UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 10, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File No. 333-56239-01
LPA HOLDING CORP.
(exact name of registrant as specified in its charter)
SEE TABLE OF ADDITIONAL REGISTRANTS
DELAWARE 48-1144353
(State or other jurisdiction of (IRS employer identification number)
incorporation or organization)
130 SOUTH JEFFERSON STREET, SUITE 300
CHICAGO, IL 60661
(Address of principal executive office and zip code)
(312) 798-1200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
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 February 23, 2004, LPA Holding Corp. had outstanding 773,403 shares of
Class A Common Stock (par value, $.01 per share) and 20,000 shares of Class B
Common Stock (par value, $.01 per share). As of February 23, 2004, the
additional registrant had the number of outstanding shares, shown on the
following table.
ADDITIONAL REGISTRANTS
Number of Shares
Jurisdiction of Commission IRS Employer of Common
Name Incorporation File Number Identification No. Stock Outstanding
- ---- ------------- ----------- ------------------ -----------------
La Petite Academy, Inc. Delaware 333-56239 43-1243221 100 shares of Common
Stock (par value, $.01 per
share)
-2-
LPA HOLDING CORP. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED):
Condensed Consolidated Balance Sheets 4-5
Condensed Consolidated Statements of Operations and Comprehensive Loss 6
Condensed Consolidated Statements of Cash Flows 7
Notes to Condensed Consolidated Financial Statements 8-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12-19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
ITEM 4. CONTROLS AND PROCEDURES 19-20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURES 22-23
-3-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LPA HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
JANUARY 10, JUNE 28,
2004 2003
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,338 $ 9,526
Restricted cash investments
3,367 2,951
Accounts and notes receivable, net of allowance for
doubtful accounts of $663 and $496, respectively
11,015 11,024
Supplies inventory
2,563 3,075
Other prepaid expenses
4,074 905
Refundable taxes
58 56
--------------- ---------------
Total current assets
29,415 27,537
Restricted cash investments (Note 3)
7,838 5,042
Property and equipment, at cost:
Land
5,442 5,442
Buildings and leasehold improvements
78,950 77,349
Furniture and equipment
27,655 27,958
--------------- ---------------
112,047 110,749
Less accumulated depreciation
76,256 72,635
--------------- ---------------
Property and equipment, net
35,791 38,114
Other assets (Note 3)
6,338 7,396
--------------- ---------------
Total assets $ 79,382 $ 78,089
=============== ===============
-4-
LPA HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
JANUARY 10, JUNE 28,
2004 2003
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Overdrafts due banks $ 4,129 $ 3,055
Accounts payable
6,409 8,445
Current maturities of long-term debt and capital lease obligations
(Note 4) 2,016 2,499
Accrued salaries, wages and other payroll costs
19,099 17,954
Accrued insurance liabilities
4,997 5,141
Accrued property and sales taxes
5,164 4,313
Accrued interest payable
2,447 1,982
Reserve for closed academies
1,583 2,137
Other current liabilities
10,471 6,548
--------------- ---------------
Total current liabilities
56,315 52,074
Long-term liabilities:
Long-term debt and capital lease obligations (Note 4)
196,851 197,908
Other long-term liabilities (Note 5)
10,191 11,401
Series A 12% mandatorily redeemable preferred stock (Note 6)
74,739 -
--------------- ---------------
Total long-term liabilities
281,781 209,309
Series A 12% mandatorily redeemable preferred stock (Note 6)
- 69,378
Series B 5% convertible redeemable participating preferred stock
($0.01 par value per share); 13,645,000 shares authorized, 9,541,968
and 7,241,490 shares issued and outstanding as of January 10, 2004
and June 28, 2003, respectively; aggregate liquidation preference of
$22.2 million and $16.7 million, respectively 22,214 16,739
Stockholders' deficit:
Class A common stock ($0.01 par value per share); 17,500,000 shares
authorized; and 773,403 shares issued and outstanding as of January
10, 2004 and June 28, 2003, respectively 8 8
Class B common stock ($0.01 par value per share); 20,000 shares
authorized, issued and outstanding as of January 10, 2004 and June
28, 2003
Common stock warrants
8,596 8,596
Accumulated other comprehensive income
114 160
Accumulated deficit
(289,646) (278,175)
--------------- ---------------
Total stockholders' deficit
(280,928) (269,411)
--------------- ---------------
Total liabilities and stockholders' deficit $ 79,382 $ 78,089
=============== ===============
See notes to condensed consolidated financial statements.
-5-
LPA HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS (UNAUDITED)
(IN THOUSANDS OF DOLLARS)
12 WEEKS ENDED 28 WEEKS ENDED
JANUARY 10, JANUARY 11, JANUARY 10, JANUARY 11,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenue $ 82,881 $ 86,653 $ 193,611 $ 203,491
Operating expenses:
Salaries, wages and benefits
45,859 48,561 109,422 114,593
Facility lease expense
10,426 10,633 23,941 24,594
Depreciation
2,016 2,442 4,688 5,677
Restructuring charges (Note 9)
(857) 428 (823) 1,676
Provision for doubtful accounts
772 710 1,488 1,548
Other
20,020 22,264 49,757 58,492
------------ ------------ ------------ ------------
Total operating expenses
78,236 85,038 188,473 206,580
------------ ------------ ------------ ------------
Operating income (loss)
4,645 1,615 5,138 (3,089)
Interest expense
Interest on debt
4,557 5,013 10,658 11,724
Dividends and accretion on Series A preferred stock (Note 6)
2,261 - 5,362 -
------------ ------------ ------------ ------------
Total interest expense
6,818 5,013 16,020 11,724
Interest income
(9) (22) (21) (96)
------------ ------------ ------------ ------------
Net interest expense
6,809 4,991 15,999 11,628
------------ ------------ ------------ ------------
Loss before income taxes
(2,164) (3,376) (10,861) (14,717)
Provision for income taxes
59 151 137 229
------------ ------------ ------------ ------------
Net loss
(2,223) (3,527) (10,998) (14,946)
------------ ------------ ------------ ------------
Other comprehensive loss:
Derivative adjustments reclassified into operations
(20) (20) (46) (47)
------------ ------------ ------------ ------------
Total other comprehensive loss
(20) (20) (46) (47)
------------ ------------ ------------ ------------
Comprehensive loss $ (2,243) $ (3,547) $ (11,044) $ (14,993)
============ ============ ============ ============
See notes to condensed consolidated financial statements.
