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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED JULY 3, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File No. 333-56239-01
LPA HOLDING CORP.
(exact name of registrant as specified in its charter)
SEE TABLE OF ADDITIONAL REGISTRANTS
DELAWARE 48-1144353
(State or other jurisdiction of (IRS employer identification number)
incorporation or organization)
130 SOUTH JEFFERSON STREET, SUITE 300
CHICAGO, IL 60661
(Address of principal executive office and zip code)
(312) 798-1200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
1
As of April 2, 2004 (the last business day of the most recently completed second
fiscal quarter), the market value of the voting and non-voting common equity of
LPA Holding Corp. and La Petite Academy, Inc. held by non-affiliates was zero.
As of September 24, 2004, LPA Holding Corp. had outstanding 773,403 shares of
Class A Common Stock (par value, $0.01 per share) and 20,000 shares of Class B
Common Stock (par value, $0.01 per share). As of September 24, 2004, the
additional registrant had the number of outstanding shares, shown on the
following table.
ADDITIONAL REGISTRANT
Number of Shares
Jurisdiction of Commission IRS Employer of Common
Name Incorporation File Number Identification No. Stock Outstanding
- ---- --------------- ----------- ------------------ -----------------
La Petite Academy, Inc. Delaware 333-56239 43-1243221 100 shares of Common
Stock (par value, $0.01
per share)
2
LPA HOLDING CORP.
INDEX
PAGE
----
PART I.
Item 1. Business 4
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters and
Issuer Purchases of Equity Securities 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 50
Item 9A. Controls and Procedures 50
PART III.
Item 10. Directors and Executive Officers of the Registrant 52
Item 11. Executive Compensation 56
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 58
Item 13. Certain Relationships and Related Transactions 60
Item 14. Principal Accountant Fees and Services 61
PART IV.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 63
SIGNATURES 74
3
PART I.
ITEM 1. BUSINESS
ORGANIZATION
The consolidated financial statements presented herein include LPA Holding Corp.
(Parent), and its wholly owned subsidiary, La Petite Academy, Inc. (La Petite),
and La Petite's wholly owned subsidiaries: Bright Start Inc. (Bright Start), and
LPA Services, Inc. (Services). Parent, consolidated with La Petite, Bright Start
and Services, is referred to herein as the "Company".
On March 17, 1998, LPA Investment LLC (LPA), a Delaware limited liability
company, and Parent entered into an Agreement and Plan of Merger pursuant to
which a wholly owned subsidiary of LPA was merged into Parent (the
Recapitalization). LPA is the direct parent company of Parent and an indirect
parent of La Petite.
As of September 24, 2004, LPA beneficially owns 93.8% of the common stock of
Parent on a fully diluted basis, $45 million of Series A preferred stock of
Parent and $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.
BUSINESS DESCRIPTION
La Petite, founded in 1968, is the largest privately held and one of the leading
for-profit preschool educational facilities (commonly referred to as Academies)
in the United States based on the number of centers operated. The Company
provides center-based educational services and childcare to children between the
ages of six weeks and 12 years. Management believes the Company differentiates
itself through its superior educational programs, which were developed and are
regularly enhanced by its curriculum department. The Company's focus on quality
educational services allows it to capitalize on the increased awareness of the
benefits of premium educational instruction for preschool and elementary
school-age children. At its residential and employer-based Academies, the
Company utilizes its proprietary Journey(R) curriculum with the intent of
maximizing a child's cognitive and social development. The Company also operates
Montessori schools that employ the Montessori method of teaching, a classical
approach that features the programming of tasks with materials presented in a
sequence dictated by each child's capabilities.
As of July 3, 2004, the Company operated 641 schools, including 585 residential
Academies, 27 employer-based Academies and 29 Montessori schools located in 36
states and the District of Columbia. For the 52 weeks ended July 3, 2004, the
Company had an average attendance of approximately 65,500 full and part-time
children.
CURRICULUM
Residential and Employer-Based Academies. La Petite maintains a team of internal
early childhood education experts who design curricula and program materials for
each developmental age group that La Petite serves.
All of La Petite's programs are developmentally age appropriate, and follow an
integrated approach to learning. Each program is based upon thoroughly
researched learning objectives, significant teacher training, well-crafted
activities and associated assessments, a well-planned and maintained
environment, and ongoing parent communication.
Each program provides a balance of teacher-directed and child-directed
activities that address both the intellectual and physical developmental needs
of young children. Intellectual activities are designed to promote language
development, pre-reading, and writing skills as well as cognitive development,
problem
4
solving, imagination, and creativity. Physical activities are designed to
increase gross and fine motor skills such as dexterity and eye-hand
coordination.
For infants and toddlers, activities are planned for a variety of developmental
areas such as listening, talking, physical development, and creativity. As
infants become toddlers, more activities focus on nurturing their need for
independence and practicing fine motor skills that help toddlers learn to feed
themselves, walk, and communicate. Some of the many activities included in the
infant and toddler curricula are songs, finger plays, art projects,
storytelling, and exercises. These activities are designed to build the
foundation for social skills such as sharing and getting along with others.
The two-year-old curriculum includes activities that provide guidance and
practice in developing all-important social and emotional skills, as well as
emerging cognitive skills. Creativity and art continue to be reinforced through
drawing. Sample activities include story time, dancing, singing, and gluing.
For preschoolers, typically three and four-year-old children, a new Journey(R)
curriculum was developed and will be implemented in all La Petite academies in
the fall of 2004. The new Journey(R) curriculum is designed with an increased
focus on early-literacy and pre-writing skills. The program incorporates ongoing
assessments to demonstrate proof of learning for parents. Learning occurs
throughout seven Learning Centers that focus on different skills and areas of
development. The Company believes the learning outcomes generated by the
Journey(R) curriculum surpass those of any major competitor, many of which have
not updated their programs in some time, and only provide curriculum-based
activities for a portion of the day. The new Journey(R) curriculum, on the other
hand, has incorporated the most recent research in early childhood education,
and covers the entire day that children are in La Petite's care.
Pre-kindergartners, typically children that will go to kindergarten the
following fall, have their own curriculum designed to ensure that they are ready
for more formal schooling at the elementary level. This nine to twelve month
program is heavily focused on reading readiness, and also includes math,
science, character education, social and emotional development, and physical
strength and skills development. An important component of this program is based
upon Scholastic's Building Language for Literacy program, which is used in all
pre-kindergarten classrooms. Careful assessment via teacher observation and
portfolio evaluation provides accountability, and the program's focus on
understanding individual children's skills provides the necessary flexibility to
tailor lesson planning to each child's needs.
