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 14, 2006
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of February 28 2006, 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 28 2006, 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 8-13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 14-21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 21
ITEM 4. CONTROLS AND PROCEDURES 22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 23
ITEM 6. EXHIBITS 23
SIGNATURES 24-25
-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 14, JULY 2,
2006 2005
----------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 6,213 $ 5,967
Accounts receivable, net of allowance for
doubtful accounts of $614 and $567, respectively 10,290 12,676
Short-term insurance deposits (Note 3) 4,212 4,279
Supplies inventory 4,130 4,172
Other prepaid expenses 3,682 2,016
Refundable taxes 37 27
-------- --------
Total current assets 28,564 29,137
Property and equipment, at cost:
Land 5,432 5,442
Buildings and leasehold improvements 87,497 88,373
Furniture and equipment 34,569 33,198
Construction in progress 1,151 --
-------- --------
128,649 127,013
Less accumulated depreciation 92,784 88,859
-------- --------
Property and equipment, net 35,865 38,154
Long-term insurance deposits (Note 3) 6,014 5,134
Other assets (Note 3) 4,436 5,230
-------- --------
Total assets $ 74,879 $ 77,655
======== ========
(continued)
-4-
LPA HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
JANUARY 14, JULY 2,
2006 2005
----------- ---------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Overdrafts due banks $ 4,195 $ 2,879
Accounts payable 4,876 7,784
Current maturities of long-term debt and capital lease
obligations (Note 4) 617 1,014
Accrued salaries, wages and other payroll costs 20,291 20,284
Accrued insurance liabilities 6,442 6,454
Accrued property and sales taxes 4,769 3,811
Accrued interest payable 2,607 1,946
Reserve for closed schools 414 770
Other current liabilities 12,476 9,619
--------- ---------
Total current liabilities 56,687 54,561
Long-term liabilities:
Long-term debt and capital lease obligations (Note 4) 190,982 191,370
Other long-term liabilities (Note 5) 8,932 8,102
Series A 12% mandatorily redeemable preferred stock (Note 6) 98,794 91,699
--------- ---------
Total long-term liabilities 298,708 291,171
Series B 5% convertible redeemable participating preferred stock 25,601 24,935
($0.01 par value per share); 13,645,000 shares authorized, 10,006,550
shares issued and outstanding; aggregate liquidation preference of $25.6
million and $24.9 million, as of January 14, 2006 and July 2, 2005,
respectively
Stockholders' deficit:
Class A common stock ($0.01 par value per share); 17,500,000
shares authorized; and 773,403 shares issued and outstanding 8 8
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 deficit (314,721) (301,616)
--------- ---------
Total stockholders' deficit (306,117) (293,012)
--------- ---------
Total liabilities and stockholders' deficit $ 74,879 $ 77,655
========= =========
See notes to 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 14, JANUARY 15, JANUARY 14, JANUARY 15,
2006 2005 2006 2005
----------- ----------- ----------- -----------
Revenue $93,914 $86,972 $216,498 $199,344
Operating expenses:
Salaries, wages and benefits 53,995 48,975 125,014 114,856
Facility lease expense 11,194 10,780 25,977 24,920
Depreciation and amortization 2,323 2,178 6,357 5,030
Restructuring charges (reversals) (Note 9) 45 1 121 (41)
Provision for doubtful accounts 484 410 864 841
Other 21,492 19,980 52,866 50,205
------- ------- -------- --------
Total operating expenses 89,533 82,324 211,199 195,811
------- ------- -------- --------
Operating income (loss) 4,381 4,648 5,299 3,533
Interest expense
Interest on debt 4,633 4,511 10,715 10,449
Dividends and accretion on Series A
preferred stock (Note 6) 3,062 2,668 7,095 6,179
------- ------- -------- --------
Total interest expense 7,695 7,179 17,810 16,628
Interest income (38) (19) (80) (34)
------- ------- -------- --------
Net interest expense 7,657 7,160 17,730 16,594
------- ------- -------- --------
Income (loss) before income taxes (3,276) (2,512) (12,431) (13,061)
Provision (benefit) for income taxes 3 17 7 55
------- ------- -------- --------
Net income (loss) (3,279) (2,529) (12,438) (13,116)
------- ------- -------- --------
Other comprehensive loss:
Derivative adjustments reclassified into
operations -- (20) -- (46)
------- ------- -------- --------
Total other comprehensive loss -- (20) -- (46)
------- ------- -------- --------
Comprehensive income (loss) $(3,279) $(2,549) $(12,438) $(13,162)
======= ======= ======== ========
See notes to consolidated financial statements.