-6-
LPA HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS OF DOLLARS)
---------------- ----------------
28 WEEKS ENDED 28 WEEKS ENDED
JANUARY 10, 2004 JANUARY 11, 2003
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,998) $ (14,946)
Adjustments to reconcile net loss to net cash from operating activities
Restructuring charges (823) 1,676
Depreciation 4,688 5,677
Dividends and accretion on Series A preferred stock (Note 6) 5,362 -
Loss on sales and disposals of property and equipment 49 48
Other non cash items 511 1,092
Changes in assets and liabilities:
Restricted cash investments (3,212) (3,881)
Accounts and notes receivable 9 (1,353)
Supplies inventory 512 137
Other prepaid expenses (3,169) (2,381)
Refundable taxes (2) 363
Accounts payable (2,036) 3,656
Accrued salaries, wages and other payroll costs 1,034 150
Accrued property and sales taxes 851 2,145
Accrued interest payable 465 698
Other current liabilities 3,923 2,779
Accrued insurance liabilities 418 620
Reserve for closed academies (1,189) (1,243)
Other changes in assets and liabilities, net (55) (210)
--------------- ---------------
Net cash used for operating activities (3,662) (4,973)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (2,474) (3,510)
Proceeds from sale of assets 537 -
--------------- ---------------
Net cash used for investing activities (1,937) (3,510)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt and capital lease obligations (1,664) (1,131)
Net borrowings under the Revolving Credit Agreement - 1,500
Proceeds from issuance of common stock, redeemable preferred
stock and warrants, net of expenses 5,001 -
Overdrafts due bank 1,074 2,467
--------------- ---------------
Net cash provided by financing activities 4,411 2,836
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,188) (5,647)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,526 16,092
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,338 $ 10,445
=============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 9,656 $ 9,820
Income taxes 35 90
Non-cash investing and financing activities:
Capital lease obligations 124 104
See notes to condensed consolidated financial statements.
-7-
LPA HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION
The condensed consolidated financial statements presented herein include
LPA Holding Corp. (Parent), and its wholly owned subsidiary, La Petite
Academy, Inc. (La Petite), and La Petite's wholly owned subsidiaries:
Bright Start Inc. (Bright Start), and LPA Services, Inc. (Services).
Parent, consolidated with La Petite, Bright Start and Services, is referred
to herein as the "Company".
On March 17, 1998, LPA Investment LLC (LPA), a Delaware limited liability
company, and Parent entered into an Agreement and Plan of Merger pursuant
to which a wholly owned subsidiary of LPA was merged into Parent (the
Recapitalization). LPA is the direct parent company of Parent and an
indirect parent of La Petite. LPA is owned by an affiliate of J.P. Morgan
Partners LLC (JPMP) and by an entity controlled by Robert E. King, a
director of La Petite and Parent.
The Company offers educational, developmental and child care programs that
are available on a full-time or part-time basis, for children between six
weeks and twelve years old. The Company's schools are located in 36 states
and the District of Columbia, primarily in the southern, Atlantic coastal,
mid-western and western regions of the United States.
As of January 10, 2004, the Company operated 643 schools, including 588
residential Academies, 26 employer-based schools and 29 Montessori schools.
For the 28 weeks ended January 10, 2004, the Company had an average
attendance of approximately 63,160 full and part-time children.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - In the opinion of management, the accompanying
unaudited condensed consolidated interim financial statements include all
adjustments (consisting solely of normal and recurring adjustments)
necessary for their fair presentation in conformity with accounting
principles generally accepted in the United States of America (GAAP). The
results for the interim periods ended January 10, 2004 and January 11, 2003
are not necessarily indicative of the results to be expected for the entire
fiscal year.
Certain information normally included in financial statements prepared in
accordance with GAAP has been condensed or omitted. These financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's Form 10-K/A for
the fiscal year ended June 28, 2003.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Certain reclassifications to prior year amounts have been made in order to
conform to the current year presentation.
Over each of the past three years the Company has experienced significant
losses before income taxes. In addition, as shown in the accompanying
financial statements, the Company has a working capital deficit and a
stockholders' deficit as of January 10, 2004. Over the past three years,
there have been repeated instances where the Company was not in compliance
with its financial covenants and required multiple equity investments by
LPA (see Note 10) and other electing stockholders to enable it to meet its
financial obligations as they came due and provide adequate liquidity to
operate the business.
