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 15, 2005
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 March 1, 2005, 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 March 1, 2005, 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)
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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 Income (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 13-20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20
ITEM 4. CONTROLS AND PROCEDURES 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 22
ITEM 6. EXHIBITS 22
SIGNATURES 23-24
-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 15, JULY 3,
2005 2004
----------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 7,744 $ 7,542
Accounts receivable, net of allowance for
doubtful accounts of $598 and $501, respectively 11,564 10,919
Insurance deposits (Note 3) 4,371 3,415
Supplies inventory 3,706 3,949
Other prepaid expenses 3,771 887
Refundable taxes 71 39
----------- ---------
Total current assets 31,227 26,751
Property and equipment, at cost:
Land 5,442 5,442
Buildings and leasehold improvements 85,590 81,479
Furniture and equipment 32,090 30,658
Construction in progress 236 60
----------- ---------
123,358 117,639
Less accumulated depreciation 84,487 79,474
----------- ---------
Property and equipment, net 38,871 38,165
Insurance deposits (Note 3) 5,538 5,613
Other assets (Note 3) 5,312 5,333
----------- ---------
Total assets $ 80,948 $ 75,862
=========== =========
(continued)
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LPA HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
JANUARY 15, JULY 3,
2005 2004
----------- ---------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Overdrafts due banks $ 4,401 $ 3,789
Accounts payable 7,385 7,690
Current maturities of long-term debt and capital lease obligations 1,243 5,871
(Note 4)
Accrued salaries, wages and other payroll costs 18,629 20,434
Accrued insurance liabilities 6,086 5,857
Accrued property and sales taxes 4,841 4,041
Accrued interest payable 2,653 1,997
Reserve for closed schools 802 1,002
Other current liabilities 11,470 8,578
----------- ---------
Total current liabilities 57,510 59,259
Long-term liabilities:
Long-term debt and capital lease obligations (Note 4) 197,515 184,731
Other long-term liabilities (Note 5) 8,699 8,676
Series A 12% mandatorily redeemable preferred stock (Note 6) 86,045 79,866
----------- ---------
Total long-term liabilities 292,259 273,273
Series B 5% convertible redeemable participating preferred stock 24,370 22,747
($0.01 par value per share); 13,645,000 shares authorized,
10,006,550 shares issued and outstanding; aggregate liquidation
preference of $24.4 million and $22.7 million, as of January 15,
2005 and July 3, 2004, respectively
Stockholders' deficit:
Class A common stock ($0.01 par value per share); 17,500,000 8 8
shares authorized; and 773,403 shares issued and outstanding
Class B common stock ($0.01 par value per share); 20,000 shares
authorized, issued and outstanding
Common stock warrants 8,596 8,596
Accumulated other comprehensive income 28 74
Accumulated deficit (301,823) (288,095)
----------- ---------
Total stockholders' deficit (293,191) (279,417)
----------- ---------
Total liabilities and stockholders' deficit $ 80,948 $ 75,862
=========== =========
See notes to condensed consolidated financial statements.
-5-
LPA HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(IN THOUSANDS OF DOLLARS)
12 WEEKS ENDED 28 WEEKS ENDED
JANUARY 15, JANUARY 10, JANUARY 15, JANUARY 10,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Revenue $ 86,972 $ 82,881 $ 199,344 $ 193,611
Operating expenses:
Salaries, wages and benefits 48,975 45,859 114,856 109,422
Facility lease expense 10,780 10,426 24,920 23,941
Depreciation and amortization 2,178 2,016 5,030 4,688
Restructuring charges (recoveries) (Note 9) 1 (857) (41) (823)
Provision for doubtful accounts 410 772 841 1,488
Other 19,980 20,020 50,205 49,757
----------- ----------- ----------- -----------
Total operating expenses 82,324 78,236 195,811 188,473
----------- ----------- ----------- -----------
Operating income (loss) 4,648 4,645 3,533 5,138
Interest expense
Interest on debt 4,511 4,557 10,449 10,658
Dividends and accretion on Series A preferred stock
(Note 6) 2,668 2,261 6,179 5,362
----------- ----------- ----------- -----------
Total interest expense 7,179 6,818 16,628 16,020
Interest income (19) (9) (34) (21)
----------- ----------- ----------- -----------
Net interest expense 7,160 6,809 16,594 15,999
----------- ----------- ----------- -----------
Loss before income taxes (2,512) (2,164) (13,061) (10,861)
Provision (benefit) for income taxes 17 59 55 137
----------- ----------- ----------- -----------
Net loss (2,529) (2,223) (13,116) (10,998)
----------- ----------- ----------- -----------
Other comprehensive loss:
Derivative adjustments reclassified into operations (20) (20) (46) (46)
----------- ----------- ----------- -----------
Total other comprehensive loss (20) (20) (46) (46)
----------- ----------- ----------- -----------
Comprehensive loss $ (2,549) $ (2,243) $ (13,162) $ (11,044)
=========== =========== =========== ===========
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 15, 2005 JANUARY 10, 2004
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (13,116) $ (10,998)
Adjustments to reconcile net loss to net cash from operating
activities
Restructuring (recoveries) charges (41) (823)
Depreciation and amortization 5,030 4,688
Dividends and accretion on Series A preferred stock (Note 6) 6,179 5,362
Loss on sales and disposals of property and equipment 48 49
Other non cash items 499 511
Changes in assets and liabilities:
Accounts receivable (645) 9
Insurance deposits (881) (3,212)
Supplies inventory 243 512
Other prepaid expenses (2,884) (3,169)
Refundable taxes (32) (2)
Accounts payable (305) (2,036)
Accrued salaries, wages and other payroll costs (1,913) 1,034
Accrued property and sales taxes 800 851
Accrued interest payable 656 465
Other current liabilities 2,892 3,923
Accrued insurance liabilities 648 418
Reserve for closed schools (364) (1,189)
