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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 April 3, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission File No. 333-56239-01
LPA HOLDING CORP.
(exact name of registrant as specified in its charter)
SEE TABLE OF ADDITIONAL REGISTRANTS
DELAWARE 48-1144353
(State or other jurisdiction of (IRS employer identification number)
incorporation or organization)
130 SOUTH JEFFERSON STREET, SUITE 300
CHICAGO, IL 60661
(Address of principal executive office and zip code)
(312) 798-1200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 17, 2004, LPA Holding Corp. had outstanding 773,403 shares of Class A
Common Stock (par value, $.01 per share) and 20,000 shares of Class B Common
Stock (par value, $.01 per share). As of May 17, 2004, the additional registrant
had the number of outstanding shares, shown on the following table.
ADDITIONAL REGISTRANTS
Number of Shares
Jurisdiction of Commission IRS Employer of Common
Name Incorporation File Number Identification No. Stock Outstanding
- ----------------------- --------------- ----------- ------------------ -----------------
La Petite Academy, Inc. Delaware 333-56239 43-1243221 100 shares of
Common Stock
(par value,
$.01 per share)
-2-
LPA HOLDING CORP. AND SUBSIDIARIES
INDEX
PAGE
-----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED):
Condensed Consolidated Balance Sheets 4-5
Condensed Consolidated Statements of Operations and Comprehensive 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 13-19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
ITEM 4. CONTROLS AND PROCEDURES 19-20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURES 22-23
-3-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LPA HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
APRIL 3, JUNE 28,
2004 2003
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 10,048 $ 9,526
Restricted cash investments 3,595 2,951
Accounts receivable, net of allowance for
doubtful accounts of $545 and $496, respectively 11,368 11,024
Supplies inventory 2,869 3,075
Other prepaid expenses 4,668 905
Refundable taxes 26 56
---------- ----------
Total current assets 32,574 27,537
Restricted cash investments (Note 3) 6,516 5,042
Property and equipment, at cost:
Land 5,442 5,442
Buildings and leasehold improvements 79,858 77,349
Furniture and equipment 27,869 27,958
---------- ----------
113,169 110,749
Less accumulated depreciation 78,252 72,635
---------- ----------
Property and equipment, net 34,917 38,114
Other assets (Note 3) 5,585 7,396
---------- ----------
Total assets $ 79,592 $ 78,089
========== ==========
(continued)
-4-
LPA HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
APRIL 3, JUNE 28,
2004 2003
---------- ----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Overdrafts due banks $ 7,096 $ 3,055
Accounts payable 5,425 8,445
Current maturities of long-term debt and capital lease obligations
(Note 4) 3,881 2,499
Accrued salaries, wages and other payroll costs 20,574 17,954
Accrued insurance liabilities 5,214 5,141
Accrued property and sales taxes 3,612 4,313
Accrued interest payable 5,711 1,982
Reserve for closed schools 1,193 2,137
Other current liabilities 9,430 6,548
---------- ----------
Total current liabilities 62,136 52,074
Long-term liabilities:
Long-term debt and capital lease obligations (Note 4) 189,008 197,908
Other long-term liabilities (Note 5) 9,585 11,401
Series A 12% mandatorily redeemable preferred stock (Note 6) 77,197 -
---------- ----------
Total long-term liabilities 275,790 209,309
Series A 12% mandatorily redeemable preferred stock (Note 6) - 69,378
Series B 5% convertible redeemable participating preferred stock 22,470 16,739
($0.01 par value per share); 13,645,000 shares authorized, 9,541,968 and
7,241,490 shares issued and outstanding as of April 3, 2004 and June 28,
2003, respectively; aggregate liquidation preference of $22.5 million and
$16.7 million, 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 as of April
3, 2004 and June 28, 2003, respectively 8 8
Class B common stock ($0.01 par value per share); 20,000 shares
authorized, issued and outstanding as of April 3, 2004 and June 28,
2003
Common stock warrants 8,596 8,596
Accumulated other comprehensive income 94 160
Accumulated deficit (289,502) (278,175)
---------- ----------
Total stockholders' deficit (280,804) (269,411)
---------- ----------
Total liabilities and stockholders' deficit $ 79,592 $ 78,089
========== ==========
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 40 WEEKS ENDED
APRIL 3, APRIL 5, APRIL 3, APRIL 5,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Revenue $ 90,617 $ 93,546 $ 284,228 $ 297,037
Operating expenses:
Salaries, wages and benefits 50,342 49,744 159,764 164,337
Facility lease expense 10,427 10,680 34,368 35,273
Depreciation 1,996 2,407 6,684 8,084
Restructuring charges (recoveries) (Note 9) (221) 2,186 (1,044) 3,862
Provision for doubtful accounts 394 649 1,882 2,197
Other 20,352 21,968 70,109 80,460
---------- ---------- ---------- ----------
Total operating expenses 83,290 87,634 271,763 294,213
---------- ---------- ---------- ----------
Operating income 7,327 5,912 12,465 2,824
Interest expense
Interest on debt 4,546 4,977 15,204 16,701
Dividends and accretion on Series A preferred stock
(Note 6) 2,458 - 7,820 -
---------- ---------- ---------- ----------
Total interest expense 7,004 4,977 23,024 16,701
Interest income (11) (17) (32) (112)
---------- ---------- ---------- ----------
Net interest expense 6,993 4,960 22,992 16,589
---------- ---------- ---------- ----------
Income (loss) before income taxes 334 952 (10,527) (13,765)
Provision (benefit) for income taxes (66) 59 70 287
---------- ---------- ---------- ----------
Net income (loss) 400 893 (10,597) (14,052)
---------- ---------- ---------- ----------
Other comprehensive income (loss):
Derivative adjustments reclassified into operations (20) (20) (66) (67)
---------- ---------- ---------- ----------
Total other comprehensive loss (20) (20) (66) (67)
---------- ---------- ---------- ----------
Comprehensive income (loss) $ 380 $ 873 $ (10,663) $ (14,119)
========== ========== ========== ==========
See notes to condensed consolidated financial statements.