Over the past year management has implemented a series of measures to
improve the Company's operating results and cash flow. These actions
included the closure of unprofitable academies, optimization of staff
labor, personnel reductions, decreased discretionary expense spending and
greater realization of revenue resulting
-8-
from improved collections on accounts receivable. Management is continuing
to identify additional opportunities to further reduce its cost of
operation and optimize revenue per academy classroom. Management believes
that these efforts, coupled with the remaining $8.8 million of equity
commitment, as of January 10, 2004, provided by LPA and certain of the
other stockholders of Parent, will enable 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 can obtain additional funding
from LPA beyond that as noted above or from any other external source.
FISCAL YEAR END - The Company utilizes a 52 or 53-week fiscal year ending
on the Saturday closest to June 30 and is composed of 13 four-week periods
or in the case of a 53-week year, 12 four-week periods and one five week
period. Fiscal year 2004 is a 53-week fiscal year. The first quarter
contains four such periods or 16 weeks, the second and third quarters
contain 3 periods or 12 weeks and the fourth quarter contains 3 periods or
13 weeks. Fiscal year 2003 was a 52-week fiscal year. The first quarter
contained four such periods or 16 weeks and each remaining quarter
contained 3 periods or 12 weeks.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In May 2003, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No.
150 establishes standards for how companies classify and measure certain
financial instruments with characteristics of both liabilities and equity.
SFAS No. 150 requires financial instruments meeting certain criteria to be
reported as liabilities that were previously reflected between liabilities
and equity 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 adopted
the provisions of SFAS No. 150 on June 29, 2003.
The Company has determined that its Series A 12% mandatorily redeemable
preferred stock meets the criteria included in SFAS No. 150 to be reported
as a liability. Therefore, in the condensed consolidated balance sheet as
of January 10, 2004, the Series A 12% mandatorily redeemable preferred
stock has been classified as a long term liability. Additionally, dividends
and accretion attributable to these shares have now been classified as
interest expense rather than direct charges against accumulated deficit.
During the 12 and 28 weeks ended January 10, 2004, the Company recognized
$2.3 million and $5.4 million in dividends and accretion on the Series A
preferred stock as interest expense, while in the 12 and 28 weeks ended
January 11, 2003, the Company recognized a $2.0 million and $4.7 million
charge to accumulated deficit. The charges to interest expense resulting
from the adoption of SFAS No. 150 are currently non-cash charges, as the
Series A preferred stock dividends have not been paid but rather have been
added to the Series A preferred stock liquidation value and are payable in
the future. The prior year classification of the Series A preferred stock
has not been changed because the provisions of SFAS No. 150 do not permit
restatement of financial statements for earlier years presented.
The Company has determined that its Series B 5% convertible redeemable
participating preferred stock does not meet the criteria included in SFAS
No. 150 to be recorded as a liability. Therefore, in the condensed
consolidated balance sheet as of January 10, 2004, the Series B 5%
convertible redeemable participating preferred stock continues to be
classified between liabilities and equity.
3. NON-CURRENT ASSETS
The restricted cash investment balance represents the long term portion of
the cash deposited in an escrow account as security for the self-insured
portion of the Company's workers compensation, general liability and
automobile insurance coverage.
-9-
Other non-current assets consist of the following:
(in thousands of dollars)
JANUARY 10, JUNE 28,
2004 2003
-------------- --------------
Deferred financing costs $ 10,010 $ 10,010
Accumulated amortization
(6,116) (5,501)
------------- -------------
3,894 4,509
Other (a)
2,444 2,887
------------- -------------
$ 6,338 $ 7,396
============= =============
(a) Other includes properties held for sale, which are valued at fair
value less cost to sell.
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
(in thousands of dollars)
Long term debt and capital lease obligations consists of the following:
JANUARY 10, JUNE 28,
2004 2003
------------- -------------
Senior Notes, 10.0% due May 15, 2008 $ 145,000 $ 145,000
Borrowings under credit agreement 52,826 53,588
Capital lease obligations 1,041 1,819
------------- -------------
198,867 200,407
Less current maturities of long-term
debt and capital lease obligations (2,016) (2,499)
------------- -------------
$ 196,851 $ 197,908
============= =============
On July 31, 2003, Parent, La Petite and its senior secured lenders entered
into Amendment No. 6 to 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). 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 timely
with the Securities and Exchange Commission. Additionally, Amendment No. 6
revised the definition of Consolidated EBITDA in the Credit Agreement.
5. OTHER LONG-TERM LIABILITIES
(in thousands of dollars)
Other long-term liabilities consist of the following:
JANUARY 10, JUNE 28,
2004 2003
------------- -------------
Unfavorable leases (a) $ 727 $ 831
Reserve for closed schools (b)
773 2,329
Deferred severance (c)
594 705
Long-term insurance liabilities (d)
8,097 7,536
------------- -------------
$ 10,191 $ 11,401
============= =============
(a) In connection with the acquisitions of La Petite and Bright Start, a
liability for unfavorable operating leases was recorded and is being
relieved over the average remaining life of the related leases.
-10-
(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 $0.6 million and $0.7 million
as of January 10, 2004 and June 28, 2003, respectively.
(d) Long-term insurance liabilities reflect the Company's obligation for
reported and not paid and incurred but not reported, workers'
compensation, auto and general liability claims.
6. SHARES SUBJECT TO MANDATORY REDEMPTION
In May 2003, the FASB issued SFAS No. 150, which establishes standards for
how companies classify and measure certain financial instruments with
characteristics of both liabilities and equity. The Company adopted the
provisions of SFAS No. 150 on June 29, 2003. For additional information on
SFAS No. 150, see Note 2 - Recently Issued Accounting Pronouncements.