-6-
LPA HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS OF DOLLARS)
28 WEEKS 28 WEEKS
ENDED ENDED
JANUARY 14, JANUARY 15,
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(12,438) $(13,116)
Adjustments to reconcile net loss to net cash from operating activities
Restructuring charges (reversals) 121 (41)
Depreciation and amortization 6,357 5,030
Dividends and accretion on Series A preferred stock (Note 6) 7,095 6,179
Loss on sales and disposals of property and equipment 50 48
Other non cash items 475 499
Changes in assets and liabilities, net of acquisition:
Accounts receivable 2,386 (645)
Insurance deposits (813) (881)
Supplies inventory 42 243
Other prepaid expenses (1,526) (2,884)
Refundable taxes (10) (32)
Accounts payable (2,908) (305)
Accrued salaries, wages and other payroll costs (101) (1,913)
Accrued property and sales taxes 958 800
Accrued interest payable 661 656
Other current liabilities 2,857 2,892
Accrued insurance liabilities 995 648
Reserve for closed schools (340) (364)
Other changes in assets and liabilities, net (36) (140)
-------- --------
Net cash provided by (used for) operating activities 3,825 (3,326)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (4,099) (5,390)
Acquisitions (191) --
Proceeds from sale of assets 179 --
-------- --------
Net cash used for investing activities (4,111) (5,390)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of term loans and capital lease obligations (785) (901)
Net borrowings (payments) 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
Overdrafts due bank 1,317 612
-------- --------
Net cash provided by (used for) financing activities 532 8,918
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 246 202
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,967 7,542
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,213 $ 7,744
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 9,478 $ 9,269
Income taxes 3 21
Non-cash investing and financing activities:
Capital lease obligations -- 323
See notes to 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), by an entity controlled by Robert E. King, and by
senior management of the Company.
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 14, 2006, the Company operated 650 schools, including 591
residential academies, 30 employer-based schools and 29 Montessori schools.
For the 28 weeks ended January 14, 2006, the Company had an average
attendance of approximately 64,240 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 14, 2006 and January 15, 2005
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 2, 2005.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
The Company has a working capital and stockholders' deficit as of January
14, 2006 and has experienced losses before income taxes over each of the
past three fiscal years. The Company required equity investments by LPA and
other electing stockholders of $0.8 million, $5.0 million and $1.0 million
in fiscal years 2003, 2004 and 2005, respectively, to enable it to meet its
financial obligations as they came due and provide adequate liquidity to
operate the business. The last equity investment was made in December 2004
and the company has not required any equity investments since then.
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 facility utilization and from increased controls over the
use of tuition discounts and coupons. As a result of these and other
actions, revenue and operating income for the 28 weeks ended January 14,
2006, are up 8.6% and 50% respectively. Management believes that these
efforts, coupled with (i) the remaining $7.7 million of equity commitment,
as of January 14, 2006, provided by LPA and certain of the other
stockholders of Parent, (ii) the available funds under the Revolving Credit
Facility of $6.0 million, (iii) the extension of the final
-8-
maturity date of the Credit Agreement to November 2007 and (iv) 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.
DEPRECIATION ADJUSTMENT - In connection with the preparation of the first
quarter 2006 fiscal year financial statements, the Company determined that
it had understated depreciation expense related to certain real property
that was owned on leased land. The cumulative impact of the depreciation
error in the 1st quarter was $0.8 million. The impact of the error is
immaterial to any individual prior year's financial statements. The Company
does not believe the correction of this error will be material to the 2006
fiscal year annual financial statements. Accordingly, depreciation for the
28 weeks ended January 14, 2006 includes the $0.8 million correction.
