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
childcare 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.
28
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In prior years, derivative financial instruments were utilized by the Company in
the management of its interest rate exposures. The Company currently does not
use derivative financial instruments for trading or speculative purposes.
Indebtedness as of June 28, 2003 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 $34.5 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, $1.0 million in fiscal year 2004, $5.5
million in fiscal year 2005 and $28.0 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 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements:
Independent Accountants' Report
Consolidated Balance Sheets as of June 28, 2003 and June 29, 2002, as
restated
Consolidated Statements of Operations and Comprehensive Loss for the 52
weeks ended June 28, 2003, June 29, 2002, and June 30, 2001
Consolidated Statements of Stockholders' Deficit for the 52 weeks ended
June 28, 2003, June 29, 2002, and June 30, 2001, as restated
Consolidated Statements of Cash Flows for the 52 weeks ended June 28,
2003, June 29, 2002, and June 30, 2001, as restated
Notes to Consolidated Financial Statements
29
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders
LPA Holding Corp.
We have audited the accompanying consolidated balance sheets of LPA Holding
Corp. and subsidiaries (the "Company") as of June 28, 2003 and June 29, 2002,
and the related consolidated statements of operations and comprehensive loss,
stockholders' deficit, and cash flows for each of the three years in the period
ended June 28, 2003. Our audits also included the financial statement schedules
listed in the Index at Item 14. (a). 2. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of LPA Holding Corp. and subsidiaries
as of June 28, 2003 and June 29, 2002, and the results of their operations and
their cash flows for each of the three years in the period ended June 28, 2003,
in conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
As discussed in Note 16, the accompanying financial statements, as well as the
related financial statement schedules, have been restated.
Deloitte & Touche LLP
Chicago, Illinois
September 22, 2003
(December 2, 2003 as to the effects of the restatement discussed in Note 16)
30
LPA HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 28, JUNE 29,
2003 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 9,526 $ 16,092
Restricted cash investments 7,993 3,516
Accounts and notes receivable, (net of allowance for
doubtful accounts of $496 and $914, respectively) 11,024 11,225
Supplies inventory 3,075 2,955
Other prepaid expenses 905 1,517
Refundable taxes 56 528
------------ ------------
Total current assets 32,579 35,833
Property and equipment, at cost:
Land 5,442 5,168
Buildings and leasehold improvements 66,920 74,137
Furniture and equipment 11,901 16,151
Construction in progress 2,794
------------ ------------
84,263 98,250
Less accumulated depreciation 46,149 52,189
------------ ------------
Property and equipment, net 38,114 46,061
Other assets (Note 3) 7,396 9,674
------------ ------------
Total assets $ 78,089 $ 91,568
============ ============
(continued)
31
LPA HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 28, JUNE 29,
2003 2002
(AS RESTATED, (AS RESTATED,
SEE NOTE 16) SEE NOTE 16)
------------- -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Overdrafts due banks $ 3,055 $ 4,491
Accounts payable 8,445 8,069
Current maturities of long-term debt and capital lease
obligations (Note 4) 2,499 2,150
Accrued salaries, wages and other payroll costs 17,954 17,450
Accrued insurance liabilities 5,141 2,471
Accrued property and sales taxes 4,313 4,053
Accrued interest payable 1,982 2,119
Reserve for closed academies 2,137 1,833
Other current liabilities 6,548 8,754
------------- -------------
Total current liabilities 52,074 51,390
Long-term liabilities:
Long-term debt and capital lease obligations (Note 4) 197,908 196,963
Other long-term liabilities (Note 5) 11,401 11,220
------------- -------------
Total long-term liabilities 209,309 208,183
Series A 12% mandatorily redeemable preferred stock 69,378 60,422
($0.01 par value per share); 45,000 shares authorized, issued
and outstanding as of June 28, 2003 and June 29, 2002; aggregate
liquidation preference of $77.2 million and $68.8 million,
respectively
Series B 5% convertible redeemable participating preferred stock 16,739 15,227
($0.01 par value per share); 13,645,000 shares authorized,
7,241,490 and 6,899,724 shares issued and outstanding as of June
28, 2003 and June 29, 2002, respectively; aggregate liquidation
preference of $16.7 million and $15.2 million, respectively
Stockholders' deficit:
Class A common stock ($0.01 par value per share); 17,500,000 8 6
shares authorized: 773,403 and 564,985 shares issued and
outstanding as of June 28, 2003 and June 29, 2002, respectively.
Class B common stock ($0.01 par value per share); 20,000 shares
authorized, issued and outstanding as of June 28, 2003 and June
29, 2002
Common stock warrants 8,596 8,596
Accumulated other comprehensive income 160 246
Accumulated deficit (278,175) (252,502)
------------- -------------
Total stockholders' deficit (269,411) (243,654)
------------- -------------
Total liabilities and stockholders' deficit $ 78,089 $ 91,568
============= =============
See notes to consolidated financial statements.
32
LPA HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(IN THOUSANDS OF DOLLARS)
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JUNE 28, JUNE 29, JUNE 30,
2003 2002 2001
---------- ---------- ---------
Revenue $ 390,165 $ 391,205 $ 384,924
Operating expenses:
Salaries, wages and benefits 214,414 215,572 216,297
Facility lease expense 45,652 45,554 44,815
Depreciation and amortization 10,372 14,664 14,966
Restructuring charges (Note 12) 4,908 3,208 2,455
Asset impairments (Note 13) 3,057 57,436
Provision for doubtful accounts 2,802 2,951 4,665
Other 103,280 110,130 93,308
---------- ---------- ---------
Total operating expenses 384,485 449,515 376,506
---------- ---------- ---------
Operating income (loss) 5,680 (58,310) 8,418
Interest expense 21,509 21,902 20,487
Interest income (127) (204) (85)
---------- ---------- ---------
Net interest expense 21,382 21,698 20,402
---------- ---------- ---------
Loss before income taxes (15,702) (80,008) (11,984)
Provision (benefit) for income taxes 246 (3,236) 16,204
---------- ---------- ---------
Net loss (15,948) (76,772) (28,188)
---------- ---------- ---------
Other comprehensive income (loss):
Derivative adjustments, net 492
Amounts reclassified into operations (86) (85) (161)
---------- ---------- ---------
Total other comprehensive income (loss) (86) (85) 331
---------- ---------- ---------
Comprehensive loss $ (16,034) $ (76,857) $ (27,857)
========== ========== =========
See notes to consolidated financial statements.
33
LPA HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS OF DOLLARS)
CLASS A AND B
-------------
COMMON STOCK
------------ ACCUMULATED TOTAL
NUMBER ACCUMULATED OTHER COMPRE- STOCKHOLDERS'
OF SHARES AMOUNT WARRANTS DEFICIT HENSIVE INCOME DEFICIT
--------- ------ -------- ----------- -------------- -------------
Balance, July 1, 2000 (as 584,985 $ 6 $ 8,596 $ (132,725) $(124,123)
restated, see Note 16)
======== ====== ======== =========== ============== =============
Derivative adjustments, net 492 492
Amounts reclassified into operations (161) (161)
Preferred stock dividend (6,791) (6,791)
and accretion (as
restated, see Note 16)
Net loss (28,188) (28,188)
-------- ------ -------- ----------- -------------- -------------
Balance, June 30, 2001 584,985 6 8,596 (167,704) 331 (158,771)
(as restated, see Note 16)
======== ====== ======== =========== ============== =============
Amounts reclassified into operations (85) (85)
Preferred stock dividend (8,026) (8,026)
and accretion (as
restated, see Note 16)
Net loss (76,772) (76,772)
-------- ------ -------- ----------- -------------- -------------
Balance, June 29, 2002 584,985 6 8,596 (252,502) 246 (243,654)
(as restated, see Note 16)
======== ====== ======== =========== ============== =============
Amounts reclassified into operations (86) (86)
Exercise of stock options 208,418 2 2
Preferred stock dividend (9,725) (9,725)
and accretion (as
restated, see Note 16)
Net loss (15,948) (15,948)
-------- ------ -------- ----------- -------------- -------------
Balance, June 28, 2003 793,403 $ 8 $ 8,596 $ (278,175) $ 160 $ (269,411)
(as restated, see Note 16)
======== ====== ======== =========== ============== =============
See notes to consolidated financial statements
34
LPA HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JUNE 28, 2003 JUNE 29, 2002 JUNE 30, 2001
(AS RESTATED, (AS RESTATED, (AS RESTATED,
SEE NOTE 16) SEE NOTE 16) SEE NOTE 16)
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (15,948) $ (76,772) $ (28,188)
Adjustments to reconcile net loss to net cash from
operating activities
Asset impairments 3,057 57,436
Restructuring charges 4,908 3,208 2,455
Depreciation and amortization 10,372 14,664 14,966
Loss on sales and disposals of property and equipment 90 29 93
Deferred income taxes 16,520
Other non cash items 1,925 867 (2,575)
Changes in assets and liabilities:
Restricted cash investments (4,477) (3,154) 475
Accounts and notes receivable 201 595 (2,370)
Supplies inventory (120) 3,391 781
Other prepaid expenses 612 1,438 2,641
Refundable taxes 472 53 (471)
Accounts payable 376 621 (825)
Accrued salaries, wages and other payroll costs 1,210 235 1,561
Accrued property and sales taxes 260 246 176
Accrued interest payable (137) (108) (341)
Other current liabilities (2,206) 2,171 613
Accrued insurance liabilities 2,861 2,177 986
Reserve for closed academies (3,268) (3,238) (3,645)
Other changes in assets and liabilities, net (308) 542 598
------------- ------------- -------------
Net cash (used for) provided by operating
activities (120) 4,401 3,450
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (5,594) (9,629) (14,502)
Proceeds from sale of assets 1,487 838 189
------------- ------------- -------------
Net cash used for investing activities (4,107) (8,791) (14,313)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt and capital lease obligations (3,083) (1,917) (1,900)
Net borrowings under the Revolving Credit Agreement 1,931 4,164 13,000
Deferred financing costs (496) (745)
Proceeds from issuance of common stock, redeemable
preferred stock and warrants, net of expenses 745 15,000
Overdrafts due bank (1,436) (1,434) 1,169
------------- ------------- -------------
Net cash (used for) provided by financing
activities (2,339) 15,068 12,269
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,566) 10,678 1,406
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 16,092 5,414 4,008
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,526 $ 16,092 $ 5,414
============= ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 19,585 $ 19,917 $ 20,866
Income taxes 138 184 160
Non-cash investing and financing activities:
Capital lease obligations 1,400 801 1,793
See notes to consolidated financial statements.
35
LPA HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 childcare programs
that are available on a full-time or part-time basis, for children
between six weeks and twelve years old. The Company's Academies are
located in 36 states and the District of Columbia, primarily in the
southern, Atlantic coastal, mid-western and western regions of the
United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - Over each of the past three years, the Company
has experienced significant losses before taxes. In addition, as shown
in the accompanying financial statements as of June 28, 2003, the
Company has a working capital deficit and a stockholders' deficit.
These losses resulted in repeated instances where the Company was not
in compliance with its financial covenants and required multiple equity
investments by LPA and other electing stockholders to enable it to meet
its financial obligations as they came due and provide adequate
liquidity to operate the business. Management has instituted a series
of plans and actions designed to improve the Company's operating
results and cash flow and to strengthen the Company's financial
position. These plans included cost reductions resulting from continued
academy closures and personnel reductions, as well as targeted
reductions in certain overhead costs and optimization of the Company's
real estate portfolio. Management is continuing to identify
opportunities to maximize revenue and reduce costs and believes that
implementation of their 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 up to
$13.8 million provided by LPA and certain of the other stockholders of
Parent, 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. There also can be no assurance that the Company
can obtain additional funding from LPA beyond that as noted above or
any other external source.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Parent and its wholly-owned subsidiary, La
Petite, and La Petite's wholly-owned subsidiaries, Bright Start and
Services, after elimination of all significant inter-company accounts
and transactions.
FISCAL YEAR END - On April 18, 2001, the Company changed its fiscal
year end from the 52 or 53-week period ending on the first Saturday in
July to the 52 or 53-week period ending on the Saturday closest to June
30. This change was made to align the Company's business fiscal year
with its tax fiscal year.
36
USE OF ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America 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.
CASH EQUIVALENTS - The Company's cash equivalents consist of commercial
paper and money market funds with original maturities of three months
or less.
RESTRICTED CASH INVESTMENTS - The restricted cash investment balance
represents cash deposited in an escrow account as security for the
self-insured portion of the Company's workers compensation and
automobile insurance coverage.
SUPPLIES INVENTORY- The Company's inventory consists primarily of
various supplies, such as books, small equipment and office supplies,
which are used in the operation of the Academies. The Company estimates
the value of supplies on hand based on recent purchases and the related
usage periods of those supplies. During fiscal 2002, the Company
changed its methodology for estimating the usage of supplies. The
change in estimate resulted in a $2.7 million reduction in the supplies
inventory in the fourth quarter of fiscal 2002.
PROPERTY AND EQUIPMENT - Buildings, furniture and equipment are
depreciated over the estimated useful lives of the assets using the
straight-line method. Leasehold improvements are depreciated over the
lesser of the estimated useful lives of the assets or the remaining
life of the lease using the straight-line method. For financial
reporting purposes, buildings are generally depreciated over 29 to 40
years, furniture and equipment over three to 10 years and leasehold
improvements over five to 15 years.