Shares subject to mandatory redemption consists of 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 January
10, 2004. 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 $82.2 million and $77.2 million as of January 10,
2004 and June 28, 2003, respectively. Accrued dividends were $37.2 million
and $32.2 million at January 10, 2004 and June 28, 2003, 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.
During the 12 and 28 weeks ended January 10, 2004, the Company recognized
$2.3 million and $5.4 million in dividends and accretion on the Series A
preferred stock as interest expense, while in the 12 and 28 weeks ended
January 11, 2003, the Company recognized a $2.0 million and $4.7 million
charge to accumulated deficit. The charges to interest expense resulting
from the adoption of SFAS No. 150 are currently non-cash charges, as the
Series A preferred stock dividends have not been paid but rather have been
added to the Series A preferred stock liquidation value and are payable in
the future.
7. COMMITMENTS AND CONTINGENCIES
The Company is presently, and has been from time to time, subject to claims
and litigation arising in the ordinary course of business. Management
believes that none of the claims or litigation, of which it is aware, will
materially affect the Company's financial condition, liquidity, or annual
results of operations, although assurance cannot be given with respect to
the ultimate outcome of any such actions.
8. STOCK-BASED COMPENSATION
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.
No options were granted during the 28 weeks ended January 10, 2004. If
compensation cost for options granted in prior periods had 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.
9. RESTRUCTURING CHARGES
During the second quarter of the 2004 fiscal year, the Company recorded
adjustments to its previously
-11-
established restructuring reserves, which had the net effect of reducing
the reserves by $0.9 million. These adjustments included restructuring
charges of $0.5 million, primarily due to contractual repairs and
maintenance costs related to closed schools, offset by recoveries of $1.4
million principally due to settlement of lease liabilities for less than
the recorded reserves in the second quarter of the 2004 fiscal year. In the
second quarter of the 2003 fiscal year, the Company recognized
restructuring charges of $0.6 million in connection with the closure of
nine schools, offset by recoveries of $0.2 million principally due to
settlement of lease liabilities for less than the recorded reserves.
Included in the restructuring charges for the 2003 fiscal year were
non-cash charges of $0.2 million. The restructuring charges related to the
school closures consisted principally of the present value of rent (net of
anticipated sublease income), real estate taxes, repairs and maintenance
costs, common area maintenance charges, and utilities, along with the
write-off of leasehold improvements. A summary of the restructuring reserve
activity is as follows, with dollars in thousands:
FISCAL YEAR FISCAL YEAR
2004 2003
--------------- --------------
Balances at June 28, 2003 and June 29, 2002 $ 4,466 $ 4,598
Provision recorded in first quarter
57 2,877
Recoveries recorded in first quarter
(23) (1,629)
Amount utilized in first quarter
(877) (1,725)
--------------- --------------
Balance at October 18, 2003 and October 19, 2002 $ 3,623 $ 4,121
=============== ==============
Provision recorded in second quarter $ 548 $ 639
Recoveries recorded in second quarter (1,405) (211)
Amount utilized in second quarter (411) (639)
--------------- --------------
Balance at January 10, 2004 and January 11, 2003 $ 2,355 $ 3,910
=============== ==============
10. SERIES B 5% CONVERTIBLE REDEEMABLE PARTICIPATING PREFERRED STOCK ISSUANCE
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, as amended by Amendment No. 1
to the Securities Purchase Agreement dated July 31, 2003, Parent may issue
up to a total of 6,669,734 shares of its Series B 5% convertible redeemable
participating preferred stock (Series B preferred stock) at a price of
$2.174 per share. LPA has committed to purchase in accordance with the
terms of the Securities Purchase Agreement, 6,658,636 shares of the Series
B preferred stock being offered. Purchases may be made at LPA's discretion
or upon occurrence of conditions detailed in the Securities Purchase
Agreement. In accordance with such commitment, LPA purchased 2,299,908
shares of Series B preferred stock for $5.0 million during the second
quarter of fiscal 2004. Accordingly, the remaining contingent equity
commitment from the stockholders of Parent has been reduced to $8.8
million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and the related notes thereto
included elsewhere in this report.
Historically, the Company's operating revenue has followed the seasonality of
the school year, declining during the summer months and the calendar year-end
holiday period. The number of new children enrolling at La Petite's educational
facilities (the schools) is generally highest in September-October and
January-February, generally referred to as the Fall and Winter enrollment
periods. As a result of this seasonality, results for one quarter are not
necessarily indicative of results for an entire year.
-12-
The Company operated 643 schools at the end of the second quarter of fiscal year
2004 as compared to 683 schools for the same period of fiscal year 2003. The net
decrease of 40 schools is a result of one opening, 38 closures and the reduction
of 3 locations due to the combining of operations. The closures resulted from
management's decision to close certain school locations where the conditions no
longer supported an economically viable operation.
New educational facilities (new schools), as defined by the Company, are
Academies opened within the current or previous fiscal year. These schools
typically generate operating losses until the Academies achieve normalized
occupancies. Established educational facilities (established schools), as
defined by the Company, are schools that were open prior to the start of the
previous fiscal year.
Full-time equivalent (FTE) attendance, as defined by the Company, is not a
measure of the absolute number of students attending the Company's schools, but
rather is an approximation of the full-time equivalent number of students based
on Company estimates and weighted averages. For example, a student attending
full-time is equivalent to one FTE, while a student attending only one-half of
each day is equivalent to 0.5 FTE. The average weekly FTE tuition rate, as
defined by the Company, is the tuition revenue divided by the FTE attendance for
the respective period.