The private kindergarten program provides a balanced educational approach that
rivals any school district's program. This program meets or exceeds all
applicable state requirements. Scholastic's Kindergarten Place, Handwriting
without Tears, AIMS Science Program and Everyday Math along with LPA specific
report cards, portfolios, and character education round out this program.
The Kids Station curriculum for school age children, typically children ages
five through twelve, consists of ten Fun Stations with appropriate activities in
each. Examples of these stations include Study Hall, in which the teacher helps
the children complete their homework, the Recreation Station, which offers fun
indoor games, and Sports Port, which utilizes outdoor areas for sports and other
related activities. In addition to allowing children time to complete their
homework, the Kids Station program allows children to develop relationships with
other children their own age, and participate in enrichment activities such as
arts and crafts and fitness. Most locations also provide transportation to and
from local elementary schools.
Montessori Schools. Montessori is a non-traditional method of education where
children work and learn in a highly individualized environment. Montessori
materials, combined with the Company's certified Montessori instructors, create
a learning environment in which children become energized to explore,
investigate, and learn. Children work in mixed age-group classrooms with
state-of-the-art Montessori materials that have been designed to stimulate each
child's interest in reading, mathematics, geography, and science. In addition to
the Montessori method, some Montessori schools provide foreign language and
computer programs.
5
ACADEMY NETWORK
The Company operates three types of childcare centers: residential Academies,
employer-based Academies and Montessori schools. Academies generally operate
year-round, five days-a-week and typically are open from 6:30 AM to 6:30 PM. A
child may be enrolled in any of a variety of program schedules from a full-time,
five-day-per-week plan to as little as two or three half-days a week. A child
attending full-time typically spends approximately nine hours-a-day, five
days-per-week, at an Academy. The Kids Station program for children ages five to
12 provides extended childcare before and after the elementary school day and
transportation to and from the elementary school.
Academy employees include Academy Directors, Assistant Directors (who are
generally teachers), full-time and part-time teachers, temporary and substitute
teachers, teachers' aides, and non-teaching staff. On average, there are 15 to
20 employees per Academy. Each Academy is managed by an Academy Director. An
Academy Director's responsibilities include management of company policies and
procedures, curriculum implementation, the establishment of daily, weekly and
monthly operating schedules, staffing, marketing to develop and increase
enrollment and control of operating expenses. Personnel involved in operations
as Academy Director and above are compensated in part on the basis of the
profitability and level of parent and employee satisfaction of each Academy for
which they have managerial responsibility.
Academy Directors are supervised by 46 District Managers. District Managers have
an average of 12 years of experience with the Company, typically are responsible
for 7 to 22 Academies and report to one of six Divisional Vice Presidents.
District Managers visit their Academies regularly and are in frequent contact to
help make decisions and improvements to program quality and profitability. The
Divisional Vice Presidents have an average of 9 years of experience with the
Company.
Residential Academies. As of July 3, 2004, the Company operated 585 residential
Academies. Residential Academies are typically located in residential, middle
income neighborhoods, and are usually one-story, air-conditioned buildings
located on three-quarters of an acre to one acre of land. A typical Academy also
has an adjacent playground designed to accommodate the full age range of
children attending the school. The latest Academy design is approximately 12,800
square feet, built on a site of approximately 1.5 acres, with an operating
capacity of approximately 185 children and incorporates a closed classroom
concept. The Company continues to improve, modernize and renovate existing
residential Academies to improve efficiency and operations, to better compete,
to respond to the requests of parents and to support the Journey(R) curriculum.
Residential Academies generally have programs to care for children from toddlers
to 12 years old arranged in five age groups. In addition, over half of the
Academies offer childcare for infants, as young as six weeks old.
Teacher-student ratios vary depending on state requirements but generally
decrease with the older child groups.
Employer-Based Academies. As of July 3, 2004, the Company operated 27
employer-based Academies. These Academies utilize an operating model that is
very similar to residential Academies including collecting tuition fees directly
from the employee parent. They are, however, opened to support businesses,
government, hospitals and universities with large, single-site employee
populations. Employer-based Academies are located on the employer's property and
the employer sponsors and usually support the Academy with free or reduced rent,
utilities and custodial maintenance. Employer-based Academies may be operated on
a management fee basis, on a profit and loss basis or a variation of the two.
Most employer-based Academies also allow community children to attend as a
second priority to the business owner employee's children, which helps to
maximize the revenue and profit opportunity at each employer-based Academy.
Montessori Schools. As of July 3, 2004, the Company operated 29 Montessori
schools. Montessori schools are typically located in upper-middle income areas
and feature brick facades and closed classrooms. The Montessori schools
typically have lower staff turnover, and their lead teachers are certified
Montessori instructors, many of whom are certified through the Company's
internal training program. In addition, unlike students at residential
Academies, Montessori students are enrolled for an entire school year, pay
tuition monthly in advance and pay higher tuition rates.
6
SEASONALITY
Historically, the Company's operating revenue has followed the seasonality of a
school year, declining during the summer months and the year-end holiday period.
The number of new children enrolling at the Academies is generally highest in
September-October and January-February; therefore, the Company attempts to
concentrate its marketing efforts immediately preceding these high enrollment
periods.
NEW ACADEMY DEVELOPMENT
In fiscal 2005, the Company plans to seek out sites for new school locations
within existing markets. As part of this expansion, the Company is looking at
build-to-suit leases, and is seeking out "turn-key" opportunities from existing
local child-care operators or other users whose facilities meet the Company's
needs. Management believes it has developed an effective selection process to
identify attractive sites through the use of a newly purchased national site
selection/demographic software mapping program. In evaluating the suitability of
a particular location, the Company performs an extensive financial analysis of
the historical performance of all existing schools, which includes consideration
of each facility's structural condition, looking for a positive trend within
that market. Once this has been established, the Company concentrates on the
demographics of its target customer within a two-mile radius of new school
locations.
Newly constructed Academies are generally able to open approximately 36 weeks
after the real estate contract is signed. Because a location's early performance
is critical in establishing its ongoing reputation, the Academy staff is
supported with a variety of special programs to help achieve quick enrollment
gains and development of a positive reputation. These programs include
investment in local marketing prior to the opening.
During fiscal 2004, the Company opened one employer-based Academy, and one
residential-based Academy.
TUITION
Academy tuition depends upon a number of factors including, but not limited to,
location of an Academy, age of the child, full or part-time attendance,
utilization and competition. The Company also provides various tuition discounts
primarily consisting of sibling, staff, and Preferred Employer Program. 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. Management estimates that state governments subsidize the tuition for
approximately 25% of the children under its care.