Maintenance and repairs are charged to expense as incurred. The cost of
additions and improvements is capitalized and depreciated over the
remaining useful lives of the assets. The cost and accumulated
depreciation of assets sold or retired are removed from the accounts,
and any gain or loss is recognized in the year of disposal, except
gains and losses on property and equipment that have been sold and
leased back, which are recognized over the terms of the related lease
agreements.
GOODWILL - The excess of the purchase price over the fair value of
assets and liabilities acquired related to the acquisitions of La
Petite and Bright Start were being amortized over periods of 30 years
and 20 years, respectively, on the straight-line method. As discussed
in Note 13, the Company wrote-off the unamortized goodwill balance in
the fourth quarter of fiscal 2002.
OTHER ASSETS - Other assets include real estate property held for sale,
the deferred loss on real estate sale-leaseback transactions, deposits
for rent and utilities, and deferred financing costs. The loss on
sale-leaseback transactions is being amortized over the lease term.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews long-lived assets
and certain identifiable intangibles for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If the carrying amount is not recoverable and
the fair value is less than the carrying amount of the asset, a loss is
recognized for the difference. Fair value is determined based on market
quotes, if available, or is based on valuation techniques (See Note
13).
INCOME TAXES - The Company uses the asset and liability method of
accounting for deferred income taxes. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. This method also requires
the recognition of future tax benefits such as net operating loss carry
forwards, to the extent that realization of such benefits is more
likely than not. Deferred tax
37
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
DISCLOSURES REGARDING FINANCIAL INSTRUMENTS - At June 28, 2003 the
carrying values of the Company's financial instruments, with the
exception of the Company's Senior Notes, preferred stock, and
convertible redeemable participating preferred stock approximate fair
value. The estimated fair value of the Senior Notes was $87.0 million
and $76.8 million at June 28, 2003 and June 29, 2002, respectively.
Estimates of fair value for the Senior Notes are obtained from
independent broker quotes. There is not an active market for the
Company's preferred stock. Management estimates that the Series A and
Series B preferred stock had no fair value at June 28, 2003 and June
29, 2002.
RECOGNITION OF REVENUES AND PRE-OPENING EXPENSES - The Company operates
preschool education and childcare Academies. Tuition revenue, net of
discounts, and other revenues are recognized as services are performed.
Certain fees and tuition revenue may be received in advance of services
being rendered, in which case the fee revenue is deferred and
recognized over the appropriate time period. At June 28, 2003 and June
29, 2002, deferred registration fees and tuition revenue were $3.1
million and $3.5 million, respectively. Expenses associated with
opening new Academies are charged to expense as incurred.
ADVERTISING COSTS - The Company expenses the production costs of
advertising the first time the advertising takes place, except for
direct-response advertising, which is capitalized and amortized over
its expected period of future benefits. At June 28, 2003 and June 29,
2002, no advertising was reported as an asset. Advertising expense was
$4.3 million, $7.3 million and $6.1 million for the 52 weeks ended June
28, 2003, June 29, 2002 and June 30, 2001, respectively.
SELF-INSURANCE PROGRAMS - The Company is self-insured for certain
levels of general liability, workers' compensation, auto and employee
medical coverage. Estimated costs of these self-insurance programs are
accrued at the value of projected settlements for known and anticipated
claims incurred.
STOCK-BASED COMPENSATION - The Company accounts for stock compensation
awards under Accounting Principles Board ("APB") Opinion No. 25 that
requires compensation cost to be recognized based on the excess, if
any, between the market price of the stock at the date of grant and the
amount an employee must pay to acquire the stock. The Company has
disclosed the pro forma net income (loss) determined under the fair
value method in accordance with Statement of Financial Accounting
Standards ("SFAS) No. 123.
The weighted average fair value at date of grant for options granted
during fiscal year 2003 was $0.00. There were no options granted in
fiscal 2002. 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. The Company is privately owned and there is no market for
its stock. The estimated compensation element is based on the time
value of money at the U.S. Treasury rates assuming that the value of
the stock will be at least equal to the grant price when fully
exercisable. The estimated compensation expense is assumed to be
amortized over the vesting periods.
SEGMENT REPORTING - The Company has determined that it currently
operates entirely in one segment.
DERIVATIVE FINANCIAL INSTRUMENTS - Effective July 2, 2000, the Company
adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, which establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. All
derivatives, whether designated in hedging relationships or not, are
required to be recorded on the balance sheet at fair
38
value. If the derivative is designated as a fair value hedge, the
changes in the fair value of the derivative and of the hedged item
attributable to the effective portion of the hedged risk are recognized
in earnings. If the derivative is designated as a cash flow hedge, the
effective portion of changes in the fair value of the derivative are
recorded in other comprehensive income and are recognized in the income
statement when the hedged item affects earnings. Ineffective portions
of changes in the fair value of cash flow hedges are recognized in
earnings. Changes in fair value of derivative instruments that do not
meet hedge accounting criteria are recorded as a component of current
operations. The deferred gains or losses are reflected on the balance
sheet in other current and noncurrent liabilities or assets. Upon early
termination of a financial instrument, gains or losses are deferred and
amortized as adjustments to the hedged asset or liability, as it
affects the income statement, over the period covered by the terminated
financial instrument.
Derivative financial instruments were utilized by the Company in the
management of its interest rate exposures. The Company did not use
derivative financial instruments for trading or speculative purposes.
The Company was exposed to credit risk on derivative instruments,
limited to the net interest receivable and the fair market value of the
derivative instrument had the counter-party failed. Credit risk was
managed through an evaluation of the credit worthiness of
counter-parties and continuing review and monitoring of
counter-parties. The Company was also exposed to market risk from
derivative instruments when adverse changes in interest rates occurred.
Market risk was monitored and controlled through adherence to financial
risk policies and periodic review of open positions. The adoption of
SFAS No. 133 on July 2, 2000 resulted in a transition gain recorded in
other comprehensive income of $0.8 million ($0.5 million net of taxes)
resulting from the fair value adjustment of interest rate collars that
were used to hedge cash flows associated with variable rate debt (see
Note 4b). Additionally, the fair value adjustment to record an interest
rate swap and related collar resulted in a $3.5 million ($2.1 million
net of tax) charge to earnings which was offset by a corresponding gain
of $3.5 million ($2.1 million net of tax) on fixed rate senior notes
(see Note 4a).
The aforementioned interest rate agreements did not qualify for hedge
accounting on an ongoing basis. Accordingly, such contracts were marked
to market subsequent to the adoption of SFAS No. 133. The adjustment
recorded upon transition to the carrying value of the fixed rate debt
was being amortized to interest expense through May 15, 2003. The
variable rate debt transition gain recorded as the only component of
accumulated other comprehensive income is reclassified into interest
expense over the remaining life of the related contract, which matures
on May 2005.
During both fiscal years ended June 28, 2003 and June 29, 2002,
approximately $85,000, net of taxes, was reclassified from accumulated
other comprehensive income into interest expense.
The Company had no derivative financial instruments as of June 28, 2003
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In June 2002, the Financial
Accounting Standards Board ("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 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 has impacted the timing of recognizing a
restructuring charge, the Company has determined that SFAS No. 146 did
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
39
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 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 the issuance of FIN
45. Because the Company has no guarantees, the Company believes that
adoption of the recognition provisions of FIN 45 will not have a
material effect on its financial condition, results of operations or
cash flows.
In January 2003, the FASB issued FASB 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 relationships with variable
interest entities and therefore does not believe that the adoption of
FIN 46 will have an impact on its financial condition, results of
operations or cash flows.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". The statement improves the accounting for certain financial
instruments that, under previous guidance, issuers could account for as
equity. The new statement requires that certain instruments be
classified as liabilities in statements of financial position. Most of
the guidance in SFAS No. 150 is effective for all financial instruments
entered into or modified after May 31, 2003, and otherwise is effective
at the beginning of the first interim period beginning after June 15,
2003. The Company has determined that the adoption of SFAS No. 150 will
impact the classification of its Series A preferred stock and will
require that accrued dividends and accretion related to these shares be
classified as interest expense rather than a charge to accumulated
deficit.
40
RECLASSIFICATIONS - Certain reclassifications to prior year amounts
have been made in order to conform to the current year presentation.
3. OTHER ASSETS
(in thousands of dollars)
JUNE 28, JUNE 29,
2003 2002
--------- ---------
Deferred financing costs $ 10,010 $ 9,514
Accumulated amortization (5,501) (4,342)
--------- ---------
4,509 5,172
Other 2,887 4,502
--------- ---------
$ 7,396 $ 9,674
========= =========
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
(in thousands of dollars)
JUNE 28, JUNE 29,
2003 2002
-------- --------
Senior Notes, 10.0% due May 15, 2008 (a) $145,000 $143,954
Borrowings under credit agreement (b) 53,588 53,414
Capital lease obligations 1,819 1,745
-------- --------
200,407 199,113
Less current maturities of long-term debt
and capital lease obligations (2,499) (2,150)
-------- --------
$197,908 $196,963
======== ========
a) The Senior Notes mature on May 15, 2008. Interest is payable
semi-annually on May 15 and November 15 of each year. Commencing May
15, 2003, the Senior Notes are redeemable at various redemption prices
at Parent and La Petite's option. The Senior Notes are joint and
several obligations of Parent and its 100% owned subsidiary, La Petite,
as co-issuers, and are fully and unconditionally guaranteed on a joint
and several basis by all of La Petite's 100% owned subsidiaries,
namely, Bright Start and Services. Parent has no independent assets or
operations. The Senior Notes contain certain covenants that, among
other things, limit La Petite's ability to incur additional debt, pay
cash dividends to Parent, transfer or sell assets, incur liens, enter
into transactions with affiliates and merge with or into, consolidate
with or transfer all or substantially of its assets to, other persons.
In addition, the Senior Notes limit Parent's ability to merge with or
into, consolidate with or transfer all or substantially all of its
assets to, other persons. Except for these provisions in the Senior
Notes and the provisions in the Credit Agreement described in the next
paragraph, there are no restrictions on the ability of Parent or La
Petite to obtain funds from its subsidiaries by dividend or loan.
b) On May 11, 1998 the Company entered into an agreement (the Credit
Agreement) providing for a term loan facility in the amount of $40.0
million and a revolving credit agreement for working capital and other
general corporate purposes in the amount of $25 million. Borrowings
under the Credit Agreement are secured by substantially all of the
assets of the Parent, La Petite and its subsidiaries. Loans under the
Credit Agreement bear an interest rate per annum equal to (at the
Company's option): (i) an adjusted London inter-bank offered rate
(LIBOR) not to be less than an amount equal to 2.5% per annum, plus a
percentage based on the Company's financial performance or (ii) 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 rate plus
1/2 of 1% plus in each case a percentage based on the Company's
financial
41
performance. The Company is required to pay fees of 0.5% per
annum of the unused portion of the Credit Agreement plus
letter of credit fees, annual administration fees and agent
arrangement fees. The Credit Agreement contains certain
covenants that, among other things, limit La Petite's and
Parent's ability to incur additional debt, and limit La
Petite's ability to pay cash dividends or make certain other
restricted payments. In particular under the Credit Agreement,
Parent may not incur any intercompany indebtedness and La
Petite's ability to pay dividends to Parent is limited to
dividends which are used by Parent to pay (i) expenses for
administrative, legal and accounting services in an amount not
to exceed $500,000 per year and (ii) franchise fees and taxes.
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 and each of
the quarterly periods in fiscal years 1999 through 2002. The
Company received limited waivers of noncompliance with the
foregoing financial and informational covenants through
February 7, 2003. Amendment No. 5 to the Credit Agreement
dated as of February 10, 2003 permanently waived such
defaults.
On February 10, 2003, Parent, La Petite and its senior secured
lenders entered into Amendment No. 5 to the Credit Agreement.
The amendment waived the 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.
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. Amendment No. 6
to the Credit Agreement dated as of July 31, 2003, permanently
waived such defaults.
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 fiscal 2003 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, Amendment No. 6 revised the
definition of Consolidated EBITDA in the Credit Agreement.
As of June 28, 2003, the Credit Agreement had a maturity date
of May 2006 and principal payments due under the term loan are
$1.0 million in fiscal year 2004, $5.5 million in fiscal year
2005, and $28.0 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
percentage of excess cash flow (as defined). At June 28, 2003
there was $19.1 million outstanding on the revolver, and
outstanding letters of credit in an aggregate amount equal to
$5.9 million.
42
Scheduled maturities and mandatory prepayments of long-term debt and
capital lease obligations during the five years subsequent to June 28,
2003, adjusted for the impact of the amendment of the Credit Agreement,
are as follows (in thousands of dollars):
CAPITAL LEASES
--------------------- LONG-TERM
FISCAL YEAR ENDING: COMPUTERS VEHICLES DEBT TOTAL
2004 $ 598 $ 901 $ 1,000 $ 2,499
2005 11 307 5,500 5,818
2006 2 47,088 47,090
2007
2008 145,000 145,000
2009 and thereafter
--------- -------- --------- --------
$ 611 $ 1,208 $ 198,588 $200,407
========= ======== ========= ========
5. OTHER LONG-TERM LIABILITIES
(in thousands of dollars)
Unfavorable leases (a) $ 831 $ 1,111
Reserve for closed schools (b) 2,329 2,765
Deferred severance (c) 705
Long-term insurance liabilities (d) 7,536 7,344
--------- ---------
$ 11,401 $ 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.
(c) On December 11, 2002, the Company entered into a Separation Agreement
with the Company's former Chief Executive Officer and President. The
long-term portion of the Company's total contractual obligations
pursuant to the Separation Agreement is $0.7 million as of June 28,
2003.