-6-
LPA HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS OF DOLLARS)
40 WEEKS ENDED 40 WEEKS ENDED
APRIL 3, 2004 APRIL 5, 2003
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,597) $ (14,052)
Adjustments to reconcile net loss to net cash from operating
activities
Restructuring charges (1,044) 3,862
Depreciation 6,684 8,084
Dividends and accretion on Series A preferred stock (Note 6) 7,820 -
Loss on sales and disposals of property and equipment 120 69
Other non cash items 729 1,590
Changes in assets and liabilities:
Restricted cash investments (2,118) (4,904)
Accounts receivable (344) (1,546)
Supplies inventory 206 (236)
Other prepaid expenses (3,763) (3,045)
Refundable taxes 30 424
Accounts payable (3,020) 840
Accrued salaries, wages and other payroll costs 2,462 1,067
Accrued property and sales taxes (701) (576)
Accrued interest payable 3,729 3,760
Other current liabilities 2,882 327
Accrued insurance liabilities 350 597
Reserve for closed schools (1,639) (2,140)
Other changes in assets and liabilities, net (70) (248)
------------- -------------
Net cash provided by (used for) operating activities 1,716 (6,127)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (3,595) (4,652)
Proceeds from sale of assets 1,001 -
------------- -------------
Net cash used for investing activities (2,594) (4,652)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt and capital lease obligations (12,642) (1,733)
Net borrowings under the Revolving Credit Agreement 5,000 1,931
Deferred financing costs - (496)
Proceeds from issuance of common stock, redeemable preferred
stock and warrants, net of expenses 5,001 2
Overdrafts due bank 4,041 1,125
------------- -------------
Net cash provided by financing activities 1,400 829
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 522 (9,950)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,526 16,092
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,048 $ 6,142
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 10,708 $ 11,205
Income taxes 45 115
Non-cash investing and financing activities:
Capital lease obligations 124 457
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 April 3, 2004, the Company operated 644 schools, including 588
residential academies, 27 employer-based schools and 29 Montessori
schools. For the 40 weeks ended April 3, 2004, the Company had an average
attendance of approximately 64,948 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 April 3, 2004 and April 5, 2003 are
not necessarily indicative of the results to be expected for the entire
fiscal year.
Certain information normally included in financial statements prepared in
accordance with GAAP has been condensed or omitted. These financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's Form 10-K/A for
the fiscal year ended June 28, 2003.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Certain reclassifications to prior year amounts have been made in order to
conform to the current year presentation.
Over each of the past three years the Company has experienced significant
losses before income taxes. In addition, as shown in the accompanying
financial statements, the Company has a working capital deficit and a
stockholders' deficit as of April 3, 2004. Over the past three years,
there have been repeated instances in which the Company was not in
compliance with its financial covenants and required multiple equity
investments by LPA (see Note 10) and other electing stockholders to enable
it to meet its financial obligations as they came due and provide adequate
liquidity to operate the business.
Over the past year management has implemented a series of measures to
improve the Company's operating results and cash flow. These actions
included the closure of unprofitable schools, optimization of staff labor,
personnel reductions, decreased discretionary expense spending and greater
realization of revenue resulting
-8-
from improved collections on accounts receivable. Management is continuing
to identify additional opportunities to further reduce its cost of
operation and optimize revenue per academy classroom. Management believes
that these efforts, coupled with the remaining $8.8 million of equity
commitment, as of April 3, 2004, provided by LPA and certain of the other
stockholders of Parent, and the available funds under the Revolving Credit
Facility, will enable the Company to comply with its required financial
covenants, meet its obligations as they come due and provide adequate
liquidity to operate the business for the next twelve months. However,
there can be no assurance in this regard. Furthermore, there can be no
assurance that the Company can obtain additional funding from LPA beyond
that as noted above or from any other external source.
FISCAL YEAR END - The Company utilizes a 52 or 53-week fiscal year ending
on the Saturday closest to June 30 and is composed of 13 four-week periods
or in the case of a 53-week year, 12 four-week periods and one five week
period. Fiscal year 2004 is a 53-week fiscal year. The first quarter
contains four such periods or 16 weeks, the second and third quarters
contain 3 periods or 12 weeks and the fourth quarter contains 3 periods or
13 weeks. Fiscal year 2003 was a 52-week fiscal year. The first quarter
contained four such periods or 16 weeks and each remaining quarter
contained 3 periods or 12 weeks.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In May 2003, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No.
150 establishes standards for how companies classify and measure certain
financial instruments with characteristics of both liabilities and equity.
SFAS No. 150 requires financial instruments meeting certain criteria to be
reported as liabilities that were previously reflected between liabilities
and equity in statements of financial position. Most of the guidance in
SFAS No. 150 is effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. The Company
adopted the provisions of SFAS No. 150 on June 29, 2003.
The Company has determined that its Series A 12% mandatorily redeemable
preferred stock meets the criteria included in SFAS No. 150 to be reported
as a liability. Therefore, in the condensed consolidated balance sheet as
of April 3, 2004, the Series A 12% mandatorily redeemable preferred stock
has been classified as a long term liability. Additionally, dividends and
accretion attributable to these shares have now been classified as
interest expense rather than direct charges against accumulated deficit.
During the 12 and 40 weeks ended April 3, 2004, the Company recognized
$2.5 million and $7.8 million in dividends and accretion on the Series A
preferred stock as interest expense, while in the 12 and 40 weeks ended
April 5, 2003, the Company recognized a $2.1 million and $6.8 million
charge to accumulated deficit. The charges to interest expense resulting
from the adoption of SFAS No. 150 are currently non-cash charges, as the
Series A preferred stock dividends have not been paid but rather have been
added to the Series A preferred stock liquidation value and are payable in
the future. The prior year classification of the Series A preferred stock
has not been changed because the provisions of SFAS No. 150 do not permit
restatement of financial statements for earlier years presented.
The Company has determined that its Series B 5% convertible redeemable
participating preferred stock does not meet the criteria included in SFAS
No. 150 to be recorded as a liability. Therefore, in the condensed
consolidated balance sheet as of April 3, 2004, the Series B 5%
convertible redeemable participating preferred stock continues to be
classified between liabilities and equity.