FISCAL YEAR END - The Company's fiscal year ends on the Saturday closest to
June 30 and is composed of 13 four-week periods. The first quarter contains
four such periods or 16 weeks and each remaining quarter contains 3 periods
or 12 weeks. Unless otherwise noted, references in this report relate to
fiscal years rather than calendar years.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -In December 2004, the Financial
Accounting Standards Board (FASB) issued SFAS No. 123 (R), 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 adopted the provisions of
Statement 123 (R) on July 3, 2005. The Company adopted Statement 123 (R)
using a modified prospective application, as permitted under Statement 123
(R). Accordingly, prior period amounts have not been restated. Under this
application, the Company is required to record compensation expense for all
awards granted after the date of adoption and for the unvested portion of
previously granted awards that remain outstanding at the date of adoption.
See Note 8 for additional information regarding the adoption of Statement
123 (R).
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 not have commercial substance. The Statement is effective for
nonmonetary asset exchanges occurring in the fiscal periods beginning after
June 15, 2005. The Company adopted the provisions of Statement No. 153 on
July 3, 2005.
In March 2005, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 47, "Accounting for Conditional Asset Retirement
Obligations", to clarify certain provisions of FASB Statement No. 143,
"Accounting for Asset Retirement Obligations." Interpretation No. 47
specifies that the term "conditional asset retirement obligation" includes
an entity's legal obligation to perform an asset retirement activity for
which the timing and (or) method of settlement are conditional on a future
event that may or may not be in the control of the entity. This
interpretation provides that an entity is required to recognize a liability
for a conditional asset retirement obligation if the fair value of the
obligation can be reasonably estimated. Interpretation No. 47 is effective
no later than the end of fiscal years ending after December 15, 2005. The
Company is in the process of assessing the impact of adoption on the
company's financial position and results of operations.
3. OTHER ASSETS
Short and long term 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.
-9-
Other non-current assets consist of the following (in thousands of dollars):
JANUARY 14, JULY 2,
2006 2005
----------- -------
Deferred financing costs $10,576 $10,576
Accumulated amortization (8,317) (7,740)
------- -------
2,259 2,836
Other (a)
2,177 2,394
------- -------
$ 4,436 $ 5,230
======= =======
(a) Other includes the unamortized portion of losses on sale-leasebacks,
utility deposits, goodwill, 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 14, JULY 2,
2006 2005
----------- --------
Senior Notes, 10.0% due May 15, 2008 $145,000 $145,000
Borrowings under term loan facility,
interest rate of 8.64% at January 14, 2006 32,181 32,452
Borrowings under revolving credit agreement,
interest rate of 8.84% at January 14, 2006 14,000 14,000
Capital lease obligations and other long term debt 418 932
-------- --------
191,599 192,384
Less current maturities of long-term
debt and capital lease obligations (617) (1,014)
-------- --------
$190,982 $191,370
======== ========
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 2006, $0.4 million in fiscal year 2007 and $31.6 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). 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. On April
13, 2005, the Company entered into Amendment No. 8 to the Credit Agreement
to change the issuing bank of its Letters of Credit and to restore a
swingline loan mechanism that was previously deleted by prior amendments to
the Company's 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
14, 2006.
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5. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following (in thousands of
dollars):
JANUARY 14, JULY 2,
2006 2005
----------- -------
Unfavorable leases (a) $ 333 $ 435
Reserve for closed schools (b) 300 267
Deferred severance (c) 194 302
Long-term insurance liabilities (d) 8,105 7,098
------ ------
$8,932 $8,102
====== ======
(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.
(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 $0.2 million as of January 14, 2006.
(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
14, 2006. 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 $103.9 million and $97.6 million as of January 14,
2006 and July 2, 2005, respectively. Accrued dividends were $58.9 million
and $52.6 million at January 14, 2006 and July 2, 2005, 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 $7.1 million and $6.2 million in dividends and
accretion on the Series A preferred stock as interest expense during the 28
weeks ended January 14, 2006 and January 15, 2005, 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. On July 1, 2005, the Series
A preferred stock dividends became payable in cash, subject to the
limitations in the Company's senior credit agreement which prohibits such
payments without the lenders' prior consent. Absent such consent, the
dividends continue to be added to the Series A preferred stock liquidation
value.
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
On July 3, 2005, the Company adopted the provisions of SFAS No. 123 (R).
The Company adopted Statement
-11-
123 (R) using a modified prospective application, as permitted under
Statement 123 (R). Accordingly, prior period amounts have not been
restated. Under this application, the Company is required to record
compensation expense for the fair value of all awards granted after the
date of adoption and for the unvested portion of previously granted awards
that remain outstanding at the date of adoption.