(d) Long-term insurance liabilities reflect the Company's obligation for
reported but not paid, and incurred but not reported, workers'
compensation, auto and general liability claims.
6. INCOME TAXES
The provision (benefit) for income taxes recorded in the Consolidated
Statements of Operations and Comprehensive Loss consisted of the
following (in thousands of dollars):
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JUNE 28, JUNE 29, JUNE 30,
2003 2002 2001
-------- --------- ---------
Current:
Federal $ 46 $ (3,412) $ (503)
State 200 176 187
-------- --------- ---------
Total 246 (3,236) (316)
-------- --------- ---------
Deferred:
Federal 13,834
State 2,686
-------- --------- ---------
Total 16,520
-------- --------- ---------
$ 246 $ (3,236) $ 16,204
======== ========= =========
43
A reconciliation between the statutory federal income tax rate and the
effective income tax rate is as follows (in thousands of dollars):
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JUNE 28, JUNE 29, JUNE 30,
2003 2002 2001
--------- --------- ---------
Expected tax benefit at federal statutory
rate of 35% $ (5,495) $ (28,003) $ (4,195)
State income tax benefit, net of federal income
tax effect (879) (4,480) (671)
Goodwill amortization and impairment 22,593 1,315
Tax credits (154) (526) (1,222)
Valuation allowance adjustment 6,316 6,255 20,870
Other 458 925 107
--------- --------- ---------
Total $ 246 $ (3,236) $ 16,204
========= ========= =========
Deferred income taxes result from differences between the financial
reporting and income tax basis of the Company's assets and liabilities.
The sources of these differences and their cumulative tax effects at
June 28, 2003 and June 29, 2002 are estimated as follows (in thousands
of dollars):
JUNE 28, JUNE 29,
2003 2002
----------- ----------
Current deferred taxes:
Accruals not currently deductible $ 6,280 $ 5,493
Supplies (1,078) (1,100)
Prepaids and other 249 122
----------- ----------
Gross current deferred tax assets 5,451 4,515
Noncurrent deferred taxes:
Unfavorable leases 337 451
Insurance reserves 3,059 2,982
Reserve for closed academies 946 1,123
Operational losses and tax credit carry 14,656 8,975
forwards
Property and equipment 7,472 7,784
Intangible assets 264 363
Original issue discount 899 992
Derivative financial instruments (257) (425)
Other 614 365
----------- ----------
Gross noncurrent deferred tax assets 27,990 22,610
----------- ----------
Total gross deferred tax assets 33,441 27,125
Less valuation allowance (33,441) (27,125)
----------- ----------
Net deferred tax assets $ $
=========== ==========
The Company determined that based on cumulative historical pretax
losses, it was more likely than not that the deferred tax assets as of
June 28, 2003 and June 29, 2002 would not be realized. Therefore, the
Company has recorded a valuation allowance to fully reserve those
deferred tax assets at both fiscal 2003 and 2002 year-end. The
provision for income taxes at June 28, 2003 and June 29, 2002 includes
$6.3 million and $6.2 million, respectively to record these valuation
allowances.
The Company has federal net operating loss carry-forwards and tax
credit carry-forwards of $31.4 million and $1.9 million, respectively.
These carry-forwards expire in fiscal years 2004 through 2023.
44
7. LEASES
Academy facilities are leased for terms ranging from 15 to 20 years.
The leases provide renewal options and require the Company to pay
utilities, maintenance, insurance and property taxes. Some leases
provide for annual increases in the rental payment and many leases
require the payment of additional rentals if operating revenue exceeds
stated amounts. These additional rentals range from 2% to 10% of
operating revenue in excess of the stated amounts and are recorded as
rental expense. Vehicles are also rented under various lease
agreements, most of which are cancelable within 30 days after a
one-year lease obligation. Substantially all facility leases and
approximately half of the vehicle leases are operating leases. Rental
expenses for these leases were $48.7 million, $50.9 million, and $51.9
million, for the 52 weeks ended June 28, 2003, June 29, 2002, and June
30, 2001, respectively. Contingent rental expense of $1.5 million, $2.0
million and $2.3 million were included in rental expense for the 52
weeks June 28, 2003, June 29, 2002, and June 30, 2001, respectively.
Aggregate minimum future rentals payable under facility leases as of
June 28, 2003 were as follows (in thousands of dollars):
Fiscal year ending:
2004 $ 41,332
2005 34,506
2006 29,603
2007 20,325
2008 14,279
2009 and thereafter 46,153
-----------
$ 186,198
-----------
8. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
The authorized stock of Parent as of June 28, 2003 consists of:
(i) 45,000 shares of Series A 12% mandatorily redeemable preferred
stock, $0.01 par value, (Series A preferred stock) all of
which were issued and outstanding as of June 28, 2003 and June
29, 2002. The original carrying value of the preferred stock
of $36.4 million is being accreted to its redemption value of
$45.0 million on May 11, 2008. The Series A preferred stock is
non-voting and mandatorily redeemable on May 11, 2008.
Dividends at the rate of 12.0% per annum are cumulative and if
not paid on the June 30 or December 31 semi-annual Series A
preferred stock dividend dates are added to the liquidation
value. The liquidation value was $77.2 million and $68.8
million as of June 28, 2003 and June 29, 2002, respectively.
Accrued dividends were $32.2 million and $23.8 million at June
28, 2003 and June 29, 2002, respectively. The Series A
preferred stock may be exchanged for 12.0% Subordinated
Exchange Debentures due 2008, at Parent's option, subject to
certain conditions, in whole, but not in part, on any
scheduled dividend payment date. The Series A preferred stock
contains certain restrictive provisions that limit the ability
of Parent to pay cash dividends.
45
(ii) 13,645,000 shares of Series B 5% convertible participating
redeemable preferred stock, $0.01 par value, (Series B
preferred stock) of which 7,241,490 shares and 6,899,724
shares were issued and outstanding as of June 28, 2003 and
June 29, 2002, respectively. The Series B preferred stock
votes on an "as-converted" basis with the Class A common stock
and is redeemable at the holders' option, at any time on or
after May 11, 2009. Dividends at the rate of 5.0% per annum
are cumulative and if not paid on the June 30 or December 31
semi-annual preferred stock dividend dates are added to the
liquidation value. The liquidation value was $16.7 million and
$15.2 million as of June 28, 2003 and June 29, 2002,
respectively. Accrued dividends were $1.0 million and $0.2
million at June 28, 2003 and June 29, 2002, respectively. The
Series B preferred stock may be converted into shares of the
Company Class A common stock at any time at the then
applicable conversion price, as defined in the purchase
agreement, and all shares will automatically convert into
shares of the Company Class A common stock (i) upon an
election to so convert by holders of a majority of the Series
B preferred stock or (ii) immediately prior to the
consummation of a qualified initial public offering of common
stock. The conversion rate was $2.174 as of June 28, 2003.
13,645,000 shares of Class A common stock has been reserved
for the conversion of the Series B preferred stock. The Series
B preferred stock contains certain restrictive provisions that
limit the ability of Parent to pay cash dividends.
(iii) 17,500,000 shares of Class A common stock, $0.01 par value,
(Class A common stock) of which 773,403 and 564,985 shares
were issued and outstanding as of June 28, 2003 and June 29,
2002, respectively. At June 28, 2003, 526,582 shares of Class
A common stock were reserved for issuance under the 1998 Stock
Option Plan and the 1999 Non Employee Director Stock Option
Plan. The Class A common stock contains certain restrictive
provisions that limit the ability of Parent to pay cash
dividends.
(iv) 20,000 shares of Class B common stock, $0.01 par value, (Class
B common stock) of which 20,000 shares were issued and
outstanding as of June 28, 2003 and June 29, 2002. The Class B
common stock votes together with the Class A common stock as a
single class, with the holder of each share of common stock
entitled to cast one vote. The holders of the Class B common
stock have the exclusive right, voting separately as a class,
to elect one member to the Board of Directors of Parent. Each
share of the Class B common stock is convertible at the option
of the holder, at any time, into one share of Class A common
stock.
The outstanding warrants of Parent as of June 28, 2003 consist of:
(i) Warrants to purchase 64,231 shares of Class A common stock at
a purchase price of $0.01 per share any time on or before May
11, 2008. The warrants were issued in connection with the sale
of Series A preferred stock; the Company recognized discounts
on the Series A preferred stock by allocating $8.6 million to
the warrants representing the fair value of the warrants when
issued.
(ii) Warrants to purchase 562,500 shares of Class A common stock at
a purchase price of $0.01 per share any time on or before May
11, 2009. The warrants were issued in connection with the sale
of Series B preferred stock in fiscal year 2002. The Company
did not recognize discounts on the Series B preferred stock,
as the warrants had no fair value when issued.
(iii) Warrants to purchase 1,692,423 shares of Class A common stock
at a purchase price of $0.01 per share any time on or before
May 11, 2009. The warrants were issued in connection with the
commitment by LPA and other electing shareholders to purchase
Series B preferred stock. The Company did not recognize
discounts on the Series B preferred stock, as the warrants had
no fair value when issued.
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 the 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
46
received by Parent from the issuance of the Series B preferred stock
will be contributed to La Petite as common equity and are expected to
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 for $0.7 million.
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, at
September 25, 2003 the contingent equity commitment from the
stockholders of Parent has been reduced from $14.5 million to $13.8
million.
9. BENEFIT PLAN
The Company sponsors a defined contribution plan that was established
on January 1, 2001 (the "2001 Plan") for substantially all employees.
Eligible participants may make contributions to the 2001 Plan from 0%
to 15% of their compensation (as defined). The Company may make
47
contributions at the discretion of the Board of Directors. The Company
made no contributions for fiscal years 2003 and 2002
10. 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, annual results of operations or annual cash flows.
The Company has employment contracts with certain executive officers.
11. STOCK-BASED COMPENSATION
On August 27, 1995, the Board of Directors of Parent adopted the
"Non-Qualified Stock Option Agreement" (1995 Plan). Under the terms of
the 1995 Plan, the Board of Directors in their sole discretion granted
non-qualified options for common stock of Parent to key executives of
the Company. Options were granted pursuant to an agreement at the time
of grant, and typically become exercisable in equal cumulative
installments over a five-year period beginning one year after the date
of grant. All such options granted expire on the tenth anniversary of
the grant date. No market existed for the common stock of Parent, but
options were granted at prices that, in the opinion of the Board of
Directors, were equal to or greater than the fair value of the stock at
the time of grant.
Effective May 11, 1998, the Board of Directors of Parent adopted the
"1998 Stock Option Plan" (1998 Plan). The 1998 Plan provides for the
granting of Tranche A and Tranche B options to purchase up to 60,074
shares of the Parent's common stock. During the 2001 year, the Board of
Directors of parent amended the 1998 Plan, increasing to 230,000 the
number of shares of the Parent's common stock that may be purchased.
During the 2002 year, the Board of Directors of Parent amended the 1998
Plan, increasing to 725,000 the number of shares of the Parent's common
stock that may be purchased. Tranche A options expire ten years from
the date of grant and become exercisable ratably over 48 months.
Tranche B options expire ten years from the date of grant and are
exercisable only in the event of a change in control or a registered
public offering of common stock which provides certain minimum returns
(as defined).
On August 19, 1999, Parent adopted the 1999 Stock Option Plan for
Non-Employee Directors (1999 Plan). Under the terms of the 1999 Plan,
10,000 shares of Parent's common stock are reserved for issuance to
non-employee directors at prices that approximate the fair value of a
share of Parent's common stock at the date of issuance. Options vest
ratably on the last day of each month over four years following the
date of grant, if the person is a director on that day.
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. In February 2003, the former Chief Executive Officer exercised
options to purchase 208,418 shares of common stock of LPA Holding at an
exercise price of $0.01 and 61,963 options were cancelled.
The 1995 Plan, the 1998 Plan, and the 1999 Plan were approved by the
shareholders of Parent.
48
Stock option transactions during the past three years have been as
follows:
1998 PLAN 1998 PLAN
-------------------- --------------------
1995 PLAN TRANCHE A TRANCHE B 1999 PLAN
-------------------- -------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
OPTIONS AVG. PRICE OPTIONS AVG. PRICE OPTIONS AVG. PRICE OPTIONS AVG. PRICE
------- ---------- ------- ---------- ------- ---------- ------- ----------
Options outstanding
at July 1, 2000 3,963 $ 21.22 9,900 $ 66.92 4,800 $ 133.83 4,400 $ 66.92
------- ---------- ------- ---------- ------- ---------- ------- ----------
Granted 182,285 $ 66.92
Exercised
Canceled 750 $ 18.00 2,575 $ 66.92 4,200 $ 133.83 500 $ 66.92
------- ---------- ------- ---------- ------- ---------- ------- ----------
Options outstanding
at June 30, 2001 3,213 $ 21.97 189,610 $ 66.92 600 $ 133.83 3,900 $ 66.92
------- ---------- ------- ---------- ------- ---------- ------- ----------
Granted
Exercised
Canceled 70,000 $ 66.92
------- ---------- ------- ---------- ------- ---------- ------- ----------
Options outstanding
at June 29, 2002 3,213 $ 21.97 119,610 $ 66.92 600 $ 133.83 3,900 $ 66.92
------- ---------- ------- ---------- ------- ---------- ------- ----------
Granted 450,635 $ 0.01
Exercised 208,418 $ 0.01
Canceled 131,773 $ 35.46
------- ---------- ------- ---------- ------- ---------- ------- ----------
Options outstanding
at June 28, 2003 3,213 $ 21.97 230,054 $ 14.49 600 $ 133.83 3,900 $ 66.92
======= ========== ======= ========== ======= ========== ======= ==========
Options exercisable
at June 28, 2003 3,213 79,227 3,738
======= ======= ======= =======
Options available for
grant at June 28, 2003 271,512 14,416 6,100
======= ======= =======
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ---------------------------------------------------------------------------------------------
1995 Plan:
$ 18.00 2,463 2.2 years $ 18.00 2,463 $ 18.00
$ 35.00 750 3.5 years $ 35.00 750 $ 35.00
- ---------------------------------------------------------------------------------------------
$ 18.00 to $ 35.00 3,213 2.5 years $ 21.97 3,213 $ 21.97
=============================================================================================
1998 Tranche A:
$ 66.92 49,800 6.8 years $ 66.92 37,919 $ 66.92
$ 0.01 180,254 9.8 years $ 0.01 41,308 $ 0.01
- ---------------------------------------------------------------------------------------------
$ 66.92 230,054 7.7 years $ 14.49 79,227 $ 32.03
=============================================================================================
1998 Tranche B
$ 133.83 600 4.9 years $ 133.83
=============================================================================================
1999 Plan
$ 66.92 3,900 6.1 years $ 66.92 3,738 $ 66.92
=============================================================================================
49
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.