3. NON-CURRENT ASSETS
The restricted cash investment balance represents the long-term portion of
the cash deposited in an escrow account as security for the self-insured
portion of the Company's workers compensation, general liability and
automobile insurance coverage.
-9-
Other non-current assets consist of the following in thousands of dollars:
APRIL 3, JUNE 28,
2004 2003
--------- ---------
Deferred financing costs $ 10,010 $ 10,010
Accumulated amortization (6,379) (5,501)
--------- ---------
3,631 4,509
Other (a) 1,954 2,887
--------- ---------
$ 5,585 $ 7,396
========= =========
(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:
APRIL 3, JUNE 28,
2004 2003
--------- ---------
Senior Notes, 10.0% due May 15, 2008 $ 145,000 $ 145,000
Borrowings under credit agreement 47,252 53,588
Capital lease obligations 637 1,819
--------- ---------
192,889 200,407
Less current maturities of long-term
debt and capital lease obligations (3,881) (2,499)
--------- ---------
$ 189,008 $ 197,908
========= =========
On July 31, 2003, Parent, La Petite and its senior secured lenders entered
into Amendment No. 6 to the revolving credit facility under an agreement
entered into on May 11, 1998, providing for a term loan facility and a
revolving credit agreement (the Credit Agreement). The amendment
permanently waived existing third and fourth quarter fiscal 2003 defaults
of Parent and La Petite in connection with (a) the failure to deliver
timely financial information to the senior secured lenders; (b) the
failure to deliver timely information regarding purchases of material
assets to the senior secured lenders; and (c) the failure to file certain
reports timely with the Securities and Exchange Commission. Additionally,
Amendment No. 6 revised the definition of Consolidated EBITDA in the
Credit Agreement.
5. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following in thousands of
dollars:
APRIL 3, JUNE 28,
2004 2003
-------- --------
Unfavorable leases (a) $ 682 $ 831
Reserve for closed schools (b) 543 2,329
Deferred severance (c) 548 705
Long-term insurance liabilities (d) 7,812 7,536
-------- --------
$ 9,585 $ 11,401
======== ========
(a) In connection with the acquisitions of La Petite and Bright Start, a
liability for unfavorable operating leases was recorded and is being
relieved over the average remaining life of the related leases.
-10-
(b) The reserve for closed schools includes the long-term liability
related primarily to leases for schools that were closed and are no
longer operated by the Company.
(c) On December 11, 2002, the Company entered into a Separation
Agreement with the Company's former Chief Executive Officer and
President. The long-term portion of the Company's total contractual
obligations pursuant to the Separation Agreement is $0.5 million and
$0.7 million as of April 3, 2004 and June 28, 2003, respectively.
(d) Long-term insurance liabilities reflect the Company's obligation for
reported and not paid and incurred but not reported, workers'
compensation, auto and general liability claims.
6. SHARES SUBJECT TO MANDATORY REDEMPTION
In May 2003, the FASB issued SFAS No. 150, which establishes standards for
how companies classify and measure certain financial instruments with
characteristics of both liabilities and equity. The Company adopted the
provisions of SFAS No. 150 on June 29, 2003. For additional information on
SFAS No. 150, see Note 2 - Recently Issued Accounting Pronouncements.
Shares subject to mandatory redemption consists of 45,000 shares of Series
A 12% mandatorily redeemable preferred stock, $0.01 par value (Series A
preferred stock), all of which were issued and outstanding as of April 3,
2004. The original carrying value of the preferred stock of $36.4 million
is being accreted to its redemption value of $45.0 million on May 11,
2008. The Series A preferred stock is non-voting and mandatorily
redeemable on May 11, 2008. Dividends at the rate of 12.0% per annum are
cumulative and if not paid on the June 30 or December 31 semi-annual
Series A preferred stock dividend dates are added to the liquidation
value. The liquidation value was $84.5 million and $77.2 million as of
April 3, 2004 and June 28, 2003, respectively. Accrued dividends were
$39.5 million and $32.2 million at April 3, 2004 and June 28, 2003,
respectively. The Series A preferred stock may be exchanged for 12.0%
Subordinated Exchange Debentures due 2008, at Parent's option, subject to
certain conditions, in whole, but not in part, on any scheduled dividend
payment date. The Series A preferred stock contains certain restrictive
provisions that limit the ability of Parent to pay cash dividends.
During the 12 and 40 weeks ended April 3, 2004, the Company recognized
$2.5 million and $7.8 million in dividends and accretion on the Series A
preferred stock as interest expense, while in the 12 and 40 weeks ended
April 5, 2003, the Company recognized a $2.1 million and $6.8 million
charge to accumulated deficit. The charges to interest expense resulting
from the adoption of SFAS No. 150 are currently non-cash charges, as the
Series A preferred stock dividends have not been paid but rather have been
added to the Series A preferred stock liquidation value and are payable in
the future.
7. COMMITMENTS AND CONTINGENCIES
The Company is presently, and has been from time to time, subject to
claims and litigation arising in the ordinary course of business.
Management believes that none of the claims or litigation, of which it is
aware, will materially affect the Company's financial condition,
liquidity, or annual results of operations, although assurance cannot be
given with respect to the ultimate outcome of any such actions.
8. STOCK-BASED COMPENSATION
The Company accounts for all options in accordance with APB Opinion No.
25, which requires compensation cost to be recognized only on the excess,
if any, between the fair value of the stock at the date of grant and the
amount an employee must pay to acquire the stock. Under this method, no
compensation cost has been recognized for stock options granted.
No options were granted during the 40 weeks ended April 3, 2004. If
compensation cost for options granted in prior periods had been recognized
as prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation,"
it would not have had a material effect on the Company's results of
operations.