Prior to the adoption of SFAS No. 123 (R), the Company accounted 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 previously
been recognized for stock options granted. These plans are more fully
described in Note 11 of the Company's Annual Report on Form 10-K for the
year ended July 2, 2005.
On September 28, 2005, certain members of Parent's management, including
its President and Chief Executive Officer, and its Chief Financial Officer,
were granted 98,000 Class C Units of LPA. At January 14, 2006, there were
2,000 Class C Units of LPA available for future grants. Pursuant to the
terms of the Operating Agreement of LPA, the Class C Units are non-voting
equity interests of LPA and are subject to repurchase by JPMP or its
designee upon the termination of such person's employment with Parent and
La Petite. Subject to certain conditions described in the Operating
Agreement of LPA, upon termination of such person's employment with Parent
and La Petite vested Class C Units are repurchased for fair market value
and unvested Class C Unit are repurchased for $.01 per Class C Unit. The
Class C Units vest monthly over a four year period, with credit granted for
prior years employment with Parent and La Petite. Based on the transfer
restrictions set forth in the Operating Agreement of LPA and contractual
limitations set forth in the documents governing La Petite's senior secured
loans and senior notes, in order for the Class C Units to have any
realizable value a sale of Parent or La Petite or a liquidity event (such
as an initial public offering) would be required. Since neither a sale of
La Petite nor an initial public offering is considered probable until its
occurrence, the adoption of SFAS No. 123 (R) did not result in any
incremental stock-based compensation cost during the 28 weeks ended January
14, 2006. There was no compensation expense recorded during the 28 weeks
ended January 14, 2006 for the unvested portion of options granted in prior
periods because the fair value of such options at the date of grant was not
material. If compensation cost for options granted in prior periods had
been recognized as prescribed by SFAS No. 123 (R), it would not have had a
material effect on the Company's results of operations for the 28 weeks
ended January 14, 2006.
The Company uses the Monte Carlo valuation model to determine the fair
value of Class C Units of LPA. The Monte Carlo model includes various
assumptions, including the risk free interest rate, the expected volatility
and the expected life for Class C Units of LPA. The assumptions used in the
Monte Carlo valuation model are as follows:
JANUARY 14, 2006
----------------
Risk free interest rate 4.08%
Average expected volatility 45.0%
Expected life (in years) 5
A summary of the status of the Class C units of LPA as of January 14, 2006,
and changes during the 28 weeks ended January 14, 2006 are as follows:
WEIGHTED-AVERAGE
CLASS C UNITS OF LPA SHARES GRANT DATE FAIR VALUE
-------------------- ------ ---------------------
Non-vested at July 2, 2005 -- --
Granted 98,000 $30.25
Vested 68,901 30.25
------ ------
Non-vested at January 14, 2006 (a) 29,099 $30.25
(a) As of January 14, 2006, the non-vested Class C Units of LPA had a weighted
average vesting term of 14 months. The vesting provisions as set forth in
the Operating Agreement of LPA, only apply to the repurchase of Class C
Units upon termination of employment as provided for in the Operating
Agreement of LPA.
As of January 14, 2006, there was $3.0 million in total unrecognized
compensation costs related to the Class C Units of LPA. The Company will
record the $3.0 million as an expense at the time that the service
conditions
-12-
are met and the performance conditions are deemed to be probable.
9. RESTRUCTURING CHARGES
During the second quarter of the 2006 fiscal year, the Company recorded an
adjustment to its previously established restructuring reserves, which had
the net effect of increasing the reserves by $0.1 million. The adjustment
was due to write-down to fair market value of a real estate property held
for disposal. The Company did not incur any significant restructuring
charges during the second quarter of the 2005 fiscal year. A summary of the
restructuring reserve activity for the 28 weeks ended January 14, 2006 and
January 15, 2005 are as follows, in dollars in thousands:
FISCAL YEAR FISCAL YEAR
2006 2005
----------- -----------
Balance at July 2, 2005 and July 3, 2004 $1,037 $1,576
Provision recorded in first quarter 87 --
Reversals recorded in first quarter (11) (42)
Amount utilized in first quarter (289) (245)
------ ------
Balance at October 22, 2005 and October 23, 2004 824 1,289
Provision recorded in second quarter 56 1
Reversals recorded in second quarter (11) --
Amount utilized in second quarter (155) (88)
------ ------
Balance at January 14, 2006 and January 15, 2005 714 1,202
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
$0.7 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 14, 2006, the remaining contingent equity commitment from the
stockholders of Parent was $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 Stockholders from the
equity commitments under the Securities Purchase Agreement at any time
after the repayment of the debt outstanding under the Credit Agreement.