12. RESTRUCTURING CHARGES
The Company closed 73 Academies in fiscal 2003, and closed or committed
to close 7 Academies in fiscal 2002 and 15 Academies in fiscal 2001, in
locations where the conditions no longer supported an economically
viable operation. The Company also closed one divisional office in 2002
as part of the relocation to a new corporate headquarters office and
closed two regional offices in 2001. Accordingly, the Company recorded
restructuring charges of $7.8 million, $3.2 million and $2.5 million in
fiscal years 2003, 2002 and 2001, respectively, to provide for costs
associated with the Academy closures, the office closures and
associated restructuring. The charges consisted principally of the
present value of rent (net of anticipated sublease income), real estate
taxes, common area maintenance charges, and utilities, the write-off of
goodwill associated with closed Academies, and the write-down of fixed
assets to fair market value. Included in the restructuring charges,
were non-cash charges of $1.7 million, $1.6 million and $0.8 million in
fiscal years 2003, 2002 and 2001 respectively. The Company also
recorded recoveries of $2.9 million in fiscal 2003, principally due to
settlement of lease liabilities for less than the recorded reserves. As
of June 28, 2003, the remaining reserves for closed schools primarily
reflect the present value of future rent payments for closed
facilities. The leases on the closed facilities expire between fiscal
year 2004 and 2014. A summary of the restructuring reserve activity is
as follows, with dollars in thousands:
Balance at July 1, 2000 $ 8,533
Reserves recorded in fiscal year 2001 2,455
Amount utilized in fiscal year 2001 (4,423)
----------
Balance at June 30, 2001 6,565
Reserves recorded in fiscal year 2002 3,208
Amount utilized in fiscal year 2002 (5,175)
----------
Balance at June 29, 2002 4,598
Reserves recorded in fiscal year 2003 7,788
Recoveries recorded in fiscal year 2003 (2,880)
Amount utilized in fiscal year 2003 (5,040)
----------
Balance at June 28, 2003 $ 4,466
On the 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.
13. ASSET IMPAIRMENTS
During the fourth quarter of fiscal 2003, the Company identified
conditions, including a projected current year operating loss as well
as negative cash flows in certain of the Company's schools, as
indications that the carrying amount of certain long-lived assets, may
not be recoverable. In accordance with the Company's policy, management
assessed the recoverability of long-lived assets at these schools using
a cash flow projection based on the remaining useful lives of the
assets. Based on this projection, the cumulative cash flow over the
remaining depreciation or amortization period was insufficient to
recover the carrying value of the assets at certain of these schools.
As a result, the Company recognized impairment losses of $3.1 million
related to property and equipment. During the fourth quarter of fiscal
2002, the Company recognized
50
impairment losses of $57.4 million. The Company identified conditions,
including a projected current year consolidated operating loss as well
as negative cash flows in certain of the Company's regional and
divisional operations, as indications that the carrying amount of
certain long-lived assets, primarily goodwill, may not be recoverable.
In accordance with the Company's policy, management assessed the
recoverability of those long-lived assets using a cash flow projection
based on the remaining useful life. Based on this projection, the
cumulative cash flow over the remaining depreciation or amortization
period was insufficient to recover the carrying value of the assets. In
addition, the Company evaluated the enterprise value of its remaining
goodwill in accordance with Accounting Principles Board Opinion No. 17
and determined that the goodwill was fully impaired. As a result, the
Company recognized impairment losses of $57.4 million related to the
long-lived assets, of which $52.3 million related to goodwill and $5.1
million related to property and equipment.
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of amounts reported in the Company's Quarterly
Reports on Form 10-Q.
16 WEEKS 12 WEEKS 12 WEEKS 12 WEEKS
ENDED ENDED ENDED ENDED
FISCAL YEAR 2003 OCTOBER JANUARY APRIL JUNE
IN THOUSANDS OF DOLLARS 19, 2002 11, 2003 5, 2003 28, 2003
--------- --------- -------- ---------
Revenue $ 116,838 $ 86,653 $ 93,546 $ 93,128
Operating expenses:
Salaries, wages and benefits 66,032 48,561 49,744 50,077
Facility lease expense 13,961 10,633 10,680 10,378
Depreciation and amortization 3,235 2,442 2,407 2,288
Restructuring costs 1,248 428 2,186 1,046
Asset impairments 3,057
Provision for doubtful accounts 838 710 649 605
Other 36,227 22,264 21,968 22,821
--------- --------- -------- ---------
Total operating expenses 121,541 85,038 87,634 90,272
--------- --------- -------- ---------
Operating income (loss) (4,703) 1,615 5,912 2,856
Interest expense 6,711 5,013 4,977 4,808
Interest income (74) (22) (17) (14)
--------- --------- -------- ---------
Net interest expense 6,637 4,991 4,960 4,794
--------- --------- -------- ---------
Income (loss) before income taxes (11,340) (3,376) 952 (1,938)
Provision (benefit) for income
taxes 78 151 59 (42)
--------- --------- -------- ---------
Net income (loss) $ (11,418) $ (3,527) $ 893 $ (1,896)
========= ========= ======== =========
51
16 WEEKS 12 WEEKS 12 WEEKS 12 WEEKS
ENDED ENDED ENDED ENDED
FISCAL YEAR 2002 OCTOBER JANUARY APRIL JUNE
(IN THOUSANDS OF DOLLARS) 20, 2001 12, 2002 6, 2002 29, 2002
--------- --------- --------- ---------
Revenue $ 114,398 $ 86,469 $ 94,548 $ 95,790
Operating expenses:
Salaries, wages and benefits 65,100 47,390 51,329 51,753
Facility lease expense 13,882 10,472 10,616 10,584
Depreciation and amortization 4,541 3,424 3,391 3,308
Restructuring charges 1,160 349 429 1,270
Asset impairments 57,436
Provision for doubtful accounts 1,052 725 714 460
Other 32,020 22,879 22,919 32,312
--------- --------- --------- ---------
Total operating expenses 117,755 85,239 89,398 157,123
--------- --------- --------- ---------
Operating income (loss) (3,357) 1,230 5,150 (61,333)
Interest expense 7,144 5,562 4,483 4,713
Interest income (85) (16) (40) (63)
--------- --------- --------- ---------
Net interest expense 7,059 5,546 4,443 4,650
--------- --------- --------- ---------
Income (loss) before income taxes (10,416) (4,316) 707 (65,983)
Benefit for income taxes (3,236)
--------- --------- --------- ---------
Net income (loss) $ (10,416) $ (4,316) $ 3,943 $ (65,983)
========= ========= ========= =========
15. SUBSEQUENT EVENTS
On July 31, 2003, Parent, La Petite and its senior secured lenders
entered into Amendment No. 6 to the Credit Agreement. See Note 4 for
further information.
On July 31, 2003, Parent and its stockholders who have elected to
exercise their respective preemptive rights (the "Electing
Stockholders") pursuant to the terms of the Securities Purchase
Agreement dated February 10, 2003, entered into Amendment No. 1 to the
Securities Purchase Agreement. 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. See Note 8 for further information.
16. RESTATEMENT
Subsequent to the issuance of the Company's fiscal 2003 financial
statements, the Company's management determined that it had incorrectly
accounted for the accretion of the Series A preferred stock. In
connection with the adoption of SFAS No. 150 on June 29, 2003, the
Company determined that it should have been recognizing the accretion
of the Series A preferred stock using the effective interest method
rather than the straight-line method. The correction of the error
resulted in total adjustments to Series A preferred stock and
accumulated deficit of $3.4 million and $3.0 million as of June 28,
2003 and June 29, 2002, respectively. The Company has restated its June
28, 2003 and June 29, 2002 balance sheets and its statements of
stockholders' deficit for each of the 52 weeks ended June 28, 2003,
June 29, 2002 and June 30, 2001. The cumulative effects for periods
prior to the 52 weeks ended in June 30, 2001 of approximately $1.5
million are reflected in the July 1, 2000 balance of accumulated
deficit. This restatement item has
52
no effect on statements of operations or cash flows or on total assets
or total liabilities. A summary of the significant effects of the
restatement is as follows:
JUNE 28, 2003
----------------------------
AS PREVIOUSLY AS
REPORTED RESTATED
------------- -----------
Series A preferred stock $ 72,784 $ 69,378
Accumulated deficit (281,581) (278,175)
JUNE 29, 2002
----------------------------
AS PREVIOUSLY AS
REPORTED RESTATED
------------- -----------
Series A preferred stock $ 63,397 $ 60,422
Accumulated deficit (255,477) (252,502)
The amount of accretion charged to accumulated deficit during the 52 weeks ended
June 28, 2003, June 29, 2002, and June 30, 2001 has been reduced by $0.4
million, $0.7 million and $0.8 million, respectively.
In addition, the Company restated its consolidated statements of cash flows for
the years ended June 28, 2003, June 29, 2002 and June 30, 2001 to reflect bank
overdrafts as a financing activity. This change resulted in an increase in cash
flows from operating activities and a decrease in cash flows from investing
activities of $1.4 million for each of the years ended June 28, 2003 and June
29, 2002 and a decrease in cash flows from operating activities and an increase
in cash flows from financing activities of $1.2 million for the year ended June
30, 2001.
* * * * * * *
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. 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.
As of June 28, 2003, 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"), the former Chief Financial Officer, the Company's employees and outside
contractors, including the current Chief Financial Officer ("CFO"). This
evaluation resulted in the identification of certain material weaknesses in the
Company's Internal Controls primarily related to: (a) a lack of consistent
understanding and compliance with Company's policies and procedures, and (b) 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 instituted interim
compensating controls and procedures to ensure that information required to be
disclosed in this Annual Report on Form 10-K 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) improving accounting policies and procedures, (iv)
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, (v) increasing
financial field audits of academies, (vi) increasing divisional financial staff
accountability to ensure field adherence to financial policies and internal
controls and (vii) 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 consisting 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 improving the quality and oversight of the
accounting staff; enhancing field level controls and developing metrics to
monitor and identify accounting and operational issues.
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 errors 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,
54
within the Company have been detected. These inherent 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,
within the time periods specified in the Commission's rules and forms.
There have been no changes in the Company's internal control over financial
reporting that occurred during the Company's most recent fiscal quarter (the
Company's fourth fiscal quarter in the case of the annual report) that has
materially affected, or is reasonably likely to materially affect the Company's
internal control over financial reporting other than the continuing impact of
the corrective actions discussed above.
* * * * * * *
55
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and current position held by the
persons who are the directors and executive officers of the Company:
Name Age Position
- ------------------------------------------------------------ --- ----------------------------------------------
Stephen P. Murray .......................................... 41 Chairman of the Board and Director
Gary A. Graves ............................................. 43 Chief Executive Officer, President, Chief
Operating Officer and Director
Glenn H. Gage .............................................. 61 Director
Terry D. Byers ............................................. 48 Director
Robert E. King ............................................. 67 Director
Kevin G. O'Brien ........................................... 37 Director
Ronald L. Taylor ........................................... 58 Director
Neil P. Dyment ............................................. 48 Senior Vice President, Chief Financial Officer
Hugh W. Tracy .............................................. 41 Vice President, Chief Information Officer
Damaris M. Campbell ........................................ 50 Vice President, Eastern Region
Lisa J. Miskimins .......................................... 42 Vice President, Central Region
Lawrence Appell ............................................ 53 Vice President, Western Region
Rebecca L. Perry ........................................... 48 Vice President, Operations
William C. Buckland ........................................ 57 Vice President, People
Paul G. Kreuser ............................................ 42 Vice President, Field Support Services
Gregory S. Davis .......................................... 41 Vice President, General Counsel and Secretary
William H. Van Huis ........................................ 46 Vice President, Chief Revenue Officer
The business experience during the last five years and other information
relating to each executive officer and director of the Company is set forth
below.
Stephen P. Murray became the Chairman of the Board in January 2000 and has been
a Director of the Company since May 1998. Mr. Murray has been a General Partner
of J.P. Morgan Partners, LLC (JPMP) since 1994. From 1988 to 1994 Mr. Murray was
a Principal at JPMP. Prior thereto, he was a Vice President with the
Middle-Market Lending Division of Manufacturers Hanover. Mr. Murray has a BA
from Boston College and a MBA from Columbia Business School. He also serves as
director of The International Cornerstone Group, Zoots, Cabela's, Risk Metrics
Group, Erisk, The Excite Network and National Waterworks, Inc.