RESULTS OF OPERATIONS
TWELVE WEEKS ENDED JANUARY 10, 2004 COMPARED TO TWELVE WEEKS ENDED JANUARY 11,
2003
The following table sets forth the Company's operating results for the
comparative 12 weeks ended January 10, 2004 and January 11, 2003, with amounts
presented in thousands of dollars and as percentages of revenue:
12 WEEKS ENDED 12 WEEKS ENDED
JANUARY 10, 2004 JANUARY 11, 2003
----------------------------------- ----------------------------------
Percent of Percent of
Amount Revenue Amount Revenue
--------------- --------------- --------------- ---------------
Revenue $ 82,881 100.0% $ 86,653 100.0%
Operating expenses:
Salaries, wages and benefits 45,859 55.3 48,561 56.0
Facility lease expense 10,426 12.6 10,633 12.3
Depreciation 2,016 2.4 2,442 2.8
Restructuring charges (857) (1.0) 428 0.5
Provision for doubtful accounts 772 0.9 710 0.8
Other 20,020 24.2 22,264 25.7
--------------- --------------- --------------- ---------------
Total operating expenses 78,236 94.4 85,038 98.1
--------------- --------------- --------------- ---------------
Operating income $ 4,645 5.6% $ 1,615 1.9%
=============== =============== =============== ===============
Operating revenue decreased $3.8 million or 4.4% from the same period last year.
This revenue decrease was the result of a reduction in revenue from closed
schools of $3.7 million, a $0.2 million decrease in other operating revenue and
a $0.1 million decrease at established schools, offset by a $0.2 million
increase at new schools. The revenue decrease was principally due to a decline
in FTE attendance of 10.8% offset by a 7.3% increase in average weekly FTE
tuition rates. The increase in the average weekly FTE tuition rate was
principally due to selective price increases that were put into place based on
geographic market conditions and class capacity utilization. The 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. FTE attendance was negatively impacted by the level of
governmental funding for childcare assistance programs, which declined or
remained unchanged in many areas. The Company expects that the current level of
government funding for childcare assistance programs will continue to have a
negative impact on FTE attendance in the third quarter of the current fiscal
year.
Salaries, wages, and benefits decreased $2.7 million or 5.6% from the same
period last year. As a percentage of revenue, labor costs were 55.3% for the 12
weeks ended January 10, 2004, as compared to 56.0% for the same
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period in the prior year. The decreases in salaries, wages, and benefits include
decreased labor costs of $2.1 million at closed schools and decreased benefit
costs of $1.3 million, offset by increased field management and corporate
administration labor costs of $0.3 million, and a $0.4 million increase in bonus
costs. Labor costs at established and new schools were relatively flat. A 3.1%
increase in average hourly rates at established schools was offset by a 3.4%
decrease in labor hours.
Facility lease expense decreased $0.2 million or 1.9% from the same period last
year. The decrease in facility lease expense was mainly due to closed schools,
offset by increases in lease payments for facilities with contingent rent
provisions.
Depreciation expense decreased $0.4 million or 17.4% from the same period last
year. The decrease in depreciation expense was principally due to the reduction
in the carrying value of fixed assets as a result of the impairment charge
recognized in the fourth quarter of the 2003 fiscal year and the write off the
leasehold improvements related to school closures in the 2003 fiscal year.
During the second quarter of the 2004 fiscal year, the Company recorded
adjustments to its previously established restructuring reserves, which had the
net effect of reducing the reserves by $0.9 million. These adjustments included
restructuring charges of $0.5 million, primarily due to contractual repairs and
maintenance costs related to closed schools, offset by recoveries of $1.4
million principally due to settlement of lease liabilities for less than the
recorded reserves, in the second quarter of the 2004 fiscal year. In the second
quarter of the 2003 fiscal year, the Company recognized restructuring charges of
$0.6 million in connection with the closure of nine schools, offset by
recoveries of $0.2 million principally due to settlement of lease liabilities
for less than the recorded reserves. Included in the restructuring charges for
the 2003 fiscal year were non-cash charges of $0.2 million. The restructuring
charges related to the school closures consisted principally of the present
value of rent (net of anticipated sublease income), real estate taxes, repairs
and maintenance costs, common area maintenance charges, and utilities, along
with the write-off of leasehold improvements.
Provision for doubtful accounts increased $0.1 million or 8.7% from the same
period last year. The increase in the provision for doubtful accounts is mainly
due to an increase in parent receivables in the second quarter of fiscal 2004 as
compared to the first quarter of fiscal 2004.
Other operating costs decreased $2.2 million or 10.1% from the same period last
year. Other operating costs include repairs and maintenance, utilities,
insurance, real estate taxes, food, transportation, marketing, supplies, travel,
professional fees, personnel, recruitment, training, bank overages and
shortages, and other miscellaneous costs. The decrease was due primarily to
lower legal and professional fees, taxes, marketing, transportation, and food
costs, offset by increases in repairs and maintenance and miscellaneous
expenses. As a percentage of revenue, other operating costs decreased to 24.2%
as compared to 25.7% in the same period in the prior year.
As a result of the foregoing, the Company had operating income of $4.6 million
in the second quarter of the 2004 fiscal year as compared to an operating income
of $1.6 million in the second quarter of the 2003 fiscal year.