Other changes in assets and liabilities, net (140) (55)
------------ ------------
Net cash used for operating activities (3,326) (3,662)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (5,390) (2,474)
Proceeds from sale of assets - 537
------------ ------------
Net cash used for investing activities (5,390) (1,937)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of term loan and capital lease obligations (1,029) (1,664)
Net borrowings under the Revolving Credit Agreement 8,735 -
Deferred debt issuance costs (538) -
Proceeds from issuance of common stock, redeemable preferred
stock and warrants, net of expenses 1,010 5,001
Other long term debt 128 -
Overdrafts due bank 612 1,074
------------ ------------
Net cash provided by financing activities 8,918 4,411
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 202 (1,188)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,542 9,526
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,744 $ 8,338
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 9,269 $ 9,656
Income taxes 21 35
Non-cash investing and financing activities:
Capital lease obligations 323 123
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 15, 2005, the Company operated 645 schools, including 587
residential academies, 29 employer-based schools and 29 Montessori
schools. For the 28 weeks ended January 15, 2005, the Company had an
average attendance of approximately 62,450 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 15, 2005 and January 10,
2004 are not necessarily indicative of the results to be expected for the
entire fiscal year.
Certain information normally included in financial statements prepared in
accordance with GAAP has been condensed or omitted. These financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's Form 10-K for
the fiscal year ended July 3, 2004.
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.
Over each of the past three years the Company has experienced significant
losses before income taxes. In addition, as shown in the accompanying
condensed financial statements, the Company has a working capital and
stockholders' deficit as of January 15, 2005. Over the past three years,
there have been instances where the Company was not in compliance with its
financial covenants in the Credit Agreement (as defined below) 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.
On December 6, 2004, the Company entered into Amendment No. 7 to the
Credit Agreement, effective as of November 30, 2004, which extended the
final maturity of the Credit Agreement from May 11, 2006 to November 15,
2007. Payments due under the amortization schedule for the term loan are
$0.2 million in the remainder of fiscal year 2005, $0.4 million in fiscal
year 2006, $0.4 million in fiscal year 2007 and $31.7 million in fiscal
year 2008.
Over the past year management has implemented a series of measures to
improve the Company's operating results and cash flow. These actions
included decreased discretionary expense spending and greater realization
of revenue resulting from increased controls over the use of tuition
discounts and coupons and an increased
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focus on collection of accounts receivable on the part of the divisional
finance staff. 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 (i) the remaining $7.7 million of equity commitment, as of January
15, 2005, provided by LPA and certain of the other stockholders of Parent,
(ii) the extension of the final maturity date of the Credit Agreement and
(iii) revision of certain existing financial covenant targets and
establishment of new targets for the extended period of the Credit
Agreement, 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, nor can there be any 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 which 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 2005 is a 52-week fiscal year. The first
quarter contains four such periods or 16 weeks and each remaining quarter
contains 3 periods or 12 weeks. Fiscal year 2004 was a 53-week fiscal
year. The first quarter contained four such periods or 16 weeks, the
second and third quarters contained 3 periods or 12 weeks and the fourth
quarter contained 3 periods or 13 weeks.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In December 2003, the
Financial Accounting Standards Board ("FASB") issued a revision to
Interpretation 46 (FIN 46R) to clarify some of the provisions of FASB
Interpretation No. 46, Consolidation of Variable Interest Entities. The
term "variable interest" is defined in FIN 46 as "contractual, ownership
or other pecuniary interest in an entity that change with changes in the
entity's net asset value." Variable interests are investments or other
interests that will absorb a portion of an entity's expected losses if
they occur or receive portions of the entity's expected residual returns
if they occur. The application of FIN 46R did not have an impact on the
Company's financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment. The Statement requires that the compensation cost relating to
share-based payment transactions be recognized in the financial
statements. That cost will be measured based on the fair value of the
equity or liability instruments issued. The Company will be required to
apply Statement 123 (R) as of the first interim period that begins after
June 15, 2005. Management is still evaluating the full effect of this new
accounting standard on the financial statements.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions. The amendments made by Statement No. 153 are based on the
principle that exchanges of nonmonetary assets should be measured based on
the fair value of assets exchanged. Further, the amendments eliminate the
narrow exception for nonmonetary exchanges of similar productive assets
and replace it with a broader exception for exchanges of nonmonetary
assets that do no have commercial substance. The Statement is effective
for nonmonetary asset exchanges occurring in the fiscal periods beginning
after June 15, 2005. Management is still evaluating the full effect of
this new accounting standard on the financial statements.