-13-
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 providers in the United
States based on the number of schools 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. The improvement in FTE attendance which began in the second
half of fiscal year 2005 continued throughout the 2nd quarter of fiscal year
2006. FTE attendance was up 3.9% and 5.3% for the 12 and 28 weeks ended January
14, 2006, respectively. The increase in FTE attendance occurred across all age
groups except for school age children, which were down form the prior year. The
biggest increases FTE attendance occurred in the preschool classrooms.
Management attributes much of increase in FTE attendance to the Company's
continued focus on preschool education.
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 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 increased FTE labor productivity at its established schools.
Management attributes much of this increase to the implementation of several
programs designed to improve labor productivity at school level. Administrative
labor costs have increased as management has reduced spans of control through
the hiring of additional district managers and as management has added
additional staff support at the Company's corporate office. Management believes
the reduction in spans of control and the increase in support staff has provided
for
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improved internal control and has assisted 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 650 schools at the end of the second quarter of fiscal year
2006 as compared to 645 schools at the end of the second quarter of fiscal year
2005. During that time period there were eight new school openings, including
the acquisition of six schools, 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 14, 2006 COMPARED TO TWELVE WEEKS ENDED JANUARY 15,
2005
The following table sets forth the Company's operating results for the
comparative 12 weeks ended January 14, 2006 and January 15, 2005, with amounts
presented in thousands of dollars and as percentages of revenue:
12 WEEKS ENDED 12 WEEKS ENDED
JANUARY 14, 2006 JANUARY 15, 2005
-------------------- --------------------
Percent of Percent of
Amount Revenue Amount Revenue
------- ---------- ------- ----------
Revenue $93,914 100.0% $86,972 100.0%
Operating expenses:
Salaries, wages and benefits 53,995 57.5 48,975 56.3
Facility lease expense 11,194 11.9 10,780 12.4
Depreciation 2,323 2.5 2,178 2.5
Restructuring charges (reversals) 45 0.0 1 0.0
Provision for doubtful accounts 484 0.5 410 0.5
Other 21,492 22.9 19,980 23.0
------- ----- ------- -----
Total operating expenses 89,533 95.3 82,324 94.7
------- ----- ------- -----
Operating income (loss) $ 4,381 4.7% $ 4,648 5.3%
======= ===== ======= =====
Operating revenue increased $6.9 million or 8.0% from the same period last year.
This revenue increase was the result of a $6.1 million increase at established
schools, and a $1.0 million increase at new schools, offset by a reduction in
revenue from closed schools of $0.2 million. The revenue increase was
principally due to a 3.9% increase in FTE attendance, a 4.0% 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 occurred at both established and new schools across all age
groups except for school age children.
Salaries, wages, and benefits increased $5.0 million or 10.3% from the same
period last year. As a percentage of revenue, labor costs were 57.5% for the 12
weeks ended January 14, 2006, as compared to 56.3% for the same period last
year. The increase in salaries, wages, and benefits includes increased labor
costs of $2.0 million at established schools, increased labor costs of $0.5
million at new schools, increased benefit costs of $1.3 million, increased bonus
costs of $0.9 million, and increased field management and corporate
administration labor costs of $0.4 million, offset by decreased labor costs of
$0.1 million at closed schools. The increase in labor costs at established
schools was mainly due to a 2.6% increase in average hourly rates and a 2.7%
increase in labor hours as
-15-
compared to the same period last year. The increase in benefit costs was
primarily related to increases in self insured medical claim costs.
Facility lease expense increased $0.4 million or 3.8% 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, and increases
in lease payments for facilities with contingent rent provisions.
Depreciation expense increased $0.1 million or 6.7% from the same period last
year. The increase in depreciation expense was principally due to increases to
depreciation related leasehold improvements and equipment purchases.
During the second quarter of the 2006 fiscal year, the Company recorded an
adjustment to its previously established restructuring reserves, which had the
net effect of increasing the reserves by $44,000. The adjustment was principally
due to the write-down to fair market value of a real estate property held for
disposal. The Company did not incur any significant restructuring charges during
the second quarter of the 2005 fiscal year.