Gary A. Graves joined the Company in August 2002 as the Chief Operating Officer
and became President and Chief Executive Officer in December 2002. Prior to
joining the Company, Mr. Graves was Chief Operating Officer of InterParking,
Inc. from 1998 to 2001. From 1996 to 1998, he was Executive Vice President for
Boston Market, Inc. From 1989 to 1996, Mr. Graves held various positions in
Operations for PepsiCo. He has a BS in Chemical Engineering from the University
of Michigan and a MBA from the University of Chicago.
Glenn H. Gage has been a Director of the Company since March 2003. From August
1998 until March 2001, Mr. Gage was the Senior Vice President and Chief
Financial Officer of National Steel Corporation. From 1995 until 1998, Glenn was
the Senior Vice President and Chief Financial Officer of Uarco Incorporated,
where he also served as a member of the Board of Directors. Until 1995, Mr. Gage
was a Partner with Ernst & Young. Mr. Gage has an MS in Accounting from the
University of California at Los Angeles and a BS in Accounting from the
California State University at Fresno. He is a CPA.
Terry D. Byers has been a Director of the Company since December 1998. Ms. Byers
has more than 20 years experience in information technology ranging from
hands-on systems design and development to executive management. She has
extensive experience in designing and architecting enterprise-level IT
Infrastructures, developing and integrating business information systems,
implementing large ERP
56
applications, and developing and deploying technology-based solutions to
clients. Since 1996, Ms. Byers has been an Executive Vice President and the
Chief Technology Officer for Teleflora, LLC. She holds a Bachelors of Business
Administration degree in Computer Science from the University of Central
Oklahoma.
Robert E. King has been a Director of the Company since May 1998. Mr. King is
Chairman of Salt Creek Ventures, LLC, a private equity company he founded in
1994. Salt Creek Ventures, LLC is an organization specializing in equity
investments in technology and education companies. Mr. King is also Chairman of
Collegis, Inc., a diversified education services provider serving the
post-secondary education market sector. Mr. King has been involved over the past
33 years as a corporate executive and entrepreneur in technology-based
companies. From 1983 to 1994, he was President and Chief Executive Officer of
The Newtrend Group. Mr. King has participated as a founding investor in five
companies. Mr. King has a BA from Northwestern University.
Kevin G. O'Brien has been a Director of the Company since May 2002. Mr. O'Brien
has been a Principal of JPMP since 2000. From 1994 to 2000, Mr. O'Brien was a
Vice President in the High Yield Capital Markets and High Yield Corporate
Finance Groups at Chase Securities Inc. (and prior to merging in 1996, Chemical
Securities, Inc.). From 1988 to 1992 he was a commissioned officer in the U.S.
Navy. Mr. O'Brien has a BA from the University of Notre Dame and a MBA from the
Wharton School of the University of Pennsylvania. He also serves as director of
National Waterworks, Inc.
Ronald L. Taylor has been a Director of the Company since April 1999. Mr. Taylor
has been President and CO-CEO of DeVry, Inc. since 1987. He is Chairman of the
Proprietary Schools Advisory Committee for the Illinois Board of Higher
Education; a member of the Institutional Action Committee and the Board of
Trustees for the North Central Association of Colleges and Schools. He serves on
the Board of Directors of DeVry, Inc. and the Better Business Bureau of Chicago
& Northern Illinois, Inc. Mr. Taylor has a BA from Harvard University and
received his MBA from Stanford University.
Neil P. Dyment joined the Company in August as the Chief Financial Officer.
Prior to joining La Petite, Mr. Dyment was employed by Argus Management
Corporation from 2001 to 2003 providing financial consulting and interim
financial management services to companies undergoing restructuring. Mr. Dyment
served as interim Corporate Controller at the Company from June 2002 to December
2002 and has been providing other financial advisory services to the Company
since. Prior to joining Argus Management Corporation, Mr. Dyment was Plant
Manager for Chemfab Corporation from 1996 to 2000. Prior to rejoining Chemfab
Corporation in 1996, Mr. Dyment served in a variety of financial capacities for
various companies including Corporate Controller at Chemfab from 1986 - 1991 and
a variety of financial positions at Textron Corporation (formerly AVCO
Corporation) from 1977 to 1984. He has a BS in Business Administration with an
accounting major from Northeastern University.
Hugh W. Tracy joined the Company as the Chief Information Officer in July 2003.
Prior to joining La Petite, Mr. Tracy was the Chief Information Officer at
InterPark, Inc. from 1999-2002. From 1989-1998, Mr. Tracy held various positions
in Information Technology and Operations for McDonalds Corporation and its
licensees. He has a BS in Information and Computer Science from the Georgia
Institute of Technology (Georgia Tech) and an MBA from the Wharton School,
University of Pennsylvania.
Damaris M. Campbell became the Vice President of the Eastern Region for the
Company in June 2000. She is responsible for the supervision of 15 states. From
1997 to 2000, Ms. Campbell was an Area Vice President with supervisory
responsibility for the operations of the Company in five states. She was a
Divisional Director of 54 schools in three states from 1993 to 1997. From 1983
to 1993, she supervised 13 academies in the Charlotte, NC Region. She began her
career with the Company in 1980 as a teacher.
Lisa J. Miskimins became the Vice President of the Central Region of the Company
in June 2000. She is responsible for the supervision of over 250 locations in 13
states. From 1997 to 2000, Ms. Miskimins was an Area Vice President with
supervisory responsibility for the operations of the Company in eight midwestern
states. She was a Divisional Director of 50 schools in three states from 1994 to
1997. She began her career with the Company in 1983 as a Preschool Teacher. Ms.
Miskimins has a BA in Elementary Education and English.
57
Lawrence "Larry" Appell joined La Petite Academy as the Western Division Vice
President in January 2003. Prior to joining La Petite, Mr. Appell served as
President of the International Division of Futurekids, Inc., the world's largest
provider of technology education for children from 2000-2003. From 1995-2000 he
was the President of Westlake Management Co., LLC, a boutique investment capital
and business incubator, From 1983-1995 Mr. Appell held various senior management
positions with The H.J. Heinz Company in their Weight Watchers division and The
Quaker Oats Company in their Pritikin division. Mr. Appell was a management
consultant from 1974-1983. He has a BA from the City University of New York and
a MS in Counselor Education from St. John's University.
Rebecca L. Perry became the Vice President of Operations in April 2000. She was
the Executive Vice President of Operations from 1997 to 2000. From 1993 to 1997,
Ms. Perry was a Senior Vice President and Eastern Operating Officer. From 1988
to 1993, she was Assistant Vice President of Operations with supervisory
responsibility for the operations of the Company in 14 southern and midwestern
states. From 1985 to 1988, she served as Divisional Director of Florida and from
1981 to 1985 she served as Regional Director of Tampa. Prior to joining the
Company, Ms. Perry held various positions in the childcare industry. Ms. Perry
studied childhood education at The University of South Florida.
William C. Buckland joined the Company in July 2001 as Vice President, People.
From 1993 to 2001, Mr. Buckland was Vice President, Human Resources of Allied
Van Lines, Inc. From 1990 to 1992, he was the Director, Human Resources for
SuperAmerica Group, a subsidiary of Ashland Oil. From 1969 to 1990 Mr. Buckland
held various operating and Human Resources positions with the Montgomery Ward
Company. He has a BBA from the University of Kentucky.
Paul G. Kreuser became Vice President, Field Support Services of the Company in
November of 2002, with responsibility for the purchasing, facilities,
engineering and fleet operations. Mr. Kreuser joined the Company in 2001 as the
Director of Operations Support. From 1999 to 2000, Mr. Kreuser was the Director
of Supply Chain for Amazon.com. Prior to 1999, his experience included senior
management positions with DSC Logistics, Office Depot and Federal Express. Mr.
Kreuser has a BS in Mathematics from the University of Illinois.
Gregory S. Davis joined the Company in May 2003 as the Vice President, General
Counsel. He subsequently assumed the position of Corporate Secretary. Prior to
joining the Company, Mr. Davis was one of three Andersen Partners with lead
responsibility for the international firm's expansions and alliances. From
1991-2001, he was a Partner in Andersen's Legal Group, responsible for
litigation and risk management. Mr. Davis practiced commercial litigation in the
Chicago headquarters of Seyfarth, Shaw, Fairweather & Geraldson from 1987-1991.
He holds a BA from Indiana University and a J.D. from Boston University School
of Law.
William H. Van Huis joined the Company in December 2002 as the Chief Revenue
Officer. Prior to joining La Petite Academy, Mr. Van Huis was the Vice President
of Marketing for Childtime Childcare, Inc., from 1990 to 2001. From 1986 to 1990
Mr. Van Huis was National marketing Manager for Zebart International
Corporation/TKD North America, an automotive aftermarket firm. He holds a B.A.
from Michigan State University.
BOARD COMMITTEES AND COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has an Audit Committee consisting of Glenn H. Gage,
Stephen P. Murray and Kevin G. O'Brien, and a Compensation Committee consisting
of Stephen P. Murray and Robert E. King. The Audit Committee reviews the scope
and results of audits and internal accounting controls and all other tasks
performed by our independent public accountants. The Compensation Committee
determines compensation for the executive officers and administers the 1998
Option Plan and the Non-Employee Director Plan. None of the Company's executive
officers has served as a director or member of the compensation committee (or
other committee forming an equivalent function) of any other entity whose
executive officers served as a director of or member of the Compensation
Committee of the Company's Board of Directors.
58
COMPENSATION OF DIRECTORS
The members of the Board of Directors are reimbursed for out-of-pocket expenses
related to their service on the Board of Directors or any committee thereof. In
addition, members of the Board of Directors who are neither officers of the
Company nor employed by JPMP or any of its partners are entitled to receive an
attendance fee of $1,500 for each meeting attended.
On August 19, 1999, Parent adopted the LPA Holding Corp. 1999 Stock Option Plan
for Non-Employee Directors (1999 Plan). The purpose of the plan is to provide a
means for attracting, retaining, and incentivizing qualified directors. Under
the terms of the plan, 10,000 shares of Parent's common stock are reserved for
issuance to non-employee directors.
Non-employee directors may exercise their options to purchase shares of Parent's
common stock once those options have vested. One-forty eighth of the options
become vested on the last day of each month following the date of grant, if the
person is a director on that day. Each option entitles the director to purchase
one share of Parent's common stock. The exercise price will equal the fair
market value on the date of grant of the option to the non-employee director.
Vested options and shares of common stock may be repurchased from any
non-employee director who ceases to be a director for any reason. Any options
that have not vested at the time the non-employee director ceases to be a
director are forfeited
59
ITEM 11. EXECUTIVE COMPENSATION
The following table provides certain summary information concerning compensation
earned for the 52 weeks ended June 28, 2003 (2003), June 29, 2002 (2002), and
June 30, 2001 (2001), by the Company's Chief Executive Officer, former Chief
Executive Officer and the four other most highly compensated executive officers
whose salary and bonus exceeded $100,000 for the fiscal year (collectively the
"named executive officers"):
SUMMARY COMPENSATION TABLE
COMPENSATION FOR THE PERIOD
---------------------------
ANNUAL LONG-TERM ALL OTHER
COMPENSATION COMPENSATION COMPENSATION
--------------------- ----------------- ------------
NUMBER OF
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTION/SAR AWARDS
- ---------------------------------- ---- -------- -------- -----------------
Judith A. Rogala 2003 $194,846 270,381 $100,000(1)
Former Chief Executive Officer 2002 357,308 $375,000(2)
and President (Separated from 2001 350,000 550,000(2) 49,810
Company on December 11, 2002)
Gary A. Graves 2003 $289,423(3) 295,000 180,254
Chief Executive Officer
and President
Michael F. Czlonka 2003 165,000(4)
Former Chief Financial Officer
(Separated from Company on
August 15, 2003)
Damaris M. Campbell 2003 144,674 6,255 10,860(5)
Vice President, Eastern Region 2002 121,448 15,000
2001 115,702 19,325
Lisa J. Miskimins 2003 121,448 5,413 10,860(5)
Vice President, Central Region 2002 121,448
2001 115,780 19,325 14,879(6)
William C. Buckland 2003 144,903
Vice President, People 2002 129,230(7)
(1) Represents payments made to Ms. Rogala subsequent to her termination
pursuant to her severance agreement.
(2) Includes vested portion of deferred signing bonus. (See "Employment
Contracts").
(3) Fiscal 2003 compensation covers 44 weeks from August 26, 2002 through June
28, 2003.
(4) Fiscal 2003 compensation covers 40 weeks from September 23, 2002 through
June 28, 2003.
(5) Represents auto allowance
(6) Represents payments made to Ms. Miskimins related to her relocation to the
Chicago, IL area.
(7) Fiscal 2002 compensation covers 51 weeks from July 9, 2001 through June 29,
2002.