MARKETING AND ADVERTISING
The Company's advertising plans are multi-faceted and heavily dependent on
direct response programs, including consumer and business-to-business direct
mail, mass media, and electronic media. Additional training is provided to
Academy Directors as plans are rolled out throughout the country, including
enhanced phone and tour sales training and tools. An additional emphasis is
placed on expanding corporate partner relationships and growing the Preferred
Employer Program, not necessarily through new companies, but through additional
enrollment from currently participating corporations. The Preferred Employer
Program allows the Company to build quality relationships with large
corporations by providing preferred pricing for their employees who enroll their
children at the Company's Academies.
The WOW! program, which began its launch in January 2003, continues to provide
clear and tangible facility expectations for Academy Directors, with
accountability on the District Manager level. The purpose of this program is to
insure that the Academies appearance and program execution is consistent
throughout the system. The five sections of the WOW! Program provide Academy
Directors with a clear set of minimum facility expectations, an overview, and Q
& A for each section. The WOW! Assessments are
7
now a component of the regularly conducted academy operations reviews, and will
be updated as new programs are introduced.
An internal launch of the new Journey(R) program for preschoolers commenced in
April. The focus of the early phase of this launch was to "educate and motivate"
the Academy employees and Field Management team so that they, in turn, will
share their enthusiasm with current and prospective parents. In addition, along
with the New Journey(R) Preschool launch, a Transition process was introduced to
assist Academy Directors in re-selling to current two year old parents as they
prepare their child for a successful transition to preschool.
The Parent Advisory Liaison continues in many Academies across the system and
encourages increased parent participation and loyalty, forms partnerships
between staff and parents, and creates a forum for the exchange of ideas between
staff and parents for the benefit of children. To further encourage retention,
the La Petite Academy Service Guarantee was implemented in July 2002. This
guarantee simply states: (i) the Company's education professionals are committed
to exceeding the customer's expectations and (ii) for the Company's newly
enrolled customers, after 90 days, if the Company does not meet their
expectations, the Company will guarantee to refund the customer's last
registration fee.
The VIP Referral Program continues to be highly successful in driving new
enrollments into the Academies. Through this program, current customers who
refer new customers are rewarded, and the new customer receives a discount for
enrolling.
INFORMATION SYSTEMS
The Company's financial and management-reporting systems are connected through a
Virtual Private Network (VPN) that connects all Academies, field management and
Support Center employees. Through the use of the Company's point of sale
software product, called ADMIN, and the implementation of the VPN, information
such as financial reporting, enrollments, pricing, labor, receivables, and
attendance are available at all levels of the organization.
The Company continues to review its management information systems to ensure the
issuance of meaningful, specific performance measures, and the production of
timely and accurate operating and financial information.
In July 2003 the Company hired a new Chief Information Officer. Previously this
function had been outsourced. This change resulted in significant cost savings
and a stronger alignment with the Company's business direction. Over 500 schools
were placed on broadband connections, which both improved the speed and
performance of transferring and accessing information and provided greater
security for school computers and data. A number of improvements were made to
harden the Company's computing environment and reduce business continuity risks.
In addition, enhancements were made to ADMIN to improve cash and transaction
controls.
COMPETITION
The United States preschool education and childcare industry is highly
fragmented and competitive. The Company's competition consists principally of
local nursery schools and childcare centers, some of which are non-profit
(including religious-affiliated centers), providers of services that operate out
of their homes and other for-profit companies, which may operate a number of
centers. Local nursery schools and childcare centers generally charge less for
their services. Many religious-affiliated and other non-profit childcare centers
have no or lower rental costs than the Company, may receive donations or other
funding to cover operating expenses and may utilize volunteers for staffing.
Consequently, tuition rates at these facilities are commonly lower than the
Company's rates. Additionally, fees for home-based care are normally lower than
fees for center-based care because providers of home care are not always
required to satisfy the same health, safety or operational regulations as the
Company's Academies. The competition also consists of other large, national,
for-profit childcare companies that may have more aggressive tuition discounting
and other pricing policies than La Petite. The Company competes principally by
offering trained and qualified personnel, professionally planned educational and
recreational programs that
8
emphasize the individual development of the child, well-equipped facilities and
additional services such as transportation.
REGULATION AND GOVERNMENTAL INVOLVEMENT
Childcare centers are subject to numerous state and local regulations and
licensing requirements, and the Company has policies and procedures in place in
order to comply with such regulations and requirements. Although state and local
regulations vary from jurisdiction to jurisdiction, government agencies
generally review the ratio of staff to enrolled children, the safety, fitness
and adequacy of the buildings and equipment, the dietary program, the daily
curriculum, staff training, record keeping, transportation policies and
compliance with health and safety standards. In certain jurisdictions,
regulations have been enacted or are being considered which establish
requirements for employee background checks or other clearance procedures for
new employees of childcare centers or vehicle operators. In most jurisdictions,
governmental agencies conduct scheduled and unscheduled inspections of childcare
centers, and licenses must be renewed periodically. Failure by an Academy to
comply with applicable regulations can subject it to state sanctions, which
might include the Academy being placed on probation or, in more serious cases,
suspension or revocation of the Academy's license to operate and could also lead
to sanctions against other Academies located in the same jurisdiction. In
addition, this type of action could result in reputational damage extending
beyond that jurisdiction.
Management believes the Company is in compliance with all applicable regulations
and licensing requirements. However, there is no assurance that a licensing
authority will not determine a particular Academy to be in violation of
applicable regulations and take action against that Academy. In addition, there
may be changes in regulations and licensing requirements, such as changes in the
required ratio of staff personnel to enrolled children that could have a
material adverse effect on the Company's operations.
Certain tax incentives exist for childcare programs. Section 21 of the Internal
Revenue Code provides a federal income tax credit ranging from 20% to 35% of
certain childcare expenses for "qualifying individuals" (as defined in the
Code). The fees paid to the Company for childcare services by eligible taxpayers
qualify for the tax credit, subject to the limitations of Section 21 of the
Code.
Various state and federal programs provide childcare assistance to low-income
families. These programs are generally administered through state and local
agencies. Management estimates approximately 25% of operating revenue is
generated from such federal and state programs. Although no federal license is
required at this time, there are minimum standards that must be met to qualify
for participation in certain federal subsidy programs. Many states utilize
tiered reimbursement programs. These programs typically have quality tiers that
allow higher reimbursement for low-income programs that meet the highest quality
standards.
Government, at both the federal and state levels, is involved in actively
expanding the quality and availability of childcare services. Federal support is
delivered at the state level through government-operated educational and
financial assistance programs. Childcare services offered directly by states
include training for childcare providers and resource and referral systems for
parents seeking childcare. In addition, the state of Georgia has an extensive
Government-funded private sector preschool program in which the Company
participates. Other states are evaluating preschool programs based upon the
Georgia model.