Provision for doubtful accounts increased $0.1 million or 18.0%, as compared to
the same period last year. The increase was principally related to the
collection of receivables from third party providers.
Other operating costs increased $1.5 million or 7.6% from the same period last
year. Other operating costs include repairs and maintenance, food, insurance,
utilities and telephone, 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 real estate
taxes, utilities and telephone, food costs, professional fees, and supplies,
offset by decreases in repairs and maintenance, and data processing costs. As a
percentage of revenue, other operating costs were 22.9% for the 12 weeks ended
January 14, 2006, as compared to 23.0% for the same period last year.
As a result of the foregoing, the Company had an operating income of $4.4
million in the second quarter of the 2006 fiscal year as compared $4.6 million
in the second quarter of the 2005 fiscal year.
Net interest expense increased $0.5 million or 6.9% 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 and higher interest rates related to the term loan. The charges to
interest expense on the Series A preferred stock dividends 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. On
July 1, 2005, the Series A preferred stock dividends became payable in cash,
subject to the limitations in the Company's senior credit agreement which
prohibits such payments without the lenders' prior consent. Absent such consent,
the dividends will continue to be added to the Series A preferred stock
liquidation value.
The provision for income taxes includes a provision for state and local taxes.
The effective federal tax rate for the 12 weeks ended January 14, 2006 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.
-16-
28 WEEKS ENDED JANUARY 14, 2006 COMPARED TO 28 WEEKS ENDED JANUARY 15, 2005
The following table sets forth the Company's operating results for the
comparative 28 weeks ended January 14, 2006 and January 15, 2005, with amounts
presented in thousands of dollars and as percentages of revenue:
28 WEEKS ENDED 28 WEEKS ENDED
JANUARY 14, 2006 JANUARY 15, 2005
--------------------- ---------------------
Percent of Percent of
(IN THOUSANDS OF DOLLARS) Amount Revenue Amount Revenue
-------- ---------- -------- ----------
Revenue $216,498 100.0% $199,344 100.0%
Operating expenses:
Salaries, wages and benefits 125,014 57.7 114,856 57.6
Facility lease expense 25,977 12.0 24,920 12.5
Depreciation 6,357 2.9 5,030 2.5
Restructuring charges (reversals) 121 0.1 (41) (0.0)
Provision for doubtful accounts 864 0.4 841 0.4
Other 52,866 24.4 50,205 25.2
-------- ----- -------- -----
Total operating expenses 211,199 97.6 195,811 98.2
-------- ----- -------- -----
Operating income $ 5,299 2.4% $ 3,533 1.8%
======== ===== ======== =====
Operating revenue increased $17.1 million or 8.6% from the same period last
year. This revenue increase was the result of a $15.1 million increase at
established schools, a $2.3 million increase at new schools, and a $0.1 million
increase in other revenue, offset by a reduction in revenue from closed schools
of $0.4 million. The revenue increase was principally due to a 5.3% increase in
FTE attendance, a 3.2% 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 occurred at both
established and new schools across all age groups except for school age
children.
Salaries, wages, and benefits increased $10.2 million or 8.8% from the same
period last year. As a percentage of revenue, labor costs were 57.7% for the 28
weeks ended January 14, 2006, as compared to 57.6% for the same period last
year. The increase in salaries, wages, and benefits includes increased labor
costs of $5.1 million at established schools, increased labor costs of $1.3
million at new schools, increased bonus costs of $2.1 million, increased benefit
costs of $1.1 million and increased field management and corporate
administration labor costs of $0.8 million, offset by decreased labor costs of
$0.2 million at closed schools. The increase in labor costs at established
schools was mainly due to a 2.8% increase in average hourly rates and a 2.9%
increase in labor hours as compared to the same period last year. The increase
in benefit costs was primarily related to increases in self insured medical
claim costs.
Facility lease expense increased $1.1 million or 4.2% 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, and increases
in lease payments for facilities with contingent rent provisions.
Depreciation expense increased $1.3 million or 26.4% from the same period last
year. The increase in depreciation expense was principally due to a $0.8 million
cumulative adjustment of understated depreciation expense in prior years, which
was recorded in the first quarter of fiscal 2006, along with increases to
depreciation related to leasehold improvements and equipment purchases. For
additional information regarding the depreciation adjustment, see Note 2 to the
accompanying condensed consolidated financial statements included in this
report.