9. RESTRUCTURING CHARGES
During the third quarter of the 2004 fiscal year, the Company recorded
adjustments to its previously established
-11-
restructuring reserves, which had the net effect of reducing the reserves
by $0.2 million. These adjustments were principally due to changes in
sublease arrangements. In the third quarter of the 2003 fiscal year, the
Company recognized restructuring charges of $2.3 million in connection
with the closure of ten schools, offset by recoveries of $0.1 million
principally due to settlement of lease liabilities for less than the
recorded reserves. Included in the restructuring charges for the 2003
fiscal year were non-cash charges of $0.1 million. The restructuring
charges related to the school closures consisted principally of the
present value of rent (net of anticipated sublease income), real estate
taxes, repairs and maintenance costs, common area maintenance charges, and
utilities, along with the write-off of leasehold improvements. A summary
of the restructuring reserve activity is as follows, in dollars in
thousands:
FISCAL YEAR FISCAL YEAR
2004 2003
----------- -----------
Balances at June 28, 2003 and June 29, 2002 $ 4,466 $ 4,598
Provision recorded in first quarter 57 2,877
Recoveries recorded in first quarter (23) (1,629)
Amount utilized in first quarter (877) (1,725)
-------- --------
Balance at October 18, 2003 and October 19, 2002 3,623 4,121
Provision recorded in second quarter 548 639
Recoveries recorded in second quarter (1,405) (211)
Amount utilized in second quarter (411) (639)
-------- --------
Balance at January 10, 2004 and January 11, 2003 2,355 3,910
Provision recorded in third quarter - 2,300
Recoveries recorded in third quarter (221) (114)
Amount utilized in third quarter (398) (1,045)
-------- --------
Balance at April 3, 2004 and April 5, 2003 $ 1,736 $ 5,051
======== ========
10. SERIES B 5% CONVERTIBLE REDEEMABLE PARTICIPATING PREFERRED STOCK ISSUANCE
Pursuant to the terms of the Securities Purchase Agreement dated February
10, 2003, entered into by Parent and its stockholders who have elected to
exercise their respective preemptive rights, as amended by Amendment No. 1
to the Securities Purchase Agreement dated July 31, 2003, Parent may issue
up to a total of 6,669,734 shares of its Series B 5% convertible
redeemable participating preferred stock (Series B preferred stock) at a
price of $2.174 per share. LPA has committed to purchase in accordance
with the terms of the Securities Purchase Agreement, 6,658,636 shares of
the Series B preferred stock being offered. Purchases may be made at LPA's
discretion or upon occurrence of conditions detailed in the Securities
Purchase Agreement. In accordance with such commitment, LPA purchased
2,299,908 shares of Series B preferred stock for $5.0 million during the
second quarter of fiscal 2004. Accordingly, the remaining contingent
equity commitment from the stockholders of Parent has been reduced to $8.8
million.
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and the related notes thereto
included elsewhere in this report.
Historically, the Company's operating revenue has followed the seasonality of
the school year, declining during the summer months and the calendar year-end
holiday period. The number of new children enrolling at La Petite's educational
facilities (the schools) is generally highest in September-October and
January-February, generally referred to as the Fall and Winter enrollment
periods. As a result of this seasonality, results for one quarter are not
necessarily indicative of results for an entire year.
The Company operated 644 schools at the end of the third quarter of fiscal year
2004 as compared to 673 schools for the same period of fiscal year 2003. The net
decrease of 29 schools is a result of two openings, 28 closures and the
reduction of 3 locations due to the combining of operations. The closures
resulted from management's decision to close certain school locations where the
conditions no longer supported an economically viable operation.
New educational facilities (new schools), as defined by the Company, are schools
opened within the current or previous fiscal year. These schools typically
generate operating losses until the schools achieve normalized occupancies.
Established educational facilities (established schools), as defined by the
Company, are schools that were open prior to the start of the previous fiscal
year.
Full-time equivalent (FTE) attendance, as defined by the Company, is not a
measure of the absolute number of students attending the Company's schools, but
rather is an approximation of the full-time equivalent number of students based
on Company estimates and weighted averages. For example, a student attending
full-time is equivalent to one FTE, while a student attending only one-half of
each day is equivalent to 0.5 FTE. The average weekly FTE tuition rate, as
defined by the Company, is the tuition revenue divided by the FTE attendance for
the respective period.
RESULTS OF OPERATIONS
TWELVE WEEKS ENDED APRIL 3, 2004 COMPARED TO TWELVE WEEKS ENDED APRIL 5, 2003
The following table sets forth the Company's operating results for the
comparative 12 weeks ended April 3, 2004 and April 5, 2003, with amounts
presented in thousands of dollars and as percentages of revenue:
12 WEEKS ENDED 12 WEEKS ENDED
APRIL 3, 2004 APRIL 5, 2003
------------------------ -----------------------
Percent of Percent of
Amount Revenue Amount Revenue
---------- ---------- ---------- ----------
Revenue $ 90,617 100.0% $ 93,546 100.0%
Operating expenses:
Salaries, wages and benefits 50,342 55.6 49,744 53.2
Facility lease expense 10,427 11.5 10,680 11.4
Depreciation 1,996 2.2 2,407 2.6
Restructuring charges (recoveries) (221) (0.2) 2,186 2.3
Provision for doubtful accounts 394 0.4 649 0.7
Other 20,352 22.5 21,968 23.5
---------- ---- ---------- ----
Total operating expenses 83,290 91.9 87,634 93.7
---------- ---- ---------- ----
Operating income $ 7,327 8.1% $ 5,912 6.3%
========== ==== ========== ====
-13-
Operating revenue decreased $2.9 million or 3.1% from the same period last year.
This revenue decrease was the result of a reduction in revenue from closed
schools of $2.6 million and a $0.8 million decrease at established schools,
offset by a $0.5 million increase at new schools. The revenue decrease was
principally due to a decline in FTE attendance of 6.3% offset by a 3.5% increase
in average weekly FTE tuition rates. The increase in the average weekly FTE
tuition rate was principally due to selective price increases that were put into
place based on geographic market conditions and class capacity utilization. The
decrease in FTE attendance was principally due to school closures and a decline
in FTE attendance at established schools, partially offset by increased FTE
attendance at new schools. FTE attendance was negatively impacted by the level
of governmental funding for childcare assistance programs, which declined or
remained unchanged in many areas. The Company expects that the current level of
government funding for childcare assistance programs will continue to have a
negative impact on FTE attendance in the fourth quarter of the current fiscal
year.