In September of 1998, the National Highway Transportation Safety Administration
(NHTSA) issued interpretative letters that modified its interpretation of
regulations governing the sale by automobile dealers of vehicles intended to be
used for the transportation of children to and from school. These letters
indicate that dealers may no longer sell fifteen-passenger vans for this use,
and that any vehicle designed to transport eleven persons or more must meet
federal school bus standards if it is likely to be "used significantly" to
transport children to and from school or school-related events. The Company
currently maintains a fleet of approximately 1,198 fifteen-passenger vans and
140 school buses for use in transportation of children which management believes
are safe and effective vehicles for that purpose. The Company's current fleet
meets all necessary federal, state, and local safety requirements. In accordance
with the NHTSA requirements, all new fleet additions or replacements must meet
school bus standards.
9
COMPLIANCE WITH ENVIRONMENTAL PROTECTION PROVISIONS
Compliance with federal, state and local laws and regulations governing
pollution and protection of the environment is not expected to have any material
effect upon the financial condition or results of operations of the Company.
TRADEMARKS
A federally registered trademark in the United States is effective for ten years
subject only to a required filing and the continued use of the mark by the
registrant. A federally registered trademark provides the presumption of
ownership of the mark by the registrant in connection with its goods or services
and constitutes constructive notice throughout the United States of such
ownership. The Company has various registered trademarks and servicemarks
covering the name La Petite Academy, its logos, and a number of other names,
slogans and designs, including, but not limited to: La Petite Journey(R),
Parent's Partner, SuperStars and Montessori Unlimited(R). Management believes
that the Company name and logos are important to its operations and intends to
continue to renew the registration thereof.
INSURANCE AND CLAIMS ADMINISTRATION
The Company maintains an insurance program covering comprehensive general
liability, automotive liability, workers' compensation, property and casualty,
crime and directors and officers liability insurance. The policies provide for a
variety of coverage, are subject to various limits, and include substantial
deductibles or self-insured retention levels. The Company believes its insurance
program is appropriate given the nature of its business and its claims history.
However, claims may be asserted which fall outside of, or are in excess of the
limits of, the Company's insurance, the effect of which could have a material
adverse effect on the Company.
EMPLOYEES
As of July 3, 2004, the Company employed approximately 12,000 employees. The
Company's employees are not represented by any organized labor unions or
employee organizations and management believes relations with employees are
good.
ITEM 2. PROPERTIES
As of July 3, 2004, the Company operated 641 Academies, 561 of which were leased
under operating leases, 68 of which were owned and 12 of which were operated in
employer-owned centers. Most of these Academy leases have 15-year terms, some
have 20-year terms, many have renewal options, and most require the Company to
pay utilities, maintenance, insurance and property taxes. In addition, some of
the leases provide for contingent rentals, if the Academy's operating revenue
exceeds certain base levels. The Company also leases administrative office space
in the cities of Chicago, Illinois, Overland Park, Kansas, Charlotte, North
Carolina, and Burbank, California.
Because of different licensing requirements and design features, Academies vary
in size and licensed capacity. Academies typically contain 5,400 to 9,500 square
feet in a one-story, air-conditioned building located on three-quarters of an
acre to one acre of land. Each Academy has an adjacent playground designed to
accommodate the full age range of children attending the Academy. Licensed
capacity for the same size building varies from state to state.
10
The following table summarizes Academy openings and closings for the indicated
periods.
FISCAL YEAR 2004 2003 2002 2001 2000
- ----------- ----- ------ ------ ------ ------
Academies:
Open at Beginning of Period 648 715 734 752 743
Opened During Period 2 6 8 6 59
Closed During Period (9) (73) (27) (24) (50)
------ ------ ------ ------ ------
Open at End of Period 641 648 715 734 752
====== ====== ====== ====== ======
During the 2004 fiscal year, the Company opened one Journey-based Academy and
one employer-based Academy. During that same period, the Company closed nine
schools. Three of the closures were due to the combining of operations and the
remaining closures resulted from management's decision to close certain school
locations where the conditions no longer supported an economically viable
operation.
The following table shows the number of locations operated by the Company as of
July 3, 2004:
Alabama (13) Indiana (13) Nevada (13) Tennessee (24)
Arizona (24) Iowa (5) New Jersey (2) Texas (98)
Arkansas (4) Kansas (19) New Mexico (16) Utah (4)
California (49) Kentucky (4) New York (1) Virginia (34)
Colorado (18) Louisiana (1) North Carolina (24) Washington, DC (1)
Connecticut (1) Maryland (15) Ohio (17) Washington (14)
Delaware (1) Minnesota (5) Oklahoma (21) Wisconsin (14)
Florida (77) Mississippi (2) Oregon (5)
Georgia (32) Missouri (23) Pennsylvania (5)
Illinois (19) Nebraska (8) South Carolina (15)
The leases have initial terms expiring as follows:
YEARS INITIAL LEASE TERMS EXPIRE NUMBER OF ACADEMIES
2005 91
2006 100
2007 109
2008 84
2009 77
2010 and later 100
------------
561
------------
At July 3, 2004, the Company leased 561 Academies from approximately 276
lessors. The Company has generally been successful when it has sought to renew
expiring Academy leases.
ITEM 3. LEGAL PROCEEDINGS
The Company has litigation pending which arose in the ordinary course of its
business. In management's opinion, no litigation in which the Company currently
is involved will result in liabilities that will have a material adverse effect
on its financial position, liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The common stock of the Parent is not publicly traded. As of September 24, 2004,
LPA owned 66.0% of the Parent's outstanding common stock, Vestar/LPT Limited
Partnership owned 2.7%, management owned 1.2% and former management owned 30.1%.
No cash dividends were declared or paid on the Parent's common stock during the
2004 and 2003 fiscal years. The Company's 10% Series B Senior Notes due 2008
(Senior Notes) and preferred stock (see Note 4 and Note 8 to the consolidated
financial statements) contain certain covenants that, among other things, do not
permit Parent to pay cash dividends on its common or preferred stock now or in
the immediate future.
As of September 24, 2004, there were 14 holders of record of Parent's common
stock.
Note 11 of the consolidated financial statements contains a description of the
stock based compensation plans of Parent, including the number of securities
available for future issuance under such plans and whether such plans were
approved by Parent's security holders.