Net interest expense increased $1.8 million or 36.4% as compared to the same
period last year. The increase was principally due to the $2.3 million impact
resulting from the adoption of SFAS No. 150 at the start of the 2004 fiscal
year, offset primarily by reduced interest expense resulting from the fair value
adjustment to the carrying value of the senior notes becoming fully amortized
prior to the 2004 fiscal year. SFAS No. 150 impacts the classification of the
Company's Series A preferred stock and requires that accrued dividends and
accretion related to these shares be classified as interest expense rather than
a charge to accumulated deficit. The charges to interest expense resulting from
the adoption of SFAS No. 150 are currently non-cash charges, as the Series A
preferred stock dividends have not been paid but rather have been added to the
Series A preferred stock liquidation value and are payable in the future.
The provision for income taxes includes a provision for state and local taxes.
The effective federal tax rate for the 12 weeks ended January 10, 2004 was 0%
due to the current period operating losses and the Company's provision of a full
valuation allowance against deferred tax assets.
-14-
28 WEEKS ENDED JANUARY 10, 2004 COMPARED TO 28 WEEKS ENDED JANUARY 11, 2003
The following table sets forth the Company's operating results for the
comparative 28 weeks ended January 10, 2004 and January 11, 2003, with amounts
presented in thousands of dollars and as percentages of revenue:
28 WEEKS ENDED 28 WEEKS ENDED
JANUARY 10, 2004 JANUARY 11, 2003
--------------------------------- ---------------------------------
Percent of Percent of
Amount Revenue Amount Revenue
--------------- --------------- --------------- ---------------
Revenue $ 193,611 100.0% $ 203,491 100.0%
Operating expenses:
Salaries, wages and benefits 109,422 56.5 114,593 56.3
Facility lease expense 23,941 12.4 24,594 12.1
Depreciation 4,688 2.4 5,677 2.8
Restructuring charges (823) (0.4) 1,676 0.8
Provision for doubtful accounts 1,488 0.8 1,548 0.8
Other 49,757 25.7 58,492 28.7
--------------- --------------- --------------- ---------------
Total operating expenses 188,473 97.3 206,580 101.5
--------------- --------------- --------------- ---------------
Operating income (loss) $ 5,138 2.7% $ (3,089) -1.5%
=============== =============== =============== ===============
Operating revenue decreased $9.9 million or 4.9% from the same period last year.
This revenue decrease was a result of a reduction in revenue from closed schools
of $10.2 million, a $0.2 million decrease in established schools and a $0.2
million decrease in other operating revenue offset by a $0.7 million increase at
new schools. The revenue decrease was principally due to a decline in FTE
attendance of 11.4% offset by a 7.1% increase in average weekly FTE tuition
rates. The increase in the average weekly FTE tuition rate was principally due
to selective price increases that were put into place based on geographic market
conditions and class capacity utilization. The 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. FTE attendance was negatively impacted by the level of governmental
funding for childcare assistance programs, which declined or remained unchanged
in many areas. The Company expects that the current level of government funding
for childcare assistance programs will continue to have a negative impact on FTE
attendance in the third quarter of the current fiscal year.
Salaries, wages, and benefits decreased $5.2 million or 4.5% from the same
period last year. As a percentage of revenue, labor costs were 56.5% for the 28
weeks ended January 10, 2004, as compared to 56.3% for the same period in the
prior year. The decreases in salaries, wages, and benefits include decreased
labor costs of $5.9 million at closed schools and decreased benefit costs of
$1.1 million, offset by increased field management and corporate administration
labor costs of $0.3 million, increased labor costs of $0.5 million at
established schools, increased labor costs of $0.3 million at new schools, and a
$0.7 million increase in bonus costs. The increase in labor costs at established
schools was mainly due to a 4.0% increase in average hourly wage rates offset by
a 3.5% decrease in labor hours as compared to the same period in the prior year.
Facility lease expense decreased $0.7 million or 2.7% from the same period last
year. The decrease in facility lease expense was mainly due to closed schools,
offset by increases in lease payments for facilities with contingent rent
provisions and lower rent credits resulting from certain unfavorable lease
liabilities becoming fully utilized prior to the end of the second quarter of
the 2004 fiscal year.
Depreciation expense decreased $1.0 million or 17.4% from the same period last
year. The decrease in depreciation expense was principally due to the reduction
in the carrying value of fixed assets as a result of the impairment charge
recognized in the fourth quarter of the 2003 fiscal year and the write off the
leasehold improvements related to school closures in the 2003 fiscal year.
-15-
For the 28 weeks ended January 10, 2004, the Company recognized restructuring
charges of $0.6 million, primarily due to contractual repairs and maintenance
costs related to closed schools, offset by recoveries of $1.4 million
principally due to settlement of lease liabilities for less than the recorded
reserves. For the 28 weeks ended January 11, 2003, the Company recognized
restructuring charges of $3.2 million in connection with the closure of 32
schools and $0.3 million in connection with the write-down to fair market value
of real estate properties held for disposal, offset by recoveries of $1.8
million principally due to settlement of lease liabilities for less than the
recorded reserves. The restructuring charges related to the school closures
consisted principally of the present value of rent (net of anticipated sublease
income), real estate taxes, repairs and maintenance costs, common area
maintenance charges, and utilities, along with the write-off of leasehold
improvements.
Provision for doubtful accounts decreased slightly or 3.9% from the same period
last year. The decrease is principally the result of improved collection efforts
over the same period in the prior year.
Other operating costs decreased $8.7 million or 14.9% from the same period last
year. Other operating costs include repairs and maintenance, utilities,
insurance, real estate taxes, food, transportation, marketing, supplies, travel,
professional fees, personnel, recruitment, training, bank overages and
shortages, and other miscellaneous costs. The decrease was due primarily to
lower legal and professional fees, management meeting costs, bank shortages,
marketing, transportation, taxes, personnel, and miscellaneous expenses offset
by increases in, repair and maintenance and insurance costs. As a percentage of
revenue, other operating costs decreased to 25.7% as compared to 28.7% in the
same period in the prior year.