Salaries, wages, and benefits increased $0.6 million or 1.2% from the same
period last year. As a percentage of revenue, labor costs were 55.6% for the 12
weeks ended April 3, 2004, as compared to 53.2% for the same period in the prior
year. The increases in salaries, wages, and benefits include increased labor
costs of $0.8 million at established schools, increased labor costs of $0.3
million at new schools, increased field management and corporate administration
labor costs of $0.6 million, a $0.2 million increase in bonus costs, and
increased benefit costs of $0.3 million, offset by decreased labor costs of $1.6
million at closed schools. A 3.0% increase in average hourly wage rates at
established schools was partially offset by a 1.5% decrease in labor hours.
Facility lease expense decreased $0.3 million or 2.4% from the same period last
year. The decrease in facility lease expense was mainly due to closed schools,
offset by increases in lease payments for facilities with contingent rent
provisions.
Depreciation expense decreased $0.4 million or 17.1% from the same period last
year. The decrease in depreciation expense was principally due to the reduction
in the carrying value of fixed assets as a result of the impairment charge
recognized in the fourth quarter of the 2003 fiscal year and the write off the
leasehold improvements related to school closures in the 2003 fiscal year.
During the third 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 $0.2 million. These adjustments were
principally due to changes in sublease arrangements. In the third quarter of the
2003 fiscal year, the Company recognized restructuring charges of $2.3 million
in connection with the closure of ten schools, offset by recoveries of $0.1
million principally due to settlement of lease liabilities for less than the
recorded reserves. Included in the restructuring charges for the 2003 fiscal
year were non-cash charges of $0.1 million. The restructuring charges related to
the school closures consisted principally of the present value of rent (net of
anticipated sublease income), real estate taxes, repairs and maintenance costs,
common area maintenance charges, and utilities, along with the write-off of
leasehold improvements.
Provision for doubtful accounts decreased $0.3 million or 39.3% from the same
period last year. The decrease is principally the result of improved collection
efforts over the same period in the prior year.
Other operating costs decreased $1.6 million or 7.4% 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 was due
primarily to lower supplies, bank overages and shortages, repairs and
maintenance, legal and professional fees, utilities, data processing,
transportation, food and other costs, offset by increases in insurance,
marketing, travel and training expenses. As a percentage of revenue, other
operating costs decreased to 22.5% as compared to 23.5% in the same period in
the prior year.
As a result of the foregoing, the Company had operating income of $7.3 million
in the third quarter of the 2004 fiscal year as compared to operating income of
$5.9 million in the third quarter of the 2003 fiscal year.
Net interest expense increased $2.0 million or 41.0% as compared to the same
period last year. The increase was principally due to the $2.5 million impact
resulting from the adoption of SFAS No. 150 at the start of the 2004 fiscal
year, offset primarily by reduced interest expense resulting from the fair value
adjustment to the carrying value of the senior notes becoming fully amortized
prior to the 2004 fiscal year. SFAS No. 150 impacts the classification of the
Company's Series A preferred stock and requires that accrued dividends and
accretion related to these shares be
-14-
classified as interest expense rather than a charge to accumulated deficit. The
charges to interest expense resulting from the adoption of SFAS No. 150 are
currently non-cash charges, as the Series A preferred stock dividends have not
been paid but rather have been added to the Series A preferred stock liquidation
value and are payable in the future.
The provision for income taxes includes a provision for state and local taxes.
Included in the provision for the 12 weeks ended April 3, 2004 was a $0.1
million reduction in the estimated accrual for state and local taxes. The
effective federal tax rate for the 12 weeks ended April 3, 2004 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.
40 WEEKS ENDED APRIL 3, 2004 COMPARED TO 40 WEEKS ENDED APRIL 5, 2003
The following table sets forth the Company's operating results for the
comparative 40 weeks ended April 3, 2004 and April 5, 2003, with amounts
presented in thousands of dollars and as percentages of revenue:
40 WEEKS ENDED 40 WEEKS ENDED
APRIL 3, 2004 APRIL 5, 2003
------------------------ -----------------------
Percent of Percent of
Amount Revenue Amount Revenue
---------- ---------- ---------- ----------
Revenue $ 284,228 100.0% $ 297,037 100.0%
Operating expenses:
Salaries, wages and benefits 159,764 56.2 164,337 55.3
Facility lease expense 34,368 12.1 35,273 11.9
Depreciation 6,684 2.4 8,084 2.7
Restructuring charges (recoveries) (1,044) (0.4) 3,862 1.3
Provision for doubtful accounts 1,882 0.7 2,197 0.7
Other 70,109 24.7 80,460 27.1
---------- ----- ---------- -----
Total operating expenses 271,763 95.6 294,213 99.0
---------- ----- ---------- -----
Operating income $ 12,465 4.4% $ 2,824 1.0%
========== ===== ========== =====
Operating revenue decreased $12.8 million or 4.3% from the same period last
year. This revenue decrease was a result of a reduction in revenue from closed
schools of $12.8 million, a $1.0 million decrease in established schools and a
$0.2 million decrease in other operating revenue offset by a $1.2 million
increase at new schools. The revenue decrease was principally due to a decline
in FTE attendance of 10.2% offset by a 6.5% increase in average weekly FTE
tuition rates. The increase in the average weekly FTE tuition rate was
principally due to selective price increases that were put into place based on
geographic market conditions and class capacity utilization. The decrease in FTE
attendance was principally due to school closures and a decline in FTE
attendance at established schools, partially offset by increased FTE attendance
at new schools. FTE attendance was negatively impacted by the level of
governmental funding for childcare assistance programs, which declined or
remained unchanged in many areas. The Company expects that the current level of
government funding for childcare assistance programs will continue to have a
negative impact on FTE attendance in the fourth quarter of the current fiscal
year.
Salaries, wages, and benefits decreased $4.6 million or 2.8% from the same
period last year. As a percentage of revenue, labor costs were 56.2% for the 40
weeks ended April 3, 2004, as compared to 55.3% for the same period in the prior
year. The decreases in salaries, wages, and benefits include decreased labor
costs of $7.4 million at closed schools and decreased benefit costs of $0.8
million, offset by increased field management and corporate administration labor
costs of $0.9 million, increased labor costs of $1.3 million at established
schools, increased labor costs of $0.5 million at new schools, and a $0.9
million increase in bonus costs. The increase in labor costs at established
schools was mainly due to a 3.7% increase in average hourly wage rates offset by
a 2.9% decrease in labor hours as compared to the same period in the prior year.