Pursuant to the terms of the Securities Purchase Agreement dated February 10,
2003, entered into by Parent and its stockholders who have elected to exercise
their respective preemptive rights (the "Electing Stockholders"), as amended by
Amendment No. 1 to the Securities Purchase Agreement dated July 31, 2003, Parent
may issue up to 6,669,734 shares of its Series B convertible preferred stock. In
accordance with such commitment, during fiscal 2004, LPA, as one of the Electing
Stockholders, purchased 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. Each of the foregoing transactions was exempt
from the registration requirements of the Securities Act of 1933 pursuant to
Section 4(2) thereunder, as transactions not involving any public offering. In
each of such transactions, no general solicitation was made, the securities sold
are subject to transfer restrictions, and the certificates evidencing such
securities contains an appropriate legend stating such securities have not been
registered under the Securities Act and may not be offered or sold absent
registration or pursuant to an exemption therefrom. No underwriters were
involved in connection with any of these sales of Parent's equity securities.
12
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS OF DOLLARS)
The following selected financial data of the Company should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the other financial information included
elsewhere in this annual report on Form 10-K. The Company's fiscal year ends on
the Saturday closest to June 30. The fiscal year ended July 3, 2004 contained 53
weeks.
53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
JULY 3, JUNE 28, JUNE 29, JUNE 30, JULY 1,
2004 (a) 2003 2002 2001 (a) 2000
INCOME STATEMENT DATA
Revenue $ 383,491 $ 390,165 $ 391,205 $ 384,924 $ 371,265
Operating expenses, exclusive of restructuring
charges and asset impairments 362,199 376,520 388,871 374,051 359,382
Restructuring charges (recoveries) (b) (864) 4,908 3,208 2,455 7,705
Asset impairments (c) 692 3,057 57,436 0 0
--------- --------- --------- --------- ---------
Total operating expenses 362,027 384,485 449,515 376,506 367,087
--------- --------- --------- --------- ---------
Operating (loss) income 21,464 5,680 (58,310) 8,418 4,178
Interest expense (d) 30,354 21,509 21,902 20,487 20,880
Interest income (43) (127) (204) (85) (163)
--------- --------- --------- --------- ---------
Loss before income taxes (8,847) (15,702) (80,008) (11,984) (16,539)
Provision (benefit) for income
taxes 66 246 (3,236) 16,204 (5,453)
--------- --------- --------- --------- ---------
Net loss (8,913) (15,948) (76,772) (28,188) (11,086)
Other comprehensive income (loss):
Derivative adjustments, net 492
Amounts reclassified into operations (86) (86) (85) (161)
--------- --------- --------- --------- ---------
Comprehensive loss $ (8,999) $ (16,034) $ (76,857) $ (27,857) $ (11,086)
========= ========= ========= ========= =========
BALANCE SHEET DATA (AT END OF PERIOD)
Total assets $ 75,862 $ 78,089 $ 91,568 $ 148,665 $ 165,935
Total long-term debt and capital lease 184,731 197,908 196,963 193,211 182,319
obligations
Preferred stock 102,613 86,117 75,649 52,623 45,833
Stockholders' deficit (279,417) (269,411) (243,654) (158,771) (124,123)
OTHER DATA
Cash flows from operating activities 10,377 (120) 4,401 3,450 3,464
Cash flows from investing activities (7,372) (4,107) (8,791) (14,313) (7,828)
Cash flows from financing activities (5,540) (2,339) 15,068 12,269 3,800
Depreciation and amortization 8,776 10,372 14,664 14,966 16,179
Capital expenditures 8,373 5,594 9,629 14,502 20,899
Proceeds from sale of assets 1,001 1,487 838 189 23,432
Ratio of earnings to fixed charges (e) (e) (e) (e) (e) (e)
Academies at end of period 641 648 715 734 752
FTE utilization during the period (f) 61% 62% 63% 63% 63%
13
a) On April 18, 2001, the Company changed its fiscal year end from the 52 or
53-week period ending on the first Saturday in July to the 52 or 53-week
period ending on the Saturday closest to June 30. The fiscal year ended
July 3, 2004 contains 53 weeks.
b) Restructuring charges resulted from management's decision to close certain
Academies where conditions no longer support an economically viable
operation and to restructure its operating management to better serve the
remaining Academies. These charges consist principally of the present
value of rent (net of anticipated sublease income), real estate taxes,
common area maintenance charges, and utilities, the write-off of goodwill
associated with closed Academies, and the write-down of fixed assets to
fair market value. Recoveries are principally due to settlement of lease
liabilities for less than the recorded reserves. See Note 12 to the
consolidated financial statements included in Item 8 of this report for
further discussion.
c) During fiscal years 2004 and 2003, the Company identified conditions,
including a projected current year operating loss as well as negative cash
flows in certain of the Company's schools, as indications that the
carrying amount of certain long-lived assets may not be recoverable. In
accordance with the Company's policy, management assessed the
recoverability of long-lived assets at these schools using a cash flow
projection based on the remaining useful lives of the assets. Based on
this projection, the cumulative cash flow over the remaining depreciation
or amortization period was insufficient to recover the carrying value of
the assets at certain of these schools. As a result, the Company
recognized impairment losses of $0.7 million and $3.1 million related to
property and equipment in fiscal 2004 and 2003, respectively. During
fiscal year 2002, the Company recognized asset impairment losses of $57.4
million, of which $52.3 million related to goodwill and $5.1 million
related to property and equipment.
d) Interest expense includes $10.5 million in dividends and accretion for
fiscal year 2004 as a result of the company's adoption of SFAS No. 150
"Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity" (See Note 8 to the consolidated financial
statements included at Item 8 of this report). Interest expense also
includes $1.1 million $1.2 million, $1.0 million, $1.1 million, and $1.1
million of amortization of deferred financing costs for fiscal years 2004,
2003, 2002, 2001, and 2000, respectively.
e) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as income before income taxes and extraordinary
items, plus fixed charges. Fixed charges consists of interest expense on
all indebtedness, amortization of deferred financing costs, and one-third
of rental expense on operating leases representing that portion of rental
expense that the Company deemed to be attributable to interest. For the 53
weeks ended July 3, 2004 and the 52 weeks ended June 28, 2003, June 29,
2002, June 30, 2001, and July 1, 2000, earnings were inadequate to cover
fixed charges by $8.8 million, $15.7 million, $80.0 million, $12.0
million, and $16.5 million, respectively.
f) FTE Utilization is the ratio of full-time equivalent (FTE) students to the
total operating capacity for all of the Company's Academies. FTE
attendance is not a measure of the absolute number of students attending
the Company's Academies; rather, it is an approximation of the full-time
equivalent number of students based on Company estimates and weighted
averages. For example, a student attending full-time is equivalent to one
FTE, while a student attending one-half of each day is equivalent to 0.5
FTE.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the consolidated
financial statements and the related notes thereto included in Item 8 of this
report.
The Company utilizes a 52 or 53-week fiscal year ending on the Saturday closest
to June 30. The tables below present the results of the 53 weeks ended July 3,
2004, the results of the 52 weeks ended June 28, 2003, and the results of the 52
weeks ended June 29, 2002 (herein referred to as the 2004 year, the 2003 year,
and the 2002 year).