3. NON-CURRENT ASSETS
Insurance deposits represent cash held by insurance carriers as security
for the self-insured portion of the Company's workers compensation,
general liability and automobile insurance coverage.
Other non-current assets consist of the following in thousands of dollars:
JANUARY 15, JULY 3,
2005 2004
----------- ---------
Deferred financing costs $ 10,549 $ 10,010
Accumulated amortization (7,244) (6,642)
--------- ---------
3,305 3,368
Other (a) 2,007 1,965
--------- ---------
$ 5,312 $ 5,333
========= =========
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(a) Other includes the unamortized portion of losses on sale-leasebacks,
utility deposits and properties held for sale, which are valued at fair
value less cost to sell.
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long term debt and capital lease obligations consists of the following in
thousands of dollars:
JANUARY 15, JULY 3,
2005 2004
----------- --------
Senior Notes, 10.0% due May 15, 2008 $ 145,000 $145,000
Borrowings under term loan facility 32,652 33,002
Borrowings under revolving credit agreement 19,735 11,000
Other long term debt 128 -
Capital lease obligations 1,243 1,600
----------- --------
198,758 190,602
Less current maturities of long-term
debt and capital lease obligations (1,243) (5,871)
----------- --------
$ 197,515 $184,731
=========== ========
On December 6, 2004, the Company entered into Amendment No. 7 to the
Credit Agreement, effective as of November 30, 2004. Pursuant to the
amendment to the Credit Agreement, the final maturity of the Credit
Agreement was extended from May 11, 2006 to November 15, 2007. Payments
due under the amortization schedule for the term loan are $0.2 million in
the remainder of fiscal year 2005, $0.4 million in fiscal year 2006, $0.4
million in fiscal year 2007 and $31.7 million in fiscal year 2008. The
amendment also (i) revised certain existing financial covenant targets
required to be maintained by the Company and set new targets for the
extended period of the Credit Agreement; (ii) deleted the requirement that
LIBOR borrowings pay a predetermined minimum interest rate; and (iii)
lowered the minimum dollar amount required to make a borrowing under the
Credit Agreement. The Credit Agreement contains covenants which restrict
the Company's ability, among other things, to incur debt and liens, sell
assets and make investments. The Company was in compliance with all
covenants on January 15, 2005.
5. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following in thousands of
dollars:
JANUARY 15, JULY 3,
2005 2004
----------- ---------
Unfavorable leases (a) $ 522 $ 638
Reserve for closed schools (b) 401 573
Deferred severance (c) 394 502
Long-term insurance liabilities (d) 7,382 6,963
----------- ---------
$ 8,699 $ 8,676
=========== =========
(a) In connection with the acquisition Bright Start, a liability for
unfavorable operating leases was recorded and is being relieved over the
average remaining life of the related 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.
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(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 $0.4 million and $0.5 million as of January
15, 2005 and July 3, 2004, 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
Shares subject to mandatory redemption consist 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
15, 2005. 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 $92.5 million and $86.9 million as of
January 15, 2005 and July 3, 2004, respectively. Accrued dividends were
$47.5 million and $41.9 million at January 15, 2005 and July 3, 2004,
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.
The Company recognized $6.2 million and $5.4 million in dividends and
accretion on the Series A preferred stock as interest expense during the
28 weeks ended January 15, 2005 and January 10, 2004, respectively. The
charges to interest expense 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 15, 2005. If
compensation cost for options granted in prior periods had been recognized
as prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation,"
as amended by SFAS No. 148, Accounting for Stock-Based Compensation --
Transition and Disclosure, an amendment of SFAS No. 123, it would not have
had a material effect on the Company's results of operations.