During the 28 weeks ended January 14, 2006, the Company recognized restructuring
charges of $0.1 million principally related fixed asset write-offs resulting
from the closure of one school and the write-down to fair market value of a real
estate property held for disposal. The Company did not incur any significant
restructuring charges during the 28 weeks ended January 15, 2005.
-17-
Provision for doubtful accounts increased slightly as compared to the same
period last year.
Other operating costs increased $2.7 million or 5.3% from the same period last
year. Other operating costs include repairs and maintenance, food, insurance,
utilities and telephone, 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 utilities
and telephone, real estate taxes, food costs, professional fees, and supplies,
offset by decreases in marketing, insurance, and data processing costs. As a
percentage of revenue, other operating costs were 24.4% for the 28 weeks ended
January 14, 2006, as compared to 25.2% for the same period last year.
As a result of the foregoing, the Company had an operating income of $5.3
million for the 28 weeks ended January 14, 2006, as compared to $3.5 million for
the same period last year.
Net interest expense increased $1.1 million or 6.8% 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 and higher interest rates related to the term loan. The charges to
interest expense on the Series A preferred stock dividends 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. On
July 1, 2005, the Series A preferred stock dividends became payable in cash,
subject to the limitations in the Company's senior credit agreement which
prohibits such payments without the lenders' prior consent. Absent such consent,
the dividends will continue to be added to the Series A preferred stock
liquidation value.
The provision for income taxes includes a provision for state and local taxes.
The effective federal tax rate for the 28 weeks ended January 14, 2006 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 2006, $0.4 million in fiscal year
2007 and $31.6 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 April 13, 2005, the
Company entered into Amendment No. 8 to the Credit Agreement to change the
issuing bank of its Letters of Credit and to restore a swingline loan mechanism
that was previously deleted by prior amendments to the Company's Credit
Agreement. On January 14, 2006, there was $32.2 million outstanding under the
term loan and $14.0 million outstanding under the Revolving Credit Facility. In
addition, La Petite had outstanding letters of credit in an aggregate amount of
$5.0 million, and $6.0 million available for working capital purposes under the
Revolving Credit Facility. The Company's Credit Agreement, Senior Notes and
preferred stock contain certain covenants that limit the ability of the Company
to incur additional indebtedness, pay cash dividends or make certain other
restricted payments. The Company was in compliance with all covenants on January
14, 2006.
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,
-18-
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 $0.7 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 14, 2006, the remaining contingent equity commitment
from the stockholders of Parent is $7.7 million.
As of January 14, 2006, 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 owns a majority of the voting interests of LPA. On
September 28, 2005, certain members of Parent's management, including its
President and Chief Executive Officer, and its Chief Financial Officer, were
granted 98,000 Class C Units of LPA. LPA has reserved 100,000 Class C Units to
be issued to management of Parent from time to time. Pursuant to the terms of
the Operating Agreement of LPA, the Class C Units are non-voting equity
interests of LPA and are subject to repurchase by LPA or its designee upon the
termination of such person's employment with Parent and La Petite. Upon the
achievement of enumerated valuation thresholds set forth in the Operating
Agreement, the Class C Units will represent in the aggregate up to 13% of the
economic 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 provided by operating activities were $3.8 million during the 28
weeks ended January 14, 2006 compared to cash flows used by operating activities
of $3.3 million for the 28 weeks ended January 15, 2005. The $7.1 million
increase in cash flows provided by operating activities was mainly due to a $3.1
million decrease in net losses, net of non-cash charges, and by a decrease in
working capital requirements of $4.0 million. The decrease in working capital
requirements was principally related to increased bonus accruals based on
improved company performance in the first half of fiscal 2006, reduced
receivables from insurance carriers related to hurricane damage that was
incurred in the first half of fiscal year 2005, and timing of payments received
from third party childcare payers, offset by more timely payments of accounts
payable due to increased cash availability in the first half of fiscal 2006.
Cash flows used for investing activities were $4.1 million during the 28 weeks
ended January 14, 2006 as compared to cash flows used of $5.4 million during the
28 weeks ended January 15, 2005. The $1.3 million decrease in cash flows used
for investing activities was due to decreased capital expenditures, and
increased proceeds from the sale of assets, offset by acquisition costs related
to the acquisition of one school.