60
The following tables present information relating to grants to the named
executive officers of options to purchase common stock of Company:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION/SAR VALUES
NUMBER OF
SECURITIES
UNDERLYING VALUE OF
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT FY END (#) AT FY END(1)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) REALIZED UNEXERCISABLE UNEXERCISABLE
Judith A. Rogala None / None n/a/n/a
Gary A. Graves 41,308 / 138,946(2) 0/0
Michael F. Czlonka None / None n/a/n/a
Damaris M. Campbell 15,169 / 4,831(3) 0/0
Lisa J. Miskimins 15,169 / 4,831(3) 0/0
William C. Buckland None / None n/a/n/a
(1) The equity of the Company is not traded and there is no market for pricing
the value of the options. "In the Money" calculations are based on the
estimated enterprise value of the Company adjusted for debt, preferred
stock, common shares issued and retired, warrants and options and
adjustments for market liquidity and a control premium.
(2) The Board of Directors granted to certain key executives Tranche A options
at $0.01 per share, an amount that approximates the fair value of a share
of common stock of the Company at the date of the grant. These options
become exercisable ratably over forty-eight months and expire ten years
from the date of grant.
(3) The Board of Directors granted to certain key executives Tranche A options
at $66.92 per share, an amount that approximates the fair value of a share
of common stock of the Company at the date of the grant. These options
become exercisable ratably over forty-eight months and expire ten years
from the date of grant
OPTIONS/SAR GRANTS
IN LAST FISCAL YEAR
NUMBER OF POTENTIAL REALIZABLE
SECURITIES % OF TOTAL VALUE AT ASSUMED ANNUAL
UNDERLYING OPTIONS/SAR'S EXERCISE OR RATES OF STOCK PRICE
OPTIONS/SAR'S GRANTED TO BASE PRICE EXPIRATION APPRECIATION FOR OPTION TERM
NAME GRANTED EMPLOYEES ($/SHARE) DATE 5% ($) 10% ($)
- -------------------- ------------- ------------- ----------- ------------- ------ --------
FISCAL YEAR 2003
Judith A. Rogala None n/a n/a n/a n/a n/a
Gary A. Graves 180,254 40% $0.01 August, 2012 $1,134 $4,309
Michael F. Czlonka None n/a n/a n/a n/a n/a
Damaris M. Campbell None n/a n/a n/a n/a n/a
Lisa J. Miskimins None n/a n/a n/a n/a n/a
William C. Buckland None n/a n/a n/a n/a n/a
EMPLOYMENT CONTRACTS
61
The Company has entered into an employment agreement with Gary A. Graves. The
Employment Agreement provides for Mr. Graves to receive a base salary, subject
to annual performance adjustments, of $350,000 plus a bonus of up to 150% of
base salary. Mr. Graves is also entitled to receive a cash Interim Bonus with
respect to the Company's fiscal year ending in June 2003. Mr. Graves shall also
receive options to purchase 180,254 shares of Company stock at an exercise price
of $0.01 per share. The term of the Employment Agreement is three years subject
to one-year automatic renewals. The Employment Agreement provides that the
executive is entitled to participate in the health and welfare benefit plans
available to the Company's other senior executives. The Employment Agreement
also provides for severance in the case of termination without 'cause' or a
resignation with 'good reason' in an amount equal to one year of base salary
plus a prorated bonus as described in the agreement and a cash lump sum equal to
(a) any compensation payments deferred by Mr. Graves, together with any
applicable interest or other accruals and (b) any unpaid amounts, as of the date
of such termination, in respect of the Bonus for the fiscal year ending before
the fiscal year in which such termination occurs. Included in the severance in
the case of termination without 'cause' or resignation with 'good reason' is one
year of coverage under and participation in the Company's employee benefit
program. The Employment Agreement also contains customary non-disclosure,
non-competition and non-solicitation covenants.
The Company entered into an employment agreement with Judith A. Rogala in
January 2000, which was due to expire in January 2003. Judith A. Rogala resigned
her positions as the President and Chief Executive Officer of the Company
effective as of December 11, 2002. Under the terms of her Employment Agreement
with the Company, such resignation entitled Ms. Rogala to receive a lump sum
payment of $750,000 on January 1, 2004, representing the deferred portion of her
signing bonus. In connection with her resignation and in lieu of such payment,
Ms. Rogala has entered into a Separation Agreement with the Company. Pursuant to
the Separation Agreement, Ms. Rogala is entitled to receive severance payments
from the Company at a rate equal to (a) $380,000 per annum for the period from
December 11, 2002 to December 31, 2002, and (b) $200,000 per annum for the
period from January 1, 2003 to December 31, 2007. Such payments will be
accelerated if there is a change in control of the Company or if the Company
meets certain EBITDA targets for any consecutive twelve-month period during the
term of the Separation Agreement. If the Company defaults in any of its payment
obligations to Ms. Rogala under the Separation Agreement, it will make a
lump-sum payment to Ms. Rogala equal to the product of 1.5 and any future
payments then owed to her pursuant to the Separation Agreement. The Separation
Agreement allowed Ms. Rogala to retain her options in the Company, which had
vested or will vest on or prior to January 1, 2003, for a sixty-day period from
December 11, 2002. The Company and Ms. Rogala agreed to standard mutual releases
and standard mutual non-disparagement clauses as part of the Separation
Agreement. Ms. Rogala agreed to a non-compete provision that will expire in
2007.
The Company made certain commitments to Michael F. Czlonka in conjunction with
his accepting the position of Sr. Vice President & CFO. Mr. Czlonka left the
Company effective August 14, 2003. The Company will continue to pay Mr. Czlonka
six months of continued salary and benefits in satisfaction of the
aforementioned commitments.
1998 OPTION PLAN
The Company adopted the 1998 Plan pursuant to which options, which currently
represent 2.8% of Parent's common stock, on a fully diluted basis, are available
to grant. The 1998 Plan provides for the granting of Tranche A and Tranche B
options to purchase up to 60,074 shares of Parent's common stock. During fiscal
year 2002, the Company amended the 1998 Plan, increasing to 725,000 the number
of options available for grant. The options will be allocated in amounts to be
agreed upon between LPA and Parent. Seventy-five percent of the options will
vest over four years and twenty-five percent of the options will vest if certain
transactions are consummated which generate certain minimum returns to LPA. The
exercise price for the time vesting options will be 50% of the per share price
paid by LPA for its common stock of Parent and the exercise price for the
remaining options will be 100% of the per share price paid by LPA for its common
stock of Parent. The options expire 10 years from the date of grant. Options to
purchase 230,654 shares of Parent's common stock are currently outstanding under
the 1998 Plan.
62
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
All of La Petite's common stock is held by LPA Holding Corp. (Parent). As of
June 28, 2003, LPA Investment LLC (LPA) owned 66.0% of the outstanding common
stock of Parent (approximately 92.5% on a fully diluted basis, including the
warrants described below) and Vestar, the former principal stockholder of the
Company, and La Petite's current and former management own approximately 2.7%,
1.2% and 30.1%, respectively, of the outstanding common stock of Parent
(approximately 0.2%, 2.4% and 2.2%, respectively, on a fully diluted basis). In
connection with the purchases of preferred stock of Parent, described below, LPA
received warrants to purchase shares of Parent's common stock that currently
represents the right to acquire approximately 21.3% of Parent's common stock on
a fully diluted basis.
In connection with the recapitalization, LPA purchased redeemable preferred
stock (Series A preferred stock) of Parent and warrants to purchase 42,180
shares of Parent's common stock on a fully diluted basis for aggregate cash
consideration of $30.0 million, the proceeds of which were contributed by Parent
to common equity. On December 15, 1999, LPA acquired an additional $15.0 million
of Parent's Series A preferred stock and received warrants to purchase an
additional 22,051 shares of Parent's common stock on a fully diluted basis. The
$15.0 million proceeds received by Parent were contributed to common equity.
The Series A preferred stock is not redeemable at the option of the holder prior
to the maturity of the notes and dividends are not payable in cash prior to the
seventh anniversary of the consummation of the transactions. Thereafter, Parent
may pay dividends in cash subject to any restrictions contained in the Company's
indebtedness, including the Credit Agreement and the indenture.
Following the consummation of the recapitalization, Parent and its stockholders,
including all holders of options and warrants, entered into a Stockholder's
Agreement. The Stockholders' Agreement contains restriction on the
transferability of Parent common stock, subject to certain exceptions. The
Stockholder' Agreement also contains provisions regarding the designation of
members of the Board of Directors and other voting arrangements. The
Stockholders' Agreement will terminate at such time as Parent consummates a
qualified public offering.
The Stockholders' Agreement restricts transfers of common stock of Parent by,
among other things (i) granting rights to all stockholders to tag along on
certain sales of stock by LPA and management, (ii) granting rights to LPA to
force the other stockholders to sell their common stock on the same terms as
sales of common stock by LPA, and (iii) granting preemptive rights to all
holders of 2% or more of Parent's common stock in respect of sales by other
stockholders.
The Stockholder's Agreement provides that the Board of Directors of Parent shall
consist of 5 to 8 persons as determined pursuant to the Stockholders Agreement.
The Stockholder's Agreement further provides that LPA is entitled to designate
four of the directors, one of whom is entitled to three votes as a director.
Messrs. Murray, Blutt, O'Brien and King have been elected as directors pursuant
to this provision with Mr. King being entitled to three votes as a director. On
December 11, 2002 the Stockholder's Agreement was amended to provide that the
remaining directors will be the Chief Executive Officer of Parent and up to
three other directors designated by the foregoing directors.
The Stockholders' Agreement also contains covenants in respect of the delivery
of certain financial information to Parent's stockholders and granting access to
Parent's records to holders of more than 2% of Parent's common stock.
A majority of the economic interests of LPA is owned by J.P. Morgan Partners
(23A SBIC), LLC (JPMP SBIC) an affiliate of JPMP, and a majority of the voting
interests of LPA is owned by an entity controlled by Robert E. King, one of
Parent's Directors. However, pursuant to the LPA Operating Agreement, as
amended, if certain triggering events occur and notice is given by JPMP SBIC to
LPA that it is exercising its rights thereunder, JPMP SBIC will have the right
to vote a majority of the voting interests of LPA. Accordingly, if these
triggering events occur and notice is given, through its control of LPA, JPMP
SBIC would be able to elect a majority of the Board of Directors of Parent. As a
licensed small business investment company, or SBIC, JPMP SBIC is subject to
certain restrictions imposed upon SBICs by the
63
regulations established and enforced by the United States Small Business
Administration. Among these restrictions are certain limitations on the extent
to which an SBIC may exercise control over companies in which it invests. As a
result of these restrictions, unless certain events described in the operating
agreement occur, JPMP SBIC may not own or control a majority of the outstanding
voting stock of LPA or designate a majority of the members of the Board of
Directors. Accordingly, while JPMP SBIC owns a majority of the economic
interests of LPA, JPMP SBIC owns less than a majority of LPA's voting stock. LPA
also agreed not to take certain actions in respect of the common stock of Parent
held by LPA without the consent of JPMP SBIC. At no time prior to the date
hereof, has JPMP SBIC exercised such voting rights.
In connection with the recapitalization, Parent and its stockholders following
consummation of the recapitalization entered into a Registration Rights
Agreement. The Registration Rights Agreement grants stockholders demand and
incidental registration rights with respect to shares of capital stock held by
them and contains customary terms and provisions with respect to such
registration rights.
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 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 $15.0 million of Series B preferred stock of Parent and
warrants to purchase 562,500 shares of common stock of Parent.
All of the proceeds received by Parent from the sale of Series B preferred stock
and warrants have been contributed to La Petite as common equity. In connection
with such purchase, the banks waived their right under the Credit Agreement to
require that the proceeds be used to repay amounts outstanding under the Credit
Agreement.
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 the 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 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
64
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, at September 25, 2003, the
contingent equity commitment from the stockholders of Parent has been reduced
from $14.5 million to $13.8 million.
For information regarding securities authorized for issuance under equity
compensation, see Note 11 of the Notes to Consolidated Financial Statements.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
J.P. Morgan Securities Inc., or JPMSI, one of the initial purchasers of the old
Senior Notes, is an affiliate of JPMorgan Chase Bank (formerly known as The
Chase Manhattan Bank), which is an agent and a lender to La Petite under the
Credit Agreement, an affiliate of JPMP, JPMorgan Chase Bank and JPMSI, owns
66.0% of the outstanding common stock of Parent (approximately 92.5% on a fully
diluted basis as of January 31, 2003). LPA owns $45 million of Parent's Series A
preferred stock, $15.7 million of Parent's Series B preferred stock, and
warrants to purchase 21.3% of the common stock of Parent on a fully diluted
basis. Certain employees of JPMP are members of La Petite's Board of Directors
(see Item 10). In addition, JPMSI, JPMorgan Chase Bank and their affiliates
perform various investment banking, trust and commercial banking services on a
regular basis for the Company's affiliates.
In connection with the recapitalization, JPMP SBIC entered into an
Indemnification Agreement with Robert E. King, one of Parents' Directors,
pursuant to which JPMP SBIC has agreed to indemnify Mr. King for any losses,
damages or liabilities and all expenses incurred or sustained by Mr. King in his
capacity as a manager, officer or director of LPA or any of its subsidiaries,
including Parent and La Petite.
In December 1999, November 2001, December 2001, May 2002, and June 2003 Parent
sold additional equity to LPA. See "Item 1. Business -Organization"
65
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Financial Statements
See pages 28 to 51 of this Annual Report on Form 10-K for financial
statements of LPA Holding Corp. as of June 28, 2003 and June 29, 2002
and for the 52 weeks ended June 28, 2003, June 29, 2002, and June 30,
2001.