Facility lease expense decreased $0.9 million or 2.6% from the same period last
year. The decrease in facility lease expense was mainly due to closed schools,
offset by increases in lease payments for facilities with contingent rent
-15-
provisions and lower rent credits resulting from certain unfavorable lease
liabilities becoming fully utilized prior to the end of the third quarter of the
2004 fiscal year.
Depreciation expense decreased $1.4 million or 17.3% from the same period last
year. The decrease in depreciation expense was principally due to the reduction
in the carrying value of fixed assets as a result of the impairment charge
recognized in the fourth quarter of the 2003 fiscal year and the write off the
leasehold improvements related to school closures in the 2003 fiscal year.
For the 40 weeks ended April 3, 2004, the Company recognized restructuring
charges of $0.5 million, primarily due to repairs and maintenance costs related
to closed schools, offset by recoveries of $1.5 million principally due to
settlement of lease liabilities for less than the recorded reserves and changes
in sublease arrangements. For the 40 weeks ended April 5, 2003, the Company
recognized restructuring charges of $5.5 million in connection with the closure
of 42 schools, and $0.4 million in connection with the write-down to fair market
value of real estate properties held for disposal, offset by recoveries of $2.0
million principally due to settlement of lease liabilities for less than the
recorded reserves. Included in the restructuring charges for the 2003 fiscal
year were non-cash charges of $1.3 million. The restructuring charges related to
the school closures consisted principally of the present value of rent (net of
anticipated sublease income), real estate taxes, repairs and maintenance costs,
common area maintenance charges, and utilities, along with the write-off of
leasehold improvements.
Provision for doubtful accounts decreased $0.3 million or 14.3% from the same
period last year. The decrease is principally the result of improved collection
efforts over the same period in the prior year.
Other operating costs decreased $10.4 million or 12.9% from the same period last
year. Other operating costs include repairs and maintenance, food, insurance,
utilities, supplies, real estate taxes, transportation, marketing, professional
fees, travel, bank overages and shortages, school activity costs, recruitment,
data processing, personnel and other miscellaneous costs. The decrease was due
primarily to a $3.1 million decrease in legal and professional fees, a $1.6
million decrease in management meeting costs, a $1.5 million reduction in bank
shortages, along with lower transportation, supplies, real estate taxes,
utilities, marketing, personnel and food expenses offset by a $ 1.1 million
increase in insurance costs, along with higher repair and maintenance and travel
costs. As a percentage of revenue, other operating costs decreased to 24.7% as
compared to 27.1% in the same period in the prior year.
As a result of the foregoing, the Company had operating income of $12.5 million
for the 40 weeks ended April 3, 2004 as compared to operating income of $2.8
million for the 40 weeks ended April 5, 2003.
Net interest expense increased $6.4 million or 38.6% as compared to the same
period last year. The increase was principally due to the $7.8 million impact
resulting from the adoption of SFAS No. 150 at the start of the 2004 fiscal
year, offset primarily by reduced interest expense resulting from the fair value
adjustment to the carrying value of the senior notes becoming fully amortized
prior to the 2004 fiscal year. SFAS No. 150 impacts the classification of the
Company's Series A preferred stock and requires that accrued dividends and
accretion related to these shares be classified as interest expense rather than
a charge to accumulated deficit. The charges to interest expense resulting from
the adoption of SFAS No. 150 are currently non-cash charges, as the Series A
preferred stock dividends have not been paid but rather have been added to the
Series A preferred stock liquidation value and are payable in the future.
The provision for income taxes includes a provision for state and local taxes.
The effective federal tax rate for the 40 weeks ended April 3, 2004 was 0% due
to current period pretax losses and the Company's provision of a full valuation
allowance against deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are from cash flows from operations,
borrowings on the revolving credit facility under an agreement entered into on
May 11, 1998, providing for a term loan facility and a revolving credit
agreement (the Credit Agreement), and capital contributions received from LPA.
The Company's principal uses of funds are debt service requirements, capital
expenditures and working capital needs. The Company incurred substantial
indebtedness in connection with the Recapitalization.
Parent and La Petite have entered into the Credit Agreement, as amended,
consisting of the $40 million Term Loan Facility and the $25 million Revolving
Credit Facility. Parent and La Petite borrowed the entire $40 million available
under the Term Loan Facility in connection with the Recapitalization.
-16-
The Credit Agreement will terminate on May 11, 2006. Payments due under the
amortization schedule for the term loan are $0.3 million in the remainder of
fiscal year 2004, $5.5 million in fiscal year 2005, and $27.5 million in fiscal
year 2006. The term loan is also subject to mandatory prepayment in the event of
certain equity or debt issuances or asset sales by the Company or any of its
subsidiaries and in amounts equal to specified percentages of excess cash flow
(as defined). On April 3, 2004, there was $33.3 million outstanding under the
term loan and $14.0 million outstanding under the Revolving Credit Facility. La
Petite had outstanding letters of credit in an aggregate amount of $5.9 million,
and $5.1 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.
On July 31, 2003, Parent, La Petite and its senior secured lenders entered into
Amendment No. 6 to the Credit Agreement. The amendment permanently waived
existing third and fourth quarter fiscal 2003 defaults of Parent and La Petite
in connection with (a) the failure to deliver timely financial information to
the senior secured lenders; (b) the failure to deliver timely information
regarding purchases of material assets to the senior secured lenders; and (c)
the failure to file certain reports timely with the Securities and Exchange
Commission. Additionally, Amendment No. 6 revised the definition of Consolidated
EBITDA in the Credit Agreement. For further information concerning Amendment No.
6 to the Credit Agreement, see Notes 4 and 8 to the consolidated financial
statements included at Item 8 of the Company's Annual Report on Form 10-K/A for
the year ended June 28, 2003.