Cash flows provided by financing activities were $0.5 million during the 28
weeks ended January 14, 2006, compared to cash flows provided by financing
activities of $8.9 million during the 28 weeks ended January 15, 2005. The $8.4
million decrease in cash flows provided by financing activities was due to a
$8.2 million decrease in revolver borrowings (net of deferred issuance costs),
and a $1.0 million reduction in proceeds from the issuance of redeemable
preferred stock, offset by a $0.7 million increase in bank overdrafts related to
the timing of monthly expense payments and a $0.1 million decrease in repayment
of term loan and capital lease obligations.
The Company has a working capital and stockholders' deficit as of January 14,
2006 and has experienced losses before income taxes over each of the past three
fiscal years. The Company required equity investments by LPA and other electing
stockholders of $0.8 million, $5.0 million and $1.0 million in fiscal years
2003, 2004 and 2005, respectively, to enable it to meet its financial
obligations as they came due and provide adequate liquidity to operate the
business. The last equity investment was made in December 2004 and the company
has not required any equity investments since then.
-19-
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
facility utilization and from increased controls over the use of tuition
discounts and coupons. As a result of these and other actions, revenue and
operating income for the 28 weeks ended January 14, 2006, are up 8.6% and 50%
respectively. Management believes that these efforts, coupled with (i) the
remaining $7.7 million of equity commitment, as of January 14, 2006, provided by
LPA and certain of the other stockholders of Parent, (ii) the available funds
under the Revolving Credit Facility of $6.0 million, (iii) the extension of the
final maturity date of the Credit Agreement to November 2007 and (iv) 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 for the 28 weeks ended January 14, 2006 and January
15, 2005 were $4.1 million and $5.4 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 14, 2006 and January 15,
2005 were $4.1 million, and $5.1 million, respectively. There were no capital
expenditures incurred in connection with the development of new schools for the
28 weeks ended January 14, 2006 and $0.3 million was expended in connection with
the development of new schools for the 28 weeks ended January 15, 2005. The
company also incurred acquisition costs of $0.2 million in connection with the
acquisition one school in the second quarter of fiscal year 2006.
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 14, 2006 and January 15, 2005 were
$7.6 million and $7.4 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 2, 2005. There have been no
significant changes to the Company's critical accounting policies during the 28
weeks ended January 14, 2006 except for the Company's accounting for stock-based
compensation related to the adoption SFAS No. 123 (R).
Under Statement 123 (R), the Company uses the Monte Carlo valuation model to
determine the fair value of Class C Units of LPA. The Monte Carlo model includes
various assumptions, including the expected volatility and the expected life for
Class C Units of LPA. These assumptions reflect the Company's best estimates,
but they involve inherent uncertainties based on market conditions generally
outside of the control of the Company. As a result, if other assumptions had
been used, stock-based compensation expense, as calculated and recorded under
Statement 123 (R) could have been materially impacted. Furthermore, if the
Company uses different assumptions in future periods, stock-based compensation
expense could be materially impacted in future periods. See Note 8 to the
accompanying condensed consolidated financial statements included in this report
for additional information regarding the adoption of Statement 123 (R).
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
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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 Schools, the Company's ability to comply with the
covenants contained in the Credit Agreement and the Company's ability
to satisfy its debt service obligations, including its obligations to
repay the Credit Agreement when it matures in November 2007 and the
notes when they mature in May 2008.
- 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 facilities.
- 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 14, 2006 consisted of Senior Notes in the aggregate
principal amount of $145 million, the term loan under the Credit Agreement in
the aggregate principal amount of $32.2 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 Amendment No. 7 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 2006, $0.4
million in fiscal year 2007 and $31.6 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.
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The Company had no derivative instruments at January 14, 2006.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures (the "Disclosure
Controls") that are designed to ensure that information required to be disclosed
in the reports 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 14, 2006 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"). Based on this evaluation, the
CEO and CFO have concluded that, to the best of their knowledge, 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.
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.
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: February 28, 2006 /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 28, 2006 /s/ Neil P. Dyment
------------------------------------
By: Neil P. Dyment
Chief Financial Officer and duly
authorized representative of the
registrant
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