New educational facilities (new schools), as defined by the Company, are
Academies opened within the current or previous fiscal year. These schools
typically generate operating losses until the Academies achieve normalized
occupancies. Established educational facilities (established schools), as
defined by the Company, are schools that were open prior to the start of the
previous fiscal year.
Full-time equivalent (FTE) attendance, as defined by the Company, is not a
measure of the absolute number of students attending the Company's schools, but
rather is an approximation of the full-time equivalent number of students based
on Company estimates and weighted averages. For example, a student attending
full-time is equivalent to one FTE, while a student attending only one-half of
each day is equivalent to 0.5 FTE. The average weekly FTE tuition rate, as
defined by the Company, is the tuition revenue divided by the FTE attendance for
the respective period.
OVERVIEW
La Petite is the largest privately held and one of the leading for-profit
preschool educational facilities in the United States based on the number of
centers operated. The Company provides center-based educational services and
childcare to children between the ages of six weeks and 12 years. The Company
also operates Montessori schools that employ the Montessori method of teaching,
a classical approach that features the programming of tasks with materials
presented in a sequence dictated by each child's capabilities.
The majority of the Company's revenue comes from the tuition and fees that it
charges for attendance at its Academies. Academy tuition depends upon a number
of factors including, but not limited to, location of an Academy, age of the
child, full or part-time attendance, utilization and competition. The Company
also provides various tuition discounts primarily consisting of sibling, staff,
and Preferred Employer Program. Parents also pay an annual registration fee.
Tuition and fees are payable weekly and in advance for most residential and
employer-based Academies and monthly and in advance for Montessori schools.
Other fees include activity fees for summer activities and supply fees for
Pre-Kindergarten and Private Kindergarten programs. Management estimates that
state governments subsidize the tuition for approximately 25% of the children
under its care.
Historically, operating revenue has followed the seasonality of the school year.
The number of new children attending the Company's schools is highest in
September-October and January-February, generally referred to as the fall and
winter enrollment periods. Revenues tend to decline during the calendar year-end
holiday period and during the summer.
Operating expenses consist of both direct costs associated with the operation of
our schools and administrative costs associated with the operation of our field
and corporate support centers. Direct labor costs at our schools represent the
largest component of operating expenses. Management has focused on improving
labor productivity and has implemented a labor scheduling tool to assist our
school directors in this area. As a result of these efforts, labor hours at our
established schools, excluding the 53rd week, decreased slightly in the 2004
year as compared to the prior year. 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. The Company has
15
experienced increases in lease costs, principally due to market rate increases,
increases in lease payments for facilities with contingent rent provisions and
in some cases, increases resulting from negotiated landlord funded capital
improvements. Other significant operating costs include repairs and maintenance,
food, insurance, utilities, supplies, depreciation and real estate taxes.
2004 COMPARED TO 2003 RESULTS IN THOUSANDS OF DOLLARS
53 WEEKS ENDED 52 WEEKS ENDED
JULY 3, 2004 JUNE 28, 2003
--------------------- ---------------------
Percent of Percent of
Amount Revenue Amount Revenue
--------- --------- --------- ---------
Revenue $ 383,491 100.0% $ 390,165 100.0%
Operating expenses:
Salaries, wages and benefits 214,844 56.0 214,414 55.0
Facility lease expense 44,924 11.7 45,652 11.7
Depreciation 8,776 2.3 10,372 2.7
Restructuring charges (recoveries) (864) (0.2) 4,908 1.3
Asset impairments 692 0.2 3,057 0.8
Provision for doubtful accounts 2,490 0.6 2,802 0.7
Other 91,165 23.8 103,280 26.5
--------- --------- --------- ---------
Total operating expenses 362,027 94.4 384,485 98.5
--------- --------- --------- ---------
Operating income $ 21,464 5.6% $ 5,680 1.5%
========= ========= ========= =========
The Company operated 641 schools at the end of the 2004 year as compared to 648
at the end of the 2003 year. The net decrease of 7 schools is a result of 2
openings and 9 closures, 3 of which were due to the combining of these
operations with other school locations. The closures resulted from management's
decision to close certain school locations where the conditions no longer
supported an economically viable operation.
Operating revenue. Operating revenue decreased $6.7 million or 1.7% during the
2004 year as compared to the 2003 year. Excluding the 53rd week from the 2004
year, operating revenue would have decreased $13.7 million, or 3.5%, from the
2003 year to $376.5 million. The operating revenue decrease consists of a $15.1
million reduction in operating revenue at closed schools offset by a $6.8
million increase at established schools, and a $1.6 million increase at new
schools. The revenue increase at established schools was the result of selective
price increases that were put into place based on geographic market conditions
and class capacity utilization. This increase was partially offset by decreased
FTE attendance. FTE attendance in the 2004 year 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 into the first half of the 2005 year.
Salaries, wages and benefits. Salaries, wages and benefits increased $0.4
million or 0.2% during the 2004 year as compared to the 2003 year. Excluding the
53rd week from the 2004 year, salaries would have decreased $3.6 million, or
1.7%, from the 2003 year to $210.8 million. As a percentage of revenue, labor
costs were 56.0% for the 2004 year as compared to 55.0% for the 2003 year. The
increase in salaries, wages and benefits includes increased field management and
corporate administration labor costs of $1.9 million, increased labor costs of
$5.7 million at established schools, increased labor costs of $0.8 million at
new schools, and a $1.0 million increase in bonus costs offset by reduced labor
costs of $8.9 million at closed schools and decreased benefit costs of $0.2
million. Excluding the impact of the 53rd week, labor costs at established
schools would have increased $2.3 million or 1.3%. The increase in labor costs
at established schools, excluding the impact of the 53rd week was mainly due to
a 1.3% increase in average
16
hourly wage rates offset by a 0.2% decrease in labor hours as compared to the
same period in the prior year.
Facility lease expense. Facility lease expense decreased $0.7 million or 1.6%
during the 2004 year as compared to the 2003 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, increases due to lease
renewals, and lower rent credits resulting from certain unfavorable lease
liabilities becoming fully utilized prior to the end of the 2004 year.
Depreciation and amortization. Depreciation expense decreased $1.6 million or
15.4% during the 2004 year as compared to the 2003 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.
Restructuring charges (recoveries). In the 2004 year, the Company recorded
adjustments to its previously established restructuring reserves, which had the
net effect of reducing the reserves by $0.9 million. These adjustments included
restructuring charges of $0.5 million, primarily due to repairs and maintenance
costs related to closed schools, offset by recoveries of $1.5 million
principally due to settlement of lease liabilities related to previously closed
schools. In the 2004 year, the Company also recognized restructuring charges of
$0.1 million in connection with the closure of 6 schools. In the 2003 year, the
Company recognized restructuring charges of $7.4 million in connection with the
closure of 73 schools and $0.4 million in connection with the write-down to fair
market value of real estate properties held for disposal, offset by recoveries
of $2.9 million principally due to settlement of lease liabilities related to
previously closed schools. 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.