As a result of the foregoing, the Company had operating income of $5.1 million
for the 28 weeks ended January 10, 2004 as compared to an operating loss of $3.1
million for the 28 weeks ended January 11, 2003.
Net interest expense increased $4.4 million or 37.6% as compared to the same
period last year. The increase was principally due to the $5.4 million impact
resulting from the adoption of SFAS No. 150 at the start of the 2004 fiscal
year, offset primarily by reduced interest expense resulting from the fair value
adjustment to the carrying value of the senior notes becoming fully amortized
prior to the 2004 fiscal year. SFAS No. 150 impacts the classification of the
Company's Series A preferred stock and requires that accrued dividends and
accretion related to these shares be classified as interest expense rather than
a charge to accumulated deficit. The charges to interest expense resulting from
the adoption of SFAS No. 150 are currently non-cash charges, as the Series A
preferred stock dividends have not been paid but rather have been added to the
Series A preferred stock liquidation value and are payable in the future.
The provision for income taxes includes a provision for state and local taxes.
The effective federal tax rate for the 28 weeks ended January 10, 2004 was 0%
due to the current period operating losses and the Company's provision of a full
valuation allowance against deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are from cash flows from operations,
borrowings on the revolving credit facility under 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 Credit Agreement will terminate on May 11, 2006. Payments due under the
amortization schedule for the term loan are $0.5 million in the remainder of
fiscal year 2004, $5.5 million in fiscal year 2005, and $27.7 million in fiscal
year 2006. The term loan is also subject to mandatory prepayment in the event of
certain equity or debt issuances or asset sales by the Company or any of its
subsidiaries and in amounts equal to specified percentages of excess cash flow
(as defined). On January 10, 2004, there was $33.7 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 no amount 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
-16-
the ability of the Company to incur additional indebtedness, pay cash dividends
or make certain other restricted payments.
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 timely with the Securities and Exchange
Commission. Additionally, Amendment No. 6 revised the definition of Consolidated
EBITDA in the Credit Agreement. For further information concerning Amendment No.
6 to the Credit Agreement, see Notes 4 and 8 to the consolidated financial
statements included at Item 8 of the Company's Annual Report on Form 10-K/A for
the year ended June 28, 2003.
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 a total of 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, 6,658,636 shares of the Series B preferred
stock being offered and has received warrants to purchase 1,689,607 shares of
Parent's class A common stock in connection with such commitment. In accordance
with such commitment, LPA purchased 341,766 shares of Series B preferred stock
in June 2003 for $0.8 million, 1,379,945 shares of Series B preferred stock in
November 2003 for $3.0 million, and 919,963 shares of Series B preferred stock
in December 2003 for $2.0 million. Further, in accordance with their commitment
to purchase shares of Series B preferred stock and in accordance with the terms
of the Securities Purchase Agreement, the Electing Stockholders other than LPA
purchased 570 shares of Series B preferred stock in July 2003. Accordingly, at
February 23, 2004, the remaining contingent equity commitment from the
stockholders of Parent has been reduced to $8.8 million. For further information
concerning the Securities Purchase Agreement and the terms of the equity
commitment, see Note 8 to the consolidated financial statements included at Item
8 of the Company's Annual Report on Form 10-K/A for the year ended June 28,
2003.
As of February 23, 2004, LPA beneficially owned 93.8% of the common stock of
Parent on a fully diluted basis, $45 million of Series A preferred stock of
Parent and approximately $20.7 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.
Over each of the past three years the Company has experienced significant losses
before income taxes. In addition, as shown in the accompanying financial
statements, the Company has a working capital and stockholders' deficit as of
January 10, 2004. Over the past three years, there have been repeated instances
where the Company was not in compliance with its financial covenants and
required multiple equity investments by LPA (see Note 10 to the accompanying
condensed consolidated financial statements included in this report) and other
electing stockholders to enable it to meet its financial obligations as they
came due and provide adequate liquidity to operate the business.
Over the past year management has implemented a series of measures to improve
the Company's operating results and cash flow. These actions included the
closure of unprofitable academies, optimization of staff labor, personnel
reductions, decreased discretionary expense spending and greater realization of
revenue resulting from improved collections on accounts receivable. Management
is continuing to identify additional opportunities to further reduce its cost of
operation and optimize revenue per academy classroom. Management believes that
these efforts, coupled with the remaining $8.8 million of equity commitment, as
of January 10, 2004, provided by LPA and certain of the other stockholders of
Parent, will enable 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 can obtain
additional funding from LPA beyond that as noted above or from any other
external source.
Cash flows used for operating activities were $3.7 million during the 28 weeks
ended January 10, 2004 compared to cash flows used by operating activities of
$5.0 million for the 28 weeks ended January 11, 2003. The $1.3 million decrease
in cash flows used for operating activities was mainly due to a $5.2 million
decrease in net losses, net of non-cash charges, offset by an increase in
working capital amounts of $3.9 million.
Cash flows used for investing activities were $1.9 million during the 28 weeks
ended January 10, 2004 as compared to cash flows used of $3.5 million during the
28 weeks ended on January 11, 2003. The $1.6 million decrease in
-17-
cash flows used for investing activities was due to decreased capital
expenditures of $1.0 million and increased proceeds from the sale of assets of
$0.6 million.