9. RESTRUCTURING CHARGES
The Company did not incur any significant restructuring charges during the
second quarter of the 2005 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.
Restructuring charges related to the school closures consist principally
of the present value of rent (net of anticipated sublease
-11-
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, in dollars in thousands:
FISCAL YEAR FISCAL YEAR
2005 2004
----------- -----------
Balances at July 3, 2004 and June 28, 2003 $ 1,576 $ 4,466
Provision recorded in first quarter - 57
Recoveries recorded in first quarter (42) (23)
Amount utilized in first quarter (245) (877)
----------- -----------
Balance at October 23, 2004 and October 18, 2003 1,289 3,623
Provision recorded in second quarter 1 548
Recoveries recorded in second quarter - (1,405)
Amount utilized in second quarter (88) (411)
----------- -----------
Balance at January 15, 2005 and January 10, 2004 $ 1,202 $ 2,355
=========== ===========
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 (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 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 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, 919,963 shares of Series B preferred
stock in December 2003 for $2.0 million, and 459,982 shares of Series B
preferred stock in December 2004 for $1.0 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 June 2003, 2,300 shares of Series B preferred stock in
November 2003, 1,534 shares of Series B preferred stock in December 2003,
and 766 shares of Series B preferred stock in December 2004. Accordingly,
at January 15, 2005, the remaining contingent equity commitment from the
stockholders of Parent was $7.7 million.
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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 financial statements and the related notes included elsewhere in this
report.
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.
OVERVIEW
La Petite is one of the leading for-profit preschool educational facilities 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. 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.
The majority of the Company's revenue comes from the tuition and fees that it
charges for attendance at its Academies. 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. Parents also pay an annual registration fee.
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
Pre-Kindergarten and Private Kindergarten programs. Tuition rates per FTE are
impacted by the age mix of children and generally decrease as the age of the
children increase. Over the past year the Company has experienced increases in
its infant, toddler and preschool classrooms while experiencing decreases in its
before and after school programs. Overall FTE attendance improved during the
second quarter of fiscal year 2005. While FTE attendance was down slightly for
the 28 weeks ended January 15, 2005, it was up 2.9% for the 12 weeks ended
January 15, 2005.
Historically, operating revenue has followed the seasonality of the school year.
The number of new children attending the Company's schools is highest in
September-October and January-February, generally referred to as the fall and
winter enrollment periods. Revenues tend to decline during the calendar year-end
holiday period and during the summer.
Operating expenses consist of both direct costs associated with the operation of
our schools and administrative costs associated with the operation of our field
and corporate support centers.
Direct labor costs at our schools represent the largest component of operating
expenses. Direct labor costs per FTE are impacted by the age mix of children and
generally decrease as the age of the children increase. Over the past year the
Company has experienced decreased labor productivity at its established schools.
Some of the decrease in productivity is due to non recurring training time
related to the rollout of a new preschool curriculum program during the first
quarter of fiscal year 2005. Labor has also been negatively impacted by the
change in age mix noted above, with the increase in infants and toddlers
requiring significantly more labor hours per FTE. Management is currently
implementing programs designed to improve labor productivity. Administrative
labor costs have also increased as management has reduced spans of control
through the hiring of additional divisional vice presidents and district
managers and as management has added additional staff support at the Company's
corporate office.
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Management believes the reduction in spans of control and the increase in
support staff will provide for improved internal control and will assist Academy
Directors to grow new enrollment, implement program quality improvements and
more effectively manage Academy direct labor costs.
Facility lease expense is the second largest component of operating expenses.
Most of the Company's school locations are leased under operating leases,
generally with 15 year terms. Many leases have renewal options and some provide
for contingent rentals if the Academy's operating revenue exceeds certain base
levels. Other significant operating costs include repairs and maintenance, food,
insurance, utilities, supplies, depreciation and real estate taxes.
The Company operated 645 schools at the end of the second quarter of fiscal year
2005 as compared to 643 schools at the end of the second quarter of fiscal year
2004. During that time period there were five new school openings and three
school closures. The closures resulted from management's decision to close
certain school locations where the conditions no longer supported an
economically viable operation.