Asset impairments. During fiscal years 2004 and 2003, the Company identified
conditions, including a projected current year operating loss as well as
negative cash flows in certain of the Company's schools, as indications that the
carrying amount of certain long-lived assets may not be recoverable. In
accordance with the Company's policy, management assessed the recoverability of
long-lived assets at these schools using a cash flow projection based on the
remaining useful lives of the assets. Based on this projection, the cumulative
cash flow over the remaining depreciation or amortization period was
insufficient to recover the carrying value of the assets at certain of these
schools. As a result, the Company recognized impairment losses of $0.7 million
and $3.1 million related to property and equipment in fiscal 2004 and 2003,
respectively.
Provision for doubtful accounts. The provision for doubtful accounts decreased
$0.3 million or 11.1% during the 2004 year as compared to the 2003 year. The
decrease in the provision for doubtful accounts is principally the result of
improved collection efforts over the prior year.
Other operating costs. Other operating costs decreased $12.1 million or 11.7%
during the 2004 year as compared to the 2003 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 $2.6 million
decrease in legal and professional fees, a $1.7 million reduction in bank
shortages, a $1.4 million decrease in management meeting costs, a $ 1.4 million
decrease in insurance costs, a $1.3 million reduction in supplies, a $1.0
million reduction in real estate taxes, along with lower food expenses,
transportation, personnel and utilities, offset by a $0.5 million increase in
travel costs. As a percentage of revenue, other operating costs decreased to
23.8% in the 2004 year as compared to 26.5% in the 2003 year.
Operating income. As a result of the foregoing, operating income was $21.5
million for the 2004 year as compared to $5.7 million for the 2003 year.
Interest expense. Net interest expense increased $8.9 million or 41.8% during
the 2004 year as compared to the 2003 year. The increase was principally due to
the $10.5 million impact resulting from the adoption
17
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 and by lower debt fees. 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.
Income tax rate. Income tax expense was $0.1 million in the 2004 year, as
compared to $0.2 million in the 2003 year. The effective tax rate was 0% in the
2004 and 2003 years due to the loss before income taxes in both years and the
Company's provision of a full valuation allowance against deferred tax assets
created in the 2004 and 2003 years.
2003 COMPARED TO 2002 RESULTS IN THOUSANDS OF DOLLARS
52 WEEKS ENDED 52 WEEKS ENDED
JUNE 28, 2003 JUNE 29, 2002
--------------------- ---------------------
Percent of Percent of
Amount Revenue Amount Revenue
--------- --------- --------- ----------
Revenue $ 390,165 100.0% $ 391,205 100.0%
Operating expenses:
Salaries, wages and benefits 214,414 55.0 215,572 55.1
Facility lease expense 45,652 11.7 45,554 11.6
Depreciation and amortization 10,372 2.7 14,664 3.7
Restructuring charges 4,908 1.3 3,208 0.8
Asset impairments 3,057 0.8 57,436 14.7
Provision for doubtful accounts 2,802 0.7 2,951 0.8
Other 103,280 26.5 110,130 28.2
--------- --------- --------- ---------
Total operating expenses 384,485 98.5 449,515 114.9
--------- --------- --------- ---------
Operating income (loss) $ 5,680 1.5% $ (58,310) -14.9%
========= ========= ========= =========
During the 2003 year, the Company opened 6 new schools and closed 73 schools. As
a result, the Company operated 648 schools on June 28, 2003. The closures
resulted from management's decision to close certain school locations where the
conditions no longer supported an economically viable operation.
Operating revenue. Operating revenue decreased $1.0 million or 0.3% during the
2003 year as compared to the 2002 year. The operating revenue decrease is the
result of a $16.6 million reduction in operating revenue at closed schools
offset by a $12.9 million increase at established schools, a $2.4 million
increase at new schools and a $0.3 million increase in other revenue. Tuition
revenue at established schools increased 2.7% during the 2003 year as compared
to the 2002 year. The increase in tuition revenue reflects an increase in the
average weekly FTE tuition rates of 5.4% offset by a decrease in full time
equivalent (FTE) attendance of 2.7%.
The increase in average weekly FTE tuition rates was principally due to
selective price increases, which were put into place in September 2001 and
September 2002, based on geographic market conditions and class capacity
utilization. The decrease in FTE attendance was principally due to school
closures and a decline in FTE attendance at established schools, partially
offset by increased FTE attendance at new schools.
Salaries, wages and benefits. Salaries, wages and benefits decreased $1.2
million or 0.5% during the 2003
18
year as compared to the 2002 year. As a percentage of revenue, labor costs were
55.0% for the 2003 year as compared to 55.1% for the 2002 year. The decrease in
salaries, wages and benefits includes reduced labor costs at closed schools of
$9.3 million, and reduced bonus costs of $0.6 million offset by increased labor
costs at established schools of $5.3 million, increased labor costs at new
schools of $1.3 million, increased field management and corporate administration
labor costs of $0.1 million, and increased benefit costs of $2.0 million. The
increase in labor costs at established schools was mainly due to a 5.0% increase
in average hourly wage rates offset by a 1.9% decrease in labor hours. New
schools experience higher labor costs relative to revenue as compared to the
established schools.
Facility lease expense. Facility lease expense increased $0.1 million or 0.2%
during the 2003 year as compared to the 2002 year. The increase in facility
lease expense was mainly due to lower rent credits in the 2003 year resulting
from certain unfavorable lease liabilities becoming fully amortized prior to the
end of the third quarter of the 2003 year offset by reductions in lease payments
for facilities with contingent rent provisions and lease payments for closed
schools.
Depreciation and amortization. Depreciation expense decreased $4.3 million or
29.3% during the 2003 year as compared to the 2002 year. The decrease in
depreciation and amortization principally resulted from the reduction in
carrying value of long-lived assets, including goodwill, as a result of the
impairment losses recognized in the fourth quarter of the 2002 year.
Restructuring charges. The Company recognized restructuring charges of $7.4
million in the 2003 year in connection with the closure of 73 schools and $0.4
million in connection with the write-down to fair market value of real estate
properties held for disposal, offset by recoveries of $2.9 million principally
due to settlement of lease liabilities for less than the recorded reserves. In
the 2002 year, the Company recognized a restructuring charge of $3.2 million in
connection with the closure of seven Academies and one divisional office. The
restructuring charges related to the school closures consisted principally of
the present value of rent (net of anticipated sublease income), real estate
taxes, common area maintenance charges, and utilities, along with the write-off
of fixed assets.