Pursuant to the terms of the Securities Purchase Agreement dated February 10,
2003, entered into by Parent and its stockholders who have elected to exercise
their respective preemptive rights (the "Electing Stockholders"), as amended by
Amendment No. 1 to the Securities Purchase Agreement dated July 31, 2003, Parent
may issue up to a total of 6,669,734 shares of its Series B convertible
preferred stock. LPA has committed to purchase, in accordance with the terms of
the Securities Purchase Agreement, 6,658,636 shares of the Series B preferred
stock being offered and has received warrants to purchase 1,689,607 shares of
Parent's class A common stock in connection with such commitment. In accordance
with such commitment, LPA purchased 341,766 shares of Series B preferred stock
in June 2003 for $0.8 million, 1,379,945 shares of Series B preferred stock in
November 2003 for $3.0 million, and 919,963 shares of Series B preferred stock
in December 2003 for $2.0 million. Further, in accordance with their commitment
to purchase shares of Series B preferred stock and in accordance with the terms
of the Securities Purchase Agreement, the Electing Stockholders other than LPA
purchased 570 shares of Series B preferred stock in July 2003. Accordingly, at
May 17, 2004, the remaining contingent equity commitment from the stockholders
of Parent has been reduced to $8.8 million. For further information concerning
the Securities Purchase Agreement and the terms of the equity commitment, see
Note 8 to the consolidated financial statements included at Item 8 of the
Company's Annual Report on Form 10-K/A for the year ended June 28, 2003.
As of May 17, 2004, LPA beneficially owned 93.8% of the common stock of Parent
on a fully diluted basis, $45 million of Series A preferred stock of Parent and
approximately $20.7 million of Series B preferred stock of Parent. An affiliate
of JPMP owns a majority of the economic interests of LPA and an entity
controlled by Robert E. King, a director of La Petite and Parent, owns a
majority of the voting interests of LPA.
Over each of the past three years the Company has experienced significant losses
before income taxes. In addition, as shown in the accompanying financial
statements, the Company has a working capital and stockholders' deficit as of
April 3, 2004. Over the past three years, there have been repeated instances
where the Company was not in compliance with its financial covenants and
required multiple equity investments by LPA (see Note 10 to the accompanying
condensed consolidated financial statements included in this report) and other
electing stockholders to enable it to meet its financial obligations as they
came due and provide adequate liquidity to operate the business.
Over the past year management has implemented a series of measures to improve
the Company's operating results and cash flow. These actions included the
closure of unprofitable schools, optimization of staff labor, personnel
reductions, decreased discretionary expense spending and greater realization of
revenue resulting from improved collections on accounts receivable. Management
is continuing to identify additional opportunities to further reduce its cost of
operation and optimize revenue per academy classroom. Management believes that
these efforts, coupled with the remaining $8.8 million of equity commitment, as
of April 3, 2004, provided by LPA and certain of the other stockholders of
Parent, and the available funds under the Revolving Credit Facility, will enable
the Company to comply with its required financial covenants, meet its
obligations as they come due and provide adequate liquidity to operate the
business for the next twelve months. However, there can be no assurance in this
regard. Furthermore,
-17-
there can be no assurance that the Company can obtain additional funding from
LPA beyond that as noted above or from any other external source.
Cash flows provided by operating activities were $1.7 million during the 40
weeks ended April 3, 2004 compared to cash flows used by operating activities of
$6.1 million for the 40 weeks ended April 5, 2003. The $7.8 million increase in
cash flows provided by operating activities was mainly due to a $4.1 million
decrease in net losses, net of non-cash charges and a decrease in working
capital amounts of $3.7 million.
Cash flows used for investing activities were $2.6 million during the 40 weeks
ended April 3, 2004 as compared to cash flows used of $4.7 million during the 40
weeks ended on April 5, 2003. The $2.1 million decrease in cash flows used for
investing activities was due to decreased capital expenditures of $1.1 million
and increased proceeds from the sale of assets of $1.0 million.
Cash flows provided by financing activities were $1.4 million during the 40
weeks ended April 3, 2004, compared to cash flows provided by financing
activities of $0.8 million during the 40 weeks ended April 5, 2003. The $0.6
million increase in cash flows provided by financing activities was due to a
$5.0 million increase in proceeds from the issuance of Series B preferred stock,
a $3.1 million increase in revolver borrowings, a $2.9 million increase in bank
overdrafts related to the timing of monthly expense payments, and a $0.5 million
decrease in deferred financing costs, offset by increased repayment of debt and
capital lease obligations of $10.9 million.
Total capital expenditures for the 40 weeks ended April 3, 2004 and April 5,
2003 were $3.6 million and $4.7 million, respectively. The decrease in total
capital expenditures was a result of decreased spending on maintenance capital
expenditures. The Company views all capital expenditures, other than those
incurred in connection with the development of new schools, to be maintenance
capital expenditures. All of the capital expenditures for the 40 weeks ended
April 3, 2004 and April 5, 2003 were maintenance capital expenditures.
In addition to maintenance capital expenditures, the Company expends additional
funds to repair and maintain its facilities in good working condition. Such
funds are expensed in the periods in which they are incurred. The amounts of
such expenses for the 40 weeks ended April 3, 2004 and April 5, 2003 were $4.6
million and $3.8 million, respectively.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires that management make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Predicting future events is inherently an
imprecise activity and as such requires the use of judgment. Actual results may
vary from estimates in amounts that may be material to the financial statements.
See "Cautionary Statement Concerning Forward Looking Statements."
For a description of the Company's critical accounting policies, see "Item 7.
Management's Discussion and Analysis of Financial Conditions and Results of
Operations, Summary of Critical Accounting Policies", included in the Company's
Annual Report on Form 10-K/A for the year ended June 28, 2003. There have been
no changes to the Company's critical accounting policies during the 40 weeks
ended April 3, 2004.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Under the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995, the Company cautions investors that any forward-looking statements or
projections made by the Company, including those made in this document, are
subject to risks and uncertainties that may cause actual results to differ
materially from those projected or discussed in these forward looking
statements.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this report contain forward-looking statements
that are based on management's current expectations, estimates and projections.