RESULTS OF OPERATIONS
TWELVE WEEKS ENDED JANUARY 15, 2005 COMPARED TO TWELVE WEEKS ENDED JANUARY 10,
2004
The following table sets forth the Company's operating results for the
comparative 12 weeks ended January 15, 2005 and January 10, 2004, with amounts
presented in thousands of dollars and as percentages of revenue:
12 WEEKS ENDED 12 WEEKS ENDED
JANUARY 15, 2005 JANUARY 10, 2004
---------------------- ----------------------
Percent of Percent of
Amount Revenue Amount Revenue
--------- ---------- --------- ----------
Revenue $ 86,972 100.0% $ 82,881 100.0%
Operating expenses:
Salaries, wages and benefits 48,975 56.3 45,859 55.3
Facility lease expense 10,780 12.4 10,426 12.6
Depreciation 2,178 2.5 2,016 2.4
Restructuring charges (recoveries) 1 0.0 (857) (1.0)
Provision for doubtful accounts 410 0.5 772 0.9
Other 19,980 23.0 20,020 24.2
--------- ---------- --------- ----------
Total operating expenses 82,324 94.7 78,236 94.4
--------- ---------- --------- ----------
Operating income $ 4,648 5.3% $ 4,645 5.6%
========= ========== ========= ==========
Operating revenue increased $4.1 million or 4.9% from the same period last year.
This revenue increase was the result of a $3.8 million increase at established
schools, and a $0.5 million increase at new schools offset by a reduction in
revenue from closed schools of $0.2 million and a $0.1 million reduction in
other revenue. The revenue increase was principally due to a 2.9% increase in
FTE attendance, a 1.5% increase in the average weekly FTE tuition rate, and
increased participation in the USDA Child and Adult Care Food Program. 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 increase in FTE attendance was principally
due to increases in FTE attendance at both established and new schools. While
FTE attendance continued to be negatively impacted by decreased levels of
governmental funding for childcare assistance programs, during the second
quarter the impact has begun to level off and turn around in some areas.
Salaries, wages, and benefits increased $3.1 million or 6.8% from the same
period last year. As a percentage of revenue, labor costs were 56.3% for the 12
weeks ended January 15, 2005, as compared to 55.3% for the same period last
year. The increase in salaries, wages, and benefits includes increased labor
costs of $3.5 million at established schools, increased labor costs of $0.3
million at new schools, and increased field management and corporate
administration labor costs of $0.5 million, offset by decreased labor costs of
$0.1 million at closed
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schools, a $0.6 million decrease in bonus costs, and decreased benefit costs of
$0.5 million. The increase in labor costs at established schools was mainly due
to a 3.4% increase in average hourly rates and a 5.6% increase in labor hours as
compared to the same period last year.
Facility lease expense increased $0.4 million or 3.4% from the same period last
year. The increase in facility lease expense was principally a result of
increased rents due to lease renewals, and new equipment leases, offset by
decreases in lease payments for facilities with contingent rent provisions.
Depreciation expense increased $0.2 million or 8.0% from the same period last
year. The increase in depreciation expense was principally due to increased
capital spending on leasehold improvements, and school curriculum.
The Company did not incur any significant restructuring charges during the
second quarter of the 2005 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. Restructuring charges related to the school closures
consist 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 $0.4 million or 46.9% 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 slightly from the same period last year. Other
operating costs include repairs and maintenance, food, insurance, utilities,
supplies, real estate taxes, transportation, professional fees, marketing,
travel, bank overages and shortages, training, data processing, personnel,
recruitment, and other miscellaneous costs. The decrease in other operating
costs was due primarily to decreases in professional fees, repair and
maintenance, and transportation costs, offset by increases in supplies, credit
card fees, and marketing expense. As a percentage of revenue, other operating
costs were 23.0% for the 12 weeks ended January 15, 2005, as compared to 24.2%
for the same period last year.
As a result of the foregoing, the Company had an operating income of $4.6
million in the second quarter of the 2005 and $4.6 million in the second quarter
of the 2004 fiscal year.
Net interest expense increased $0.4 million or 5.1% as compared to the same
period last year. The increase was principally due to increased interest expense
on the accrued dividends and accretion related to Company's Series A preferred
stock. The charges to interest expense on the Series A preferred stock dividends
are currently non-cash charges because such accrued dividends are added to the
Series A preferred stock liquidation value. Commencing on July 1, 2005, the
Series A preferred stock dividends become payable in cash, subject to the
limitations in the Company's senior credit agreement which prohibits such
payments without the lenders' prior consent.
The provision for income taxes includes a provision for state and local taxes.
The effective federal tax rate for the 12 weeks ended January 15, 2005 was 0%
due to pretax losses on a year to date basis and the Company's provision of a
full valuation allowance against deferred tax assets.