(a)2. Financial Statement Schedules
The following additional financial data should be read in conjunction
with the consolidated financial statements for the 52 weeks ended June
28, 2003, June 29, 2002, and June 30, 2001. Other schedules not
included with these additional financial statement schedules have been
omitted because they are not applicable or the required information is
contained in the consolidated financial statements or notes thereto.
SCHEDULES
Schedule I - Condensed Financial Information of Registrants
Schedule II - Valuation and Qualifying Accounts
(a)3. Exhibits
EXHIBIT
NUMBER DESCRIPTION
3.1(i) Amended and Restated Certificate of Incorporation of LPA
Holding Corp.
3.2(i) Certificate of Designations, Preferences and Rights of Series
A Redeemable Preferred Stock of LPA Holding Corp.
3.3(i) Bylaws of LPA Holding Corp.
3.4(i) Amended and Restated Certificate of Incorporation of La Petite Academy, Inc.
3.5(i) Bylaws of La Petite Academy, Inc.
3.6(v) Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of LPA Holding Corp. filed on
December 13, 1999.
3.7(v) Certificate of Amendment of the Certificate of Designations,
Preferences and Rights of Series A Redeemable Preferred Stock
of LPA Holdings Corp. filed on December 13, 1999.
3.8(viii) Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of LPA Holding Corp., filed on
November 14, 2001.
3.9(viii) Certificate of Designations, Preferences and Rights of Series
B Convertible Redeemable Participating Preferred Stock of LPA
Holding Corp., filed on November 14, 2001.
3.10(xvi) Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of LPA Holding Corp., filed on
February 10, 2003.
3.11(xvi) Certificate of Amendment to the Certificate of Designations,
Preferences and Rights of Series B Convertible Redeemable
Participating Preferred Stock of LPA Holding Corp., filed on
February 10, 2003.
4.1(i) Indenture among LPA Holding Corp., La Petite Academy, Inc.,
LPA Services, Inc. and PNC Bank, National Association dated as
of May 11, 1998.
4.2(iv) First Supplemental Indenture dated as of July 23, 1999, among
Bright Start, Inc., LPA Holding Corp., La Petite Academy,
Inc., and The Chase Manhattan Bank.
66
EXHIBIT
NUMBER DESCRIPTION
10.1(i) Purchase Agreement among Vestar/LPA Investment Corp., La Petite Academy, Inc., LPA
Services, Inc., Chase Securities Inc. and NationsBanc Montgomery Securities LLC
dated May 6, 1998.
10.2(i) Exchange and Registration Rights Agreement among La Petite Academy, Inc., LPA
Holding Corp., LPA Services, Inc., Chases Securities Inc., NationsBanc Montgomery
Securities LLC dated May 11, 1998.
10.3(i) Merger Agreement by and between LPA Investment LLC and Vestar/LPA Investment Corp.
dated as of March 17, 1998.
10.4(i) Stockholders Agreement among LPA Holding Corp., Vestar/LPT Limited Partnership,
LPA Investment LLC and the management stockholders dated as of May 11, 1998.
10.5(v) Amendment #1 and Consent of the Stockholders Agreement among LPA Holding Corp.,
Vestar/LPT Limited Partnership, LPA Investment LLC and the management stockholders
dated as April 8, 1999.
10.6(i) 1998 Stock Option Plan and Stock Option Agreement for LPA Holding Corp. dated as
of May 18, 1998.
10.7(i) Preferred Stock Registration Rights Agreement between LPA Holding Corp. and LPA
Investment LLC dated May 11, 1998.
10.8(i) Registration Rights Agreement among LPA Holding Corp., Vestar/LPT Limited
Partnership, the stockholders listed therein and LPA Investment LLC, dated May 11,
1998.
10.9(i) Credit Agreement dated as of May 11, 1998 among La Petite Academy, Inc., LPA
Holding Corp., Nationsbank, N.A., and The Chase Manhattan Bank.
10.10(i) Pledge Agreement among La Petite Academy, Inc., LPA Holding Corp., Subsidiary
Pledgors and Nationsbank, N.A. dated as of May 11, 1998.
10.11(i) Security Agreement among La Petite Academy, Inc., LPA Holding Corp., Subsidiary
Guarantors and Nationsbank, N.A. dated as of May 11, 1998.
10.12(i) Parent Company Guarantee Agreement among LPA Holding Corp. and Nationsbank, N.A.
dated as of May 11, 1998.
10.13(i) Subsidiary Guarantee Agreement among Subsidiary Guarantor of La Petite Academy,
Inc., LPA Services, Inc. and Nationsbank, N.A. dated as of May 11, 1998.
10.14(i) Indemnity, Subrogation and Contribution Agreement among La Petite Academy, Inc.,
LPA Services, Inc., as Guarantor and Nationsbank, N.A. dated as of May 11, 1998.
10.15(xvi) 1999 Stock Option Plan for Non-Employee Directors.
10.16(iii) Agreement and Plan of Merger By and Between La Petite Academy, Inc., LPA
Acquisition Co. Inc., and Bright Start, Inc.
10.17(v) Amendment No. 1, Consent and Waiver dated as of December 13, 1999, to the Credit
Agreement dated as of May 11, 1998 among LPA Holding Corp., La Petite Academy,
Inc., Bank of America, N.A. (formerly known as NationsBank, N.A.) as
Administrative Agent, Documentation Agent and Collateral Agent for the Lenders and
The Chase Manhattan Bank as Syndication Agent.
10.18(v) Warrant No. 2 dated as of December 15, 1999, issued by LPA Holding Corp. to LPA
Investment LLC.
10.19(v) Amendment No. 1 and Consent dated as of April 8, 1999, among LPA Holding Corp.,
Vestar/LPT Limited Partnership, LPA Investment LLC and the management stockholders
named therein, to the Stockholders Agreement dated as of May 11, 1999, among LPA
Holding Corp., Vestar/LPT Limited Partnership, LPA Investment LLC and the
management stockholders named therein.
10.20(v) Amendment No. 1 to the LPA Holding Corp. 1999 Stock Option Plan for Non-Employee
Directors.
10.21(vii) Employment Agreement among LPA Holding Corp., La Petite Academy, Inc., and Judith
A. Rogala.
67
EXHIBIT
NUMBER DESCRIPTION
10.22(viii) Amendment No. 2, Consent and Waiver dated as of June 29, 2000, to the Credit
Agreement dated as of May 11, 1998, as amended, among LPA Holding Corp., La Petite
Academy, Inc., Bank of America, N.A. (formerly known as NationsBank, N.A.) as
Administrative Agent, Documentation Agent and Collateral Agent for the Lenders and
The Chase Manhattan Bank as Syndication Agent.
10.23(viii) Amendment No. 3, Consent and Waiver dated as of November 14, 2001, to the Credit
Agreement dated as of May 11, 1998, as amended, among LPA Holding Corp., La Petite
Academy, Inc., Bank of America, N.A. (formerly known as NationsBank, N.A.) as
Administrative Agent, Documentation Agent and Collateral Agent for the Lenders and
Chase Bank of Texas, National Association (formerly known as The Chase Manhattan
Bank) as Syndication Agent.
10.24(viii) Guarantee, dated as of November 15, 2001, by J.P. Morgan Partners (23A SBIC), LLC
for the benefit of the Lenders (as defined in the Credit Agreement, dated as of
May 11, 1998, as amended), among LPA Holding Corp., La Petite Academy, Inc., the
Lenders party thereto, Bank of America, N.A. (formerly known as NationsBank, N.A.)
as Administrative Agent, Documentation Agent and Collateral Agent for the Lenders
and Chase Bank of Texas (formerly known as The Chase Manhattan Bank) as
Syndication Agent.
10.25(viii) Securities Purchase Agreement, dated as of November 14, 2001, among LPA Holding
Corp., LPA Investment, LLC and the other parties thereto.
10.26(viii) Warrant No. 3, dated as of November 14, 2001, issued by LPA Holding Corp. to LPA
Investment, LLC.
10.27(ix) First Limited Waiver dated as of May 20, 2002 to Credit Agreement dated as of May
11, 1998, as amended, among LPA Holding Corp., La Petite Academy, Inc., Bank of
America, N.A. (formerly known as NationsBank, N.A.) as Administrative Agent,
Documentation Agent and Collateral Agent for the Lenders and as Issuing Bank and
Swingline Lender and Chase Bank of Texas, National Association, (formerly known as
The Chase Manhattan Bank) as Syndication Agent.
10.28(ix) Second Limited Waiver dated as of August 15, 2002 to Credit Agreement dated as of
May 11, 1998, as amended, among LPA Holding Corp., La Petite Academy, Inc., Bank
of America, N.A. (formerly known as NationsBank, N.A.) as Administrative Agent,
Documentation Agent and Collateral Agent for the Lenders and as Issuing Bank and
Swingline Lender and Chase Bank of Texas, National Association, (formerly known as
The Chase Manhattan Bank) as Syndication Agent.
10.29(x) Third Limited Waiver dated as of September 30, 2002 to Credit Agreement dated as
of May 11, 1998, as amended, among LPA Holding Corp., La Petite Academy, Inc.,
Bank of America, N.A. (formerly known as NationsBank, N.A.) as Administrative
Agent, Documentation Agent and Collateral Agent for the Lenders and as Issuing
Bank and Swingline Lender and Chase Bank of Texas, National Association, (formerly
known as The Chase Manhattan Bank) as Syndication Agent.
10.30(xi) Extension to Third Limited Waiver dated as of November 1, 2002 to Credit Agreement
dated as of May 11, 1998, as amended, among LPA Holding Corp., La Petite Academy,
Inc., Bank of America, N.A. (formerly known as NationsBank, N.A.) as
Administrative Agent, Documentation Agent and Collateral Agent for the Lenders and
as Issuing Bank and Swingline Lender and Chase Bank of Texas, National
Association, (formerly known as The Chase Manhattan Bank) as Syndication Agent.
10.31(xii) Second Extension to Third Limited Waiver dated as of November 15, 2002 to Credit
Agreement dated as of May 11, 1998, as amended, among LPA Holding Corp., La Petite
Academy, Inc., Bank of America, N.A. (formerly known as NationsBank, N.A.) as
Administrative Agent, Documentation Agent and Collateral Agent for the Lenders and
as Issuing Bank and Swingline Lender and Chase Bank of Texas, National
Association, (formerly known as The Chase Manhattan Bank) as Syndication Agent.
68
EXHIBIT
NUMBER DESCRIPTION
10.32(xiii) Third Extension to Third Limited Waiver dated as of December 2, 2002 to Credit
Agreement dated as of May 11, 1998, as amended, among LPA Holding Corp., La Petite
Academy, Inc., Bank of America, N.A. (formerly known as NationsBank, N.A.) as
Administrative Agent, Documentation Agent and Collateral Agent for the Lenders and
as Issuing Bank and Swingline Lender and Chase Bank of Texas, National
Association, (formerly known as The Chase Manhattan Bank) as Syndication Agent.
10.33(xiii) Fourth Extension to Third Limited Waiver dated as of December 6, 2002 to Credit
Agreement dated as of May 11, 1998, as amended, among LPA Holding Corp., La Petite
Academy, Inc., Bank of America, N.A. (formerly known as NationsBank, N.A.) as
Administrative Agent, Documentation Agent and Collateral Agent for the Lenders and
as Issuing Bank and Swingline Lender and Chase Bank of Texas, National
Association, (formerly known as The Chase Manhattan Bank) as Syndication Agent.
10.34(xiv) Fourth Limited Waiver dated as of December 16, 2002 to Credit Agreement dated as
of May 11, 1998, as amended, among LPA Holding Corp., La Petite Academy, Inc.,
Bank of America, N.A. (formerly known as NationsBank, N.A.) as Administrative
Agent, Documentation Agent and Collateral Agent for the Lenders and as Issuing
Bank and Swingline Lender and Chase Bank of Texas, National Association, (formerly
known as The Chase Manhattan Bank) as Syndication Agent.
10.35(xv) Extension to Fourth Limited Waiver dated as of December 16, 2002 to Credit
Agreement dated as of May 11, 1998, as amended, among LPA Holding Corp., La Petite
Academy, Inc., Bank of America, N.A. (formerly known as NationsBank, N.A.) as
Administrative Agent, Documentation Agent and Collateral Agent for the Lenders and
as Issuing Bank and Swingline Lender and Chase Bank of Texas, National
Association, (formerly known as The Chase Manhattan Bank) as Syndication Agent.
10.36(xvi) Amendment No. 2 and Consent dated as of December 11, 2002 to Stockholders
Agreement among LPA Holding Corp., Vestar/LPT Limited Partnership, LPA Investment
LLC and the management stockholders.
10.37(xiv) Separation Agreement dated as of December 11, 2002 among LPA Holding Corp., La
Petite Academy, Inc. and Judith A. Rogala.
10.38(xvi) Consent, Waiver and Amendment dated as of August 26, 2002 to Employment Agreement
among LPA Holding Corp., La Petite Academy, Inc. and Judith A. Rogala.
10.39(xvi) Employment Agreement dated August 26, 2002 among LPA Holding Corp., La Petite
Academy, Inc. and Gary A. Graves.
10.40(xvi) Amendment No. 1 to 1998 Stock Option Plan for LPA Holding Corp
10.41(xvi) Employment Letter Agreement dated as of September 5, 2002 among La Petite Academy,
Inc and Michael F. Czlonka.
10.42(xvi) Amendment No. 5 to Credit Agreement and Waiver dated as of February 10, 2003,
among LPA Holding Corp., La Petite Academy, Inc., U.S. Bank National Association,
as Administrative Agent, and the Lenders signatory thereto.