Words such as "expects," "projects," "may," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," variations of these words and similar
expressions are intended to identify these forward-looking statements. Certain
factors, including but not limited to those listed below, may cause actual
results to differ materially from current expectations, estimates, projections
and from past results.
-18-
- 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 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 April 3, 2004 consists of Senior Notes in the aggregate
principal amount of $145 million, the term loan under the Credit Agreement in
the aggregate principal amount of $33.3 million and the revolving credit
facility under the Credit Agreement providing for revolving loans to the Company
in an aggregate principal amount (including swingline loans and the aggregate
stated amount of letters of credit) of up to $25 million. Borrowings under the
Senior Notes bear interest at 10% per annum. Borrowings under the Credit
Agreement bear interest at a rate per annum equal (at the Company's option) to:
(a) an adjusted London inter-bank offered rate ("LIBOR") not to be less than an
amount equal to 2.50% per annum, plus a percentage based on the Company's
financial performance; or (b) a rate equal to the higher of the administrative
agent's published prime rate, a certificate of deposit rate multiplied by the
statutory reserve rate, plus the cost of FDIC insurance or the federal funds
effective rate plus -1/2 of 1% plus, in each case, a percentage based on the
Company's financial performance. The borrowing margins applicable to the Credit
Agreement are currently 4.25% for LIBOR loans and 3.25% for Alternate Base Rate
loans as defined in the Credit Agreement. The Senior Notes mature in May 2008
and the Credit Agreement matures in May 2006. Payments due under the
amortization schedule for the term loan are $0.3 million in the remainder of
fiscal year 2004, $5.5 million in fiscal year 2005, and $27.5 million in fiscal
year 2006. The term loan is also subject to mandatory prepayment in the event of
certain equity or debt issuances or asset sales by the Company or any of its
subsidiaries in amounts equal to specified percentage of excess cash flow (as
defined).
A 1% increase or decrease in the applicable index rate would result in a
corresponding interest expense increase or decrease of $0.5 million per year.
The Company had no derivative instruments at April 3, 2004.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a set of disclosure controls and procedures (the
"Disclosure Controls") that are designed to ensure that information required to
be disclosed in the reports and filed under the Securities Exchange Act of 1934,
as amended ("Exchange Act"), is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms. The Company's
Disclosure Controls include, without limitation, those components of internal
controls over financial reporting ("Internal Controls") that provide reasonable
assurances that transactions are recorded as necessary to permit preparation of
the Company's financial statements in accordance with generally accepted
accounting principles.
-19-
As of April 3, 2004, the Company evaluated the effectiveness of the design and
operation of its Disclosure Controls pursuant to Rule 15d-15 of the Exchange
Act. This evaluation ("Controls Evaluation") was done under the supervision and
with the participation of management, including the Chief Executive Officer
("CEO"), the Chief Financial Officer ("CFO"). This evaluation resulted in the
identification of certain material weaknesses in the Company's Internal Controls
primarily related to: (a) a lack of consistent understanding and compliance with
Company's policies and procedures and (b) a lack of segregation of duties.
While the Company is continuing in the process of implementing a more efficient
and reliable system of Disclosure Controls, several steps have been already
taken to improve its internal controls. The Company has implemented and fully
staffed a sales audit function, has increased its internal audit staffing and
increased the number of field audits performed, has implemented extensive
training of its field personnel in the use of the Company's point of sale (POS)
accounting system, has made enhancements to limit field access to changes to
certain POS system charges, has centralized certain activities previously
performed in the field and has increased the quantity and quality of its
accounting personnel. In addition, the Company has instituted interim
compensating controls and procedures to ensure that information required to be
disclosed in this Quarterly Report on Form 10-Q has been recorded, processed,
summarized and reported to its senior management. These interim compensating
controls and procedures include, but are not necessarily limited to, (i)
communicating a tone from senior management regarding the proper conduct in
these matters, (ii) improving accounting policies and procedures, (iii)
increasing divisional financial staff accountability to ensure field adherence
to financial policies and internal controls and (iv) commencing a comprehensive,
team-based process to further assess and enhance the efficiency and
effectiveness of the Company's Disclosure Controls, including establishing an
informal Disclosure Committee consisting of internal and external professionals
with financial, legal and operational expertise.
Beyond instituting interim measures, the Company is committed to continuing the
process of identifying, evaluating and implementing corrective actions where
required to improve the effectiveness of its Disclosure Controls on an overall
basis. This has included instituting improved processes and procedures as they
relate to such critical functions as improving the quality and oversight of the
accounting staff; enhancing field level controls and developing metrics to
monitor and identify accounting and operational issues.
The Company's Disclosure Controls, including the Company's Internal Controls,
are designed to provide a reasonable level of assurance that the stated
objectives are met. The Company's management, including the CEO and CFO, does
not expect that the Company's Disclosure Controls or Internal Controls will
prevent all errors and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
Based upon the Controls Evaluation, the CEO and CFO have concluded that, to the
best of their knowledge and after giving effect to the interim compensating
controls and procedures discussed above, the Disclosure Controls are effective,
at a reasonable level of assurance, to ensure that information required to be
disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported,
within the time periods specified in the Commission's rules and forms.
There have been no changes in the Company's internal control over financial
reporting that occurred during the Company's most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting other than the continuing
impact of the corrective actions discussed above.
******
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is presently, and has been from time to time, subject to claims and
litigation arising in the ordinary course of business. Management believes that
none of the claims or litigation, of which it is aware, will materially affect
the Company's financial condition, liquidity, or annual results of operations,
although assurance cannot be given with respect to the ultimate outcome of any
such actions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits required by Item 601 of Regulation S-K:
31.1 CFO Section 302 certifications.
31.2 CEO Section 302 certifications.
32 CEO and CFO Section 906 certifications.
b. Reports on Form 8-K:
None.
ITEMS 2, 3, 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: May 17, 2004 /s/ Neil P. Dyment
-----------------------------------
By: Neil P. Dyment
Chief Financial Officer and duly
authorized representative of the
registrant
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LA PETITE ACADEMY, INC.
Dated: May 17, 2004 /s/ Neil P. Dyment
-----------------------------------
By: Neil P. Dyment
Chief Financial Officer and duly
authorized representative of the
registrant
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