-15-
28 WEEKS ENDED JANUARY 15, 2005 COMPARED TO 28 WEEKS ENDED JANUARY 10, 2004
The following table sets forth the Company's operating results for the
comparative 28 weeks ended January 15, 2005 and January 10, 2004, with amounts
presented in thousands of dollars and as percentages of revenue:
28 WEEKS ENDED 28 WEEKS ENDED
JANUARY 15, 2005 JANUARY 10, 2004
------------------------------ ------------------------------
Percent of Percent of
Amount Revenue Amount Revenue
--------- ------------- --------- ------------
Revenue $ 199,344 100.0% $ 193,611 100.0%
Operating expenses:
Salaries, wages and benefits 114,856 57.6 109,422 56.5
Facility lease expense 24,920 12.5 23,941 12.4
Depreciation 5,030 2.5 4,688 2.4
Restructuring charges (recoveries) (41) (0.0) (823) (0.4)
Asset impairments - 0.0 - 0.0
Provision for doubtful accounts 841 0.4 1,488 0.8
Other 50,205 25.2 49,757 25.7
--------- ------------- --------- ------------
Total operating expenses 195,811 98.2 188,473 97.3
--------- ------------- --------- ------------
Operating income $ 3,533 1.8% $ 5,138 2.7%
========= ============= ========= ============
Operating revenue increased $5.7 million or 3.0% from the same period last year.
This revenue increase was the result of a $5.5 million increase at established
schools, and a $1.1 million increase at new schools offset by a reduction in
revenue from closed schools of $0.8 million and a $0.1 million reduction in
other revenue. The revenue increase was principally due to a 2.7% increase in
the average weekly FTE tuition rate, and increased participation in the USDA
Child and Adult Care Food Program, offset by a 0.2% decrease in FTE attendance.
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 a decline in FTE attendance at established and closed schools
offset by an increase in FTE attendance at new schools. FTE attendance was
negatively impacted for the 28 weeks ended January 15, 2005 by the level of
governmental funding for childcare assistance programs. The negative impact on
FTE attendance related to government funded programs occurred mainly in the
first quarter of 2005 year while during the second quarter of 2005 year the
impact has began to level off and turn around in some areas.
Salaries, wages, and benefits increased $5.4 million or 5.0% from the same
period last year. As a percentage of revenue, labor costs were 57.6% for the 28
weeks ended January 15, 2005, as compared to 56.5% for the same period last
year. The increase in salaries, wages, and benefits includes increased labor
costs of $5.7 million at established schools, increased labor costs of $0.7
million at new schools, and increased field management and corporate
administration labor costs of $1.5 million, offset by decreased labor costs of
$0.4 million at closed schools, a $1.5 million decrease in bonus costs, and
decreased benefit costs of $0.6 million. The increase in labor costs at
established schools was mainly due to a 3.3% increase in average hourly rates
and a 2.8% increase in labor hours as compared to the same period last year.
Facility lease expense increased $1.0 million or 4.1% from the same period last
year. The increase in facility lease expense was principally a result of
increased rents due to lease renewals, and new equipment leases, offset by
decreases in lease payments for facilities with contingent rent provisions.
Depreciation expense increased $0.3 million or 7.3% from the same period last
year. The increase in depreciation expense was principally due to increased
capital spending on leasehold improvements, and school curriculum.
The Company did not incur any significant restructuring charges during the 28
weeks ended January 15, 2005. 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
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principally due to settlement of lease liabilities for less than the recorded
reserves. Restructuring charges related to school closures consist 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 $0.6 million or 43.5% from the same
period last year. The decrease is principally the result of improved collection
efforts over the same period in the prior year.
Other operating costs increased $0.5 million or 0.9% from the same period last
year. Other operating costs include repairs and maintenance, food, insurance,
utilities, supplies, real estate taxes, transportation, professional fees,
marketing, travel, bank overages and shortages, training, data processing,
personnel, recruitment, and other miscellaneous costs. The increase in other
operating costs was due primarily to increases in credit card fees, supplies,
marketing expense, and utilities, offset by decreases in repair and maintenance,
professional fees, transportation costs, and personnel expense. As a percentage
of revenue, other operating costs were 25.2% for the 28 weeks ended January 15,
2005, as compared to 25.7% for the same period last year.
As a result of the foregoing, the Company had an operating income of $3.5
million in the second quarter of the 2005 as compared to $5.1 million in the
second quarter of the 2004 fiscal year.
Net interest expense increased $0.6 million or 3.7% as compared to the same
period last year. The increase was principally due to increased interest expense
on the accrued dividends and accretion related to Company's Series A preferred
stock. The charges to interest expense on the Series A preferred stock dividends
are currently non-cash charges because such accrued dividends are added to the
Series A preferred stock liquidation value. Commencing on July 1, 2005, the
Series A preferred stock dividends become payable in cash, subject to the
limitations in the Company's senior credit agreement which prohibits such
payments without the lenders' prior consent.