Cash flows provided by financing activities were $4.4 million during the 28
weeks ended January 10, 2004, compared to cash flows provided by financing
activities of $2.8 million during the 28 weeks ended January 11, 2003. The $1.6
million increase in cash flows for financing activities was due to a $5.0
million increase in proceeds from the issuance of Series B preferred stock,
offset by decreased revolver borrowings of $1.5 million, increased repayment of
debt and capital lease obligations of $0.5 million and a $1.4 million decrease
in bank overdrafts related to the timing of monthly expense payments.
Total capital expenditures for the 28 weeks ended January 10, 2004 and January
11, 2003 were $2.5 million and $3.5 million, respectively. The decrease in total
capital expenditures was a result of decreased spending on maintenance capital
expenditures. The Company views all capital expenditures, other than those
incurred in connection with the development of new schools, to be maintenance
capital expenditures. All of the capital expenditures for the 28 weeks ended
January 10, 2004 and January 11, 2003 were maintenance capital expenditures.
In addition to maintenance capital expenditures, the Company expends additional
funds to repair and maintain its facilities in good working condition. Such
funds are expensed in the periods in which they are incurred. The amounts of
such expenses for the 28 weeks ended January 10, 2004 and January 11, 2003 were
$8.9 million and $7.9 million, respectively.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires that management make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Predicting future events is inherently an
imprecise activity and as such requires the use of judgment. Actual results may
vary from estimates in amounts that may be material to the financial statements.
See "Cautionary Statement Concerning Forward Looking Statements."
For a description of the Company's critical accounting policies, see "Item 7.
Management's Discussion and Analysis of Financial Conditions and Results of
Operations, Summary of Critical Accounting Policies", included in the Company's
Annual Report on Form 10-K/A for the year ended June 28, 2003. There have been
no changes to the Company's critical accounting policies during the 28 weeks
ended January 10, 2004.
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.
-18-
- 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.
No assurance can be made that any expectation, estimate or projection contained
in a forward-looking statement can be achieved. Readers are cautioned not to
place undue reliance on such statements, which speak only as of the date made.
The Company undertakes no obligation to release publicly any revisions to
forward-looking statements as the result of subsequent events or developments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Indebtedness as of January 10, 2004 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 $33.7 million 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 administrative
agent's published prime rate, a certificate of deposit rate multiplied by the
statutory reserve rate, plus the cost of FDIC insurance 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 Alternate Base Rate
loans as defined in the Credit Agreement. The Senior Notes mature in May 2008
and the Credit Agreement matures in May 2006. Payments due under the
amortization schedule for the term loan are $0.5 million in the remainder of
fiscal year 2004, $5.5 million in fiscal year 2005, and $27.7 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.
The Company had no derivative instruments at January 10, 2004.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a set of disclosure controls and procedures (the
"Disclosure Controls") that are designed to ensure that information required to
be disclosed in the reports and filed under the Securities Exchange Act of 1934,
as amended ("Exchange Act"), is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms. The Company's
Disclosure Controls include, without limitation, those components of internal
controls over financial reporting ("Internal Controls") that provide reasonable
assurances that transactions are recorded as necessary to permit preparation of
the Company's financial statements in accordance with generally accepted
accounting principles.
As of January 10, 2004, 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 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) a lack of segregation of duties.
-19-
While the Company is continuing in the process of implementing a more efficient
and reliable system of Disclosure Controls several steps have been already taken
to improve its internal controls. The Company has implemented and fully staffed
a sales audit function, has increased its internal audit staffing and increased
the number of field audits performed, has implemented extensive training of its
field personnel in the use of the Company's point of sale (POS) accounting
system, has made enhancements to limit field access to changes to certain POS
system charges, has centralized certain activities previously performed in the
field and has increased the quantity and quality of its accounting personnel. In
addition, the Company has instituted interim compensating controls and
procedures to ensure that information required to be disclosed in this Quarterly
Report on Form 10-Q has been recorded, processed, summarized and reported to its
senior management. These interim compensating controls and procedures include,
but are not necessarily limited to, (i) communicating a tone from senior
management regarding the proper conduct in these matters, (ii) improving
accounting policies and procedures, (iii) increasing divisional financial staff
accountability to ensure field adherence to financial policies and internal
controls and (iv) 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, 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 that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting other than the continuing
impact of the corrective actions discussed above.
******
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is presently, and has been from time to time, subject to claims and
litigation arising in the ordinary course of business. Management believes that
none of the claims or litigation, of which it is aware, will materially affect
the Company's financial condition or results of operations, although assurance
cannot be given with respect to the ultimate outcome of any such actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On November 20, 2003, by Action by Written Consent of the Sole Stockholder of La
Petite Academy, Inc., LPA Holding Corp., as the sole stockholder of La Petite
Academy, Inc. approved an amendment to the Bylaws of La Petite Academy, Inc.
relating to the indemnification provisions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits required by Item 601 of Regulation S-K:
31.1 CFO Section 302 certifications.
31.2 CEO Section 302 certifications.
32 CEO and CFO Section 906 certifications.
b. Reports on Form 8-K:
None.
ITEMS 2, 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LPA HOLDING CORP.
Dated: February 23, 2004 /s/ Neil P. Dyment
------------------------------------
By: Neil P. Dyment
Chief Financial Officer and duly
authorized representative of the
registrant
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LA PETITE ACADEMY, INC.
Dated: February 23, 2004 /s/ Neil P. Dyment
---------------------------------
By: Neil P. Dyment
Chief Financial Officer and duly
authorized representative of
the registrant
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