10.43(xvi) Securities Purchase Agreement dated as of February 10, 2003, among LPA Holding
Corp., LPA Investment LLC, and the other persons signatory thereto from time to
time.
10.44(xvii) Fifth Limited Waiver dated as of April 22, 2003, to Credit Agreement dated as of
May 11, 1998, as amended, among LPA Holding Corp., La Petite Academy, Inc., U.S.
Bank National Association, as Administrative Agent, Documentation Agent and
Collateral Agent for the Lenders and as Issuing Bank and Swingline Lender.
10.45(xviii) Sixth Limited Waiver dated as of May 30, 2003, to Credit Agreement dated as of May
11, 1998, as amended, among LPA Holding Corp., La Petite Academy, Inc., U.S. Bank
National Association, as Administrative Agent, Documentation Agent and Collateral
Agent for the Lenders and as Issuing Bank and Swingline Lender.
10.46(xix) Seventh Limited Waiver dated as of June 30, 2003, to Credit Agreement dated as of
May 11, 1998, as amended, among LPA Holding Corp., La Petite Academy, Inc., U.S.
Bank National Association, as Administrative Agent, Documentation Agent and
Collateral Agent for the Lenders and as Issuing Bank and Swingline Lender.
69
EXHIBIT
NUMBER DESCRIPTION
10.47* Amendment No. 6 to Credit Agreement and Waiver dated as of July 31, 2003 among La
Petite Academy, Inc., LPA Holding Corp., and U.S. Bank National Association, as
Administrative Agent, Documentation Agent and Collateral Agent for the Lenders and
as Issuing Bank and Swingline Lender.
10.48* Amendment No. 1, dated as of July 31, 2003, to the Securities Purchase Agreement
dated as of February 10, 2003 among LPA Holding Corp., LPA Investment LLC, and the
other parties signatory thereto.
10.49* Support Center Bonus Plan, effective June 29, 2003
12.1* Statement regarding computation of ratios.
21.1(vi) Subsidiaries of Registrant.
31.1** CFO Section 302 certifications.
31.2** CEO Section 302 certifications.
32** CEO and CFO Section 906 certifications.
(i) Incorporated by reference to the Exhibits to La Petite Academy, Inc.'s
Registration Statement on Form S-4, Registration No. 333-56239, filed with the
Securities and Exchange Commission on June 5, 1998.
(ii) Incorporated by reference to the Exhibits to LPA Holding Corp.'s Form 10-K for the
Fiscal Year ended August 29, 1998, filed with the Securities and Exchange
Commission on November 24, 1998.
(iii) Incorporated by reference to the Exhibits to LPA Holding Corp.'s Form 8-K, filed
with the Securities and Exchange Commission on December 7, 1999.
(iv) Incorporated by reference to the Exhibits to LPA Holding Corp.'s Form 10-Q/A for
the 16 weeks ended October 23, 1999, filed with the Securities and Exchange
Commission on December 16, 1999.
(v) Incorporated by reference to the Exhibits to LPA Holding Corp.'s Form 8-K, filed
with the Securities and Exchange Commission on December 21, 1999.
(vi) Incorporated by reference to the Exhibits to LPA Holding Corp.'s Form S-4 Post
Effective Amendment #1, filed with the Securities and Exchange Commission on
December 23, 1999.
(vii) Incorporated by reference to the Exhibits to LPA Holding Corp.'s Form 8-K, filed
with the Securities and Exchange Commission on February 16, 2000.
(viii) Incorporated by reference to the exhibits to LPA Holding Corp.'s Form 8-K, filed
with the Securities and Exchange Commission on November 16, 2001.
(ix) Incorporated by reference to the exhibits to LPA Holding Corp.'s Form 8-K, filed
with the Securities and Exchange Commission on August 21, 2002.
(x) Incorporated by reference to the exhibits to LPA Holding Corp.'s Form 8-K, filed
with the Securities and Exchange Commission on October 2, 2002.
(xi) Incorporated by reference to the exhibits to LPA Holding Corp.'s Form 8-K, filed
with the Securities and Exchange Commission on November 5, 2002.
(xii) Incorporated by reference to the exhibits to LPA Holding Corp.'s Form 8-K, filed
with the Securities and Exchange Commission on November 20, 2002.
(xiii) Incorporated by reference to the exhibits to LPA Holding Corp.'s Form 8-K, filed
with the Securities and Exchange Commission on December 9, 2002.
(xiv) Incorporated by reference to the exhibits to LPA Holding Corp.'s Form 8-K, filed
with the Securities and Exchange Commission on December 20, 2002.
(xv) Incorporated by reference to the exhibits to LPA Holding Corp.'s Form 8-K, filed
with the Securities and Exchange Commission on February 6, 2003.
(xvi) Incorporated by reference to the Exhibits to LPA Holding Corp.'s Form 10-K for the
Fiscal Year ended June 29, 2002 filed with the Securities and Exchange Commission
on February 21, 2003.
(xvii) Incorporated by reference to the exhibits to LPA Holding Corp.'s Form 8-K, filed
with the Securities and Exchange Commission on April 24, 2003.
70
(xviii) Incorporated by reference to the exhibits to LPA Holding Corp.'s Form 8-K, filed
with the Securities and Exchange Commission on June 4, 2003.
(xix) Incorporated by reference to the exhibits to LPA Holding Corp.'s Form 8-K, filed
with the Securities and Exchange Commission on July 3, 2003.
(*) Previously filed
(**) Filed herein
(b) Reports on Form 8-K
On April 23, 2003, 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 May 31, 2003.
On June 4, 2003, 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 June 30, 2003.
(c) Supplemental information to be furnished with reports filed pursuant to
Section 15(d) of the Act by Registrants, which have not registered
securities pursuant to Section 12 of the Act
Except for a copy of this Annual Report on Form 10-K, no
annual report to security holders covering the registrants'
last fiscal year or proxy materials will be sent to security
holders.
71
LPA HOLDING CORP.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
BALANCE SHEETS
JUNE 28, JUNE 29,
2003 2002
AS RESTATED(1) AS RESTATED(1)
-------------- --------------
ASSETS: $ - $ -
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Payable to La Petite Academy, Inc. 39,387 40,132
--------- ---------
Total current liabilities 39,387 40,132
Long-term liabilities:
Equity in net loss of La Petite Academy, Inc in excess of investment 143,907 127,873
--------- ---------
Total long-term liabilities 143,907 127,873
Series A 12% mandatorily redeemable preferred stock ($.01 par value 69,378 60,422
per share);
45,000 shares authorized, issued and outstanding as of June 28, 2003 and
June 29, 2002; aggregate liquidation of $77.2 million and $68.8 million,
respectively
Series B 5% convertible redeemable participating preferred stock 16,739 15,227
($.01 par value per share); 13,645,000 shares authorized, 7,241,490 and
6,899,724 shares issued and outstanding as of June 28, 2003 and June 29,
2002; aggregate liquidation preference of $16.7 million and $15.2 million,
respectively
Stockholders' deficit:
Class A common stock ($0.01 par value per share); 17,500,000 8 6
shares authorized: 773,403 and 564,985 shares issued and
outstanding as of June 28, 2003 and June 29, 2002, respectively
Class B common stock ($0.01 par value per share); 20,000 shares
authorized, issued and outstanding as of June 28, 2003 and June
29, 2002
Common stock warrants 8,596 8,596
Accumulated other comprehensive income 160 246
Accumulated deficit (278,175) (252,502)
--------- ---------
Total stockholders' deficit (269,411) (243,654)
--------- ---------
$ - $ -
========= =========
See notes to consolidated financial statements included in Part II of the Annual
Report on Form 10-K.
(1) See Note 16 to consolidated financial statements included in Part II of the
Annual Report on Form 10-K/A
72
LPA HOLDING CORP.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS OF DOLLARS)
STATEMENTS OF OPERATIONS
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JUNE 28, JUNE 29, JUNE 30,
2003 2002 2001
-------- -------- --------
Equity in net loss of La Petite Academy, Inc. $(15,948) $(76,772) $(28,188)
-------- -------- --------
Net loss (15,948) (76,772) (28,188)
-------- -------- --------
Other comprehensive income (loss):
Derivative adjustments, net 492
Amounts reclassified into operations (86) (85) (161)
-------- -------- --------
Total other comprehensive income (loss) (86) (85) 331
-------- -------- --------
Comprehensive loss $(16,034) $(76,857) $(27,857)
======== ======== ========
See notes to consolidated financial statements included in Part II of the Annual
Report on Form 10-K.
73
LPA HOLDING CORP.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS OF DOLLARS)
STATEMENTS OF CASH FLOWS
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JUNE 28, JUNE 29, JUNE 30,
2003 2002 2001
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(15,948) $(76,772) $(28,188)
Adjustments to reconcile net loss to net cash from operating
activities:
Non cash items (86) (85) 331
Equity in comprehensive loss of La Petite Academy, Inc. 16,034 76,857 27,857
-------- -------- --------
Net cash from operating activities
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in La Petite Academy, Inc. (745) (15,000)
-------- -------- --------
Net cash used in investing activities (745) (15,000)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, redeemable preferred 745 15,000
stock and warrants, net of expenses
-------- -------- --------
Net cash provided by financing activities 745 15,000
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ $ $
======== ======== ========
See Notes to Consolidated Financial Statements included in Part II of the Annual
Report on Form 10-K.
74
LPA HOLDING CORP. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
BALANCE AT CHARGED TO BALANCE AT
JUNE 29, COSTS AND JUNE 28,
DESCRIPTION 2002 EXPENSES WRITE-OFFS 2003
---------- ---------- ---------- -----------
Allowance for doubtful accounts $ 914 $ 2,802 $ 3,220 $ 496
-------- -------- ------- -------
BALANCE AT CHARGED TO BALANCE AT
JUNE 30, COSTS AND JUNE 29,
DESCRIPTION 2001 EXPENSES WRITE-OFFS 2002
---------- ---------- ---------- -----------
Allowance for doubtful accounts $ 671 $ 2,951 $ 2,708 $ 914
-------- -------- ------- -------
BALANCE AT CHARGED TO BALANCE AT
JULY 1, COSTS AND JUNE 30,
DESCRIPTION 2000 EXPENSES WRITE-OFFS 2001
---------- ---------- ---------- -----------
Allowance for doubtful accounts $ 406 $ 4,665 $ 4,400 $ 671
-------- -------- ------- -------
(continued)
75
LPA HOLDING CORP. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
RESERVE FOR CLOSED ACADEMIES
BALANCE AT CHARGED TO BALANCE AT
JUNE 29, COSTS AND CHARGED TO JUNE 28,
DESCRIPTION 2002 EXPENSES RESERVE 2003
---------- ---------- ---------- -----------
Reserve for Closed Academies $ 4,598 $ 4,908 $ 5,040 $ 4,466
-------- -------- ------- -------
BALANCE AT CHARGED TO BALANCE AT
JUNE 30, COSTS AND CHARGED TO JUNE 29,
DESCRIPTION 2001 EXPENSES RESERVE 2002
---------- ---------- ---------- -----------
Reserve for Closed Academies $ 6,565 $ 3,208 $ 5,175 $ 4,598
-------- -------- ------- -------
BALANCE AT CHARGED TO BALANCE AT
JULY 1, COSTS AND CHARGED TO JUNE 30,
DESCRIPTION 2000 EXPENSES RESERVE 2001
---------- ---------- ---------- -----------
Reserve for Closed Academies $ 8,533 $ 2,455 $ 4,423 $ 6,565
-------- -------- ------- -------
76
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, on February 6, 2004.
LPA Holding Corp.
/s/ Neil P. Dyment
---------------------------------------
By: Neil P. Dyment
Chief Financial Officer and duly
authorized representative of the
registrant
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed by the following persons on
behalf of the registrant and in the capabilities indicated on February 6, 2004.
/s/ Gary A. Graves /s/ Stephen P. Murray
- ------------------------------------- ------------------------------------
By: Gary A. Graves By: Stephen P. Murray
Chief Executive Officer, President, Chairman of the Board and Director
Chief Operating Officer, and Director
/s/ Glenn H. Gage /s/ Terry D. Byers
- -------------------------------------- ------------------------------------
By: Glenn H. Gage By: Terry D. Byers
Director Director
/s/ Robert E. King /s/ Kevin G. O'Brien
- -------------------------------------- ------------------------------------
By: Robert E. King By: Kevin G. O'Brien
Director Director
/s/ Ronald L. Taylor
- --------------------------------------
By: Ronald L. Taylor
Director
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, on February 6, 2004.
La Petite Academy, Inc.
/s/ Neil P. Dyment
---------------------------------------
By: Neil Dyment
Chief Financial Officer and duly
authorized representative of the
registrant
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed by the following persons on
behalf of the registrant and in the capabilities indicated on February 6, 2004.
/s/ Gary A. Graves /s/ Stephen P. Murray
- -------------------------------------- ------------------------------------
By: Gary A. Graves By: Stephen P. Murray
Chief Executive Officer, President Chairman of the Board and Director
Chief Operating Officer, and Director
/s/ Glenn H. Gage /s/ Terry D. Byers
- -------------------------------------- ------------------------------------
By: Glenn H. Gage By: Terry D. Byers
Director Director
/s/ Robert E. King /s/ Kevin G. O'Brien
- -------------------------------------- ------------------------------------
By: Robert E. King By: Kevin G. O'Brien
Director Director
/s/ Ronald L. Taylor
- --------------------------------------
By: Ronald L. Taylor
Director
78