The provision for income taxes includes a provision for state and local taxes.
The effective federal tax rate for the 28 weeks ended January 15, 2005 was 0%
due to pretax losses on a year to date basis and the Company's provision of a
full valuation allowance against deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING ACTIVITIES
Parent and La Petite entered into an agreement on May 11, 1998, providing for a
term loan facility and a revolving credit agreement (as amended, the "Credit
Agreement"), consisting of a $40 million Term Loan Facility and a $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.
Pursuant to an amendment to the Credit Agreement, which was effective as of
November 30, 2004, the final maturity of the Credit Agreement was extended to
November 15, 2007. This amendment also (i) revised certain existing financial
covenant targets required to be maintained by the Company and set new targets
for the extended period of the Credit Agreement; (ii) deleted the requirement
that LIBOR borrowings pay a predetermined minimum interest rate; and (iii)
lowered the minimum dollar amount required to make a borrowing under the Credit
Agreement. Payments due under the amortization schedule for the term loan are
$0.2 million in the remainder of fiscal year 2005, $0.4 million in fiscal year
2006, $0.4 million in fiscal year 2007 and $31.7 million in fiscal year 2008.
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 15, 2005, there was $32.7 million outstanding under the
term loan and $19.7 million outstanding under the Revolving Credit Facility. La
Petite had outstanding letters of credit in an aggregate amount of $5.3 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 the ability of the Company to incur
additional indebtedness, pay cash dividends or make certain other restricted
payments.
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
-17-
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 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, 919,963 shares of Series B preferred stock in
December 2003 for $2.0 million, and 459,982 shares of Series B preferred stock
in December 2004 for $1.0 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 June 2003, 2,300 shares of
Series B preferred stock in November 2003, 1,534 shares of Series B preferred
stock in December 2003, and 766 shares of Series B preferred stock in December
2004. Accordingly, at January 15, 2005, the remaining contingent equity
commitment from the stockholders of Parent is $7.7 million. Pursuant to
Amendment No. 2 to the Securities Purchase Agreement which was effective as of
November 30, 2004, the Electing Stockholders agreed to purchase Series B
preferred stock if the Company fails at any time to make principal and interest
payments on the Senior Notes due 2008. The foregoing obligation is in addition
to the existing obligations of the Electing Stockholders to purchase shares of
Series B preferred stock; however, the additional obligation does not increase
the amount of equity committed by any of the Electing Stockholders. The
amendment to the Securities Purchase Agreement also granted the holders
representing a majority of the Senior Notes due 2008 with the right to release
the Electing Stocking from the equity commitments under the Securities Purchase
Agreement at any time after the repayment of the debt outstanding under the
Credit Agreement.
As of March 1, 2005, LPA beneficially owned 94.0% of the common stock of Parent
on a fully diluted basis, $45 million of Series A preferred stock of Parent and
approximately $21.7 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.
CASH FLOWS AND SOURCES AND USES OF FUNDS
The Company's principal sources of funds are cash flows from operations,
borrowings on the revolving credit facility under 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.
Cash flows used for operating activities were $3.3 million during the 28 weeks
ended January 15, 2005 compared to $3.7 million for the 28 weeks ended January
10, 2004. The $0.4 million decrease in cash flows used by operating activities
was mainly due to a decrease in working capital amounts of $0.6 million offset
by a $0.2 million increase in net losses, net of non-cash charges.
Cash flows used for investing activities were $5.4 million during the 28 weeks
ended January 15, 2005 as compared to cash flows used of $1.9 million during the
28 weeks ended January 10, 2004. The $3.5 million increase in cash flows used
for investing activities was due to increased capital expenditures of $2.9
million and nonrecurring proceeds from the sale of assets of $0.5 million in the
period ended January 10, 2004.
Cash flows provided by financing activities were $8.9 million during the 28
weeks ended January 15, 2005, compared to cash flows provided by financing
activities of $4.4 million during the 28 weeks ended January 10, 2004. The $4.5
million increase in cash flows provided by financing activities was due to a
$8.2 million increase in revolver borrowings, a $0.6 million decrease in
repayment of term loan and capital lease obligations, and a $0.1 million
increase in other long term debt, offset by a $4.0 million reduction in proceeds
from the issuance of redeemable preferred stock and a $0.4 million decrease in
bank overdrafts related to the timing of monthly expense payments.
Over each of the past three years the Company has experienced significant losses
before income taxes. In addition, as shown in the accompanying condensed
financial statements, the Company has a working capital and stockholders'
deficit as of January 15, 2005. Over the past three years, there have been
instances where the Company was not in compliance with its financial covenants
set forth in the Credit Agreement 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 decreased
discretionary expense spending and greater realization of revenue
-18-
resulting from increased controls over the use of tuition discounts and coupons
and an increased focus on collection of accounts receivable on the part of the
divisional finance staff.
On December 6, 2004, the Company entered into Amendment No. 7 to the Credit
Agreement, effective as of November 30, 2004, which extended the final maturity
of the Credit Agreement from May 11, 2006 to November 15, 2007, revised certain
existing financial covenant targets and set new targets for the extended period
of the Credit Agreement. Payments due under the amortization schedule for the
term loan are $0.2 million in the remainder of fiscal year 2005, $0.4 million in
fiscal year 2006, $0.4 million in fiscal year 2007 and $31.7 million in fiscal
year 2008.
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 (i) the remaining $7.7 million of
equity commitment, as of January 15, 2005, provided by LPA and certain of the
other stockholders of Parent, (ii) the extension of the final maturity date of
the Credit Agreement, and (iii) revision of certain existing financial covenant
targets and establishment of new targets for the extended period of the Credit
Agreement, 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, nor can there be any assurance that the Company can
obtain additional funding from LPA beyond that as noted above or from any other
external source.
CAPITAL EXPENDITURES
Total capital expenditures, including capital leases, for the 28 weeks ended
January 15, 2005 and January 10, 2004 were $5.4 million and $2.5 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 28 weeks ended
January 15, 2005 and January 10, 2004 were $5.1 million, and $2.5 million,
respectively. Capital expenditures incurred in connection with the development
of new schools for the 28 weeks ended January 15, 2005 were $0.3 million.
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 15, 2005 and January 10, 2004 were
$7.4 million and $8.9 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 for the year ended July 3, 2004. There have been no
significant changes to the Company's critical accounting policies during the 28
weeks ended January 15, 2005.
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
-19-
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 Schools 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 Schools.
- 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 or other standards promulgated by the
Financial Accounting Standards Board, the Securities and Exchange
Commission or the Public Company Accounting Oversight Board.
- 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 will 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 15, 2005 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 $32.7 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") 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. Pursuant to an amendment to the Credit Agreement effective
November 30, 2004, the final maturity of the Credit Agreement was extended to
November 15, 2007. Payments due under the amortization schedule for the term
loan are $0.2 million in the remainder of fiscal year 2005, $0.4 million in
fiscal year 2006, $0.4 million in fiscal year 2007 and $31.7 million in fiscal
year 2008. 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 15, 2005.
-20-
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 15, 2005 the Company evaluated the effectiveness of the design and
operation of its Disclosure Controls pursuant to Rule 15d-15 of the Exchange
Act. This evaluation ("Controls Evaluation") was done under the supervision and
with the participation of management, including the Chief Executive Officer
("CEO") and the Chief Financial Officer ("CFO").
At the end of the prior fiscal year, management concluded that there were
certain material weaknesses in the Company's Internal Controls primarily related
to the lack of consistent understanding and compliance with the Company's
policies and procedures at several of its field locations, and weaknesses in the
information technology control environment.
In addition to its continuing efforts to remediate the material weaknesses, the
Company has implemented compensating controls to mitigate these weaknesses 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 compensating controls include, but are not necessarily limited
to, (i) increasing field academy management policy and system training, (ii)
increasing the number and the scope of financial field audits of academies,
(iii) implementation of a centralized sales audit function, (iv) increasing
divisional financial staff accountability to ensure field adherence to financial
policies and internal controls, and (v) the performance of additional
reconciliations and reviews.
The Company is committed to continuing the process of identifying, evaluating
and implementing corrective actions, including enhancements to the Company's
field reporting systems and its information technology controls, where required
to improve the effectiveness of its Disclosure Controls on an overall basis.
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 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.
Other than the continuing impact of the corrective actions discussed above,
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 has
materially affected, or is reasonably likely to materially affect the Company's
internal control over financial reporting.
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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, liquidity, or annual results of operations,
although assurance cannot be given with respect to the ultimate outcome of any
such actions.
ITEM 6. EXHIBITS
31.1 CFO Section 302 certifications.
31.2 CEO Section 302 certifications.
32 CEO and CFO Section 906 certifications.
ITEMS 2, 3, 4 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: March 1, 2005 /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: March 1, 2005 /s/ Neil P. Dyment
-------------------------------------------
By: Neil P. Dyment
Chief Financial Officer and duly authorized
representative of the registrant
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