Asset impairments. During fiscal year 2003, the Company identified conditions,
including a projected current year operating loss as well as negative cash flows
in certain of the Company's schools, as indications that the carrying amount of
certain long-lived assets may not be recoverable. In accordance with the
Company's policy, management assessed the recoverability of long-lived assets at
these schools using a cash flow projection based on the remaining useful lives
of the assets. Based on this projection, the cumulative cash flow over the
remaining depreciation or amortization period was insufficient to recover the
carrying value of the assets at certain of these schools. As a result, the
Company recognized impairment losses of $3.1 million related to property and
equipment in the 2003 year. During fiscal year 2002, the Company recognized
impairment losses of $57.4 million. The Company identified conditions, including
a projected current year consolidated operating loss as well as negative cash
flows in certain of the Company's regional and divisional operations, as
indications that the carrying amount of certain long-lived assets, primarily
goodwill, may not be recoverable. In accordance with the Company's policy,
management assessed the recoverability of those long-lived assets using a cash
flow projection based on the remaining useful life. Based on this projection,
the cumulative cash flow over the remaining depreciation or amortization period
was insufficient to recover the carrying value of the assets. In addition, the
Company evaluated the enterprise value of its remaining goodwill in accordance
with Accounting Principles Board Opinion No. 17 and determined that the goodwill
was fully impaired. As a result, the Company recognized impairment losses of
$57.4 million related to the long-lived assets, of which $52.3 million related
to goodwill and $5.1 million related to property and equipment in the 2002 year.
Provision for doubtful accounts. The provision for doubtful accounts decreased
$0.1 million or 5.0% during the 2003 year as compared to the 2002 year. The
decrease in the provision for doubtful accounts is principally the result of
improved collection efforts over the prior year.
Other operating costs. Other operating costs decreased $6.9 million or 6.2%
during the 2003 year as compared to the 2002 year. Other operating costs include
repairs and maintenance, utilities, insurance, real estate taxes, food,
transportation, marketing, supplies, travel, professional fees, personnel,
recruitment, training, bank overages and shortages, and other miscellaneous
costs. The decrease was due primarily to
19
decreases in supplies, marketing, special projects, school activity costs,
personnel, transportation, travel, and utilities, offset by higher expenses in
legal and professional fees, repairs and maintenance, insurance, food, bank
charges and shortages, and miscellaneous expenses. As a percentage of revenue,
other operating costs decreased to 26.5% in the 2003 year as compared to 28.2%
in the 2002 year.
Operating income. As a result of the foregoing, operating income was $5.7
million for the 2003 year as compared to an operating loss of $58.3 million for
the 2002 year.
Interest expense. Net interest expense decreased $0.3 million or 1.5% during the
2003 year as compared to the 2002 year. The decrease was principally due to a
nonrecurring $0.8 million mark-to-market adjustment for derivative instruments
in the 2002 year, offset by a $0.1 million increase resulting from additional
borrowing, and a $0.2 million increase in debt fees, and a $0.2 million increase
in interest expense related to servicing the reserve for closed schools.
Income tax rate. The 2003 year income tax expense was $0.2 million, or 2% of the
$15.7 million pretax loss compared with the 2002 tax benefit of $3.2 million, or
4% of the pretax loss. Due to a change in certain federal tax laws during the
2002 year, the Company filed for and received a refund of income taxes paid in
prior years. Excluding the impact of this refund, the effective tax rate was 0%
in the 2003 and 2002 years due to the loss before income taxes in both years and
the Company's provision of a full valuation allowance against deferred tax
assets created in the 2003 and 2002 years.
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.
The Credit Agreement will terminate on May 11, 2006. Payments due under the
amortization schedule for the term loan are $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 July 3, 2004, there
was $33.0 million outstanding under the term loan and $11.0 million outstanding
under the Revolving Credit Facility. La Petite had outstanding letters of credit
in an aggregate amount of $5.0 million, and $9.0 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 not in compliance with certain of the financial and
informational covenants during the first quarter of fiscal year 2003 and each of
the quarterly periods in fiscal year 2002. The Company received limited waivers
of noncompliance with the foregoing financial and informational covenants
through February 7, 2003. Amendment No. 5 to the Credit Agreement dated as of
February 10, 2003 permanently waived such defaults.
On February 10, 2003, Parent, La Petite and its senior secured lenders entered
into Amendment No. 5 to the Credit Agreement. The amendment waived the existing
defaults for the first quarter of fiscal year 2003 as well as existing defaults
in fiscal years 1999 through 2002 of Parent and La Petite, extended the final
maturity of the Credit Agreement by one year to May 11, 2006, revised the
amortization schedule to account for the additional one-year extension and
revised and set, as applicable, financial covenant targets (such as maximum
leverage ratio and minimum fixed charge coverage ratio) for fiscal years 2003
through 2006. As a condition to the effectiveness of Amendment No. 5, Parent was
required to obtain contingent equity commitments from its existing stockholders
for an amount equal to $14,500,000. Pursuant to Amendment No. 5, none of the
proceeds, if any, received by Parent as a result of the contingent equity
commitments is required to be used to prepay the term loans outstanding under
the Credit Agreement. See
20
Notes 4 and 8 to the consolidated financial statements included at Item 8 of
this report for further information.
During fiscal year 2003, the Company was not in compliance with certain of the
informational covenants contained in the Credit Agreement. The Company obtained
limited waivers of non-compliance with such informational covenants through July
31, 2003. Amendment No. 6 to the Credit Agreement dated as of July 31, 2003,
permanently waived such defaults. Additionally, Amendment No. 6 revised the
definition of Consolidated EBITDA in the Credit Agreement. See Notes 4 and 8 to
the consolidated financial statements included at Item 8 of this report for
further information.
Pursuant to the terms of the Securities Purchase Agreement dated February 10,
2003, entered into by Parent and its stockholders who have elected to exercise
their respective preemptive rights (the "Electing Stockholders"), as amended by
Amendment No. 1 to the Securities Purchase Agreement dated July 31, 2003, Parent
may issue up to 6,669,734 shares of its Series B convertible preferred stock.
LPA has committed to purchase, in accordance with the terms of the Securities
Purchase Agreement, 6,658,636 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 $0.7 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
September 24, 2004, the remaining contingent equity commitment from the
stockholders of Parent has been reduced to $8.8 million. See Note 8 to the
consolidated financial statements included at Item 8 of this report for further
information.
As of September 24, 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.
CASH FLOWS AND SOURCES AND USES OF FUNDS
The Company's principal sources of funds are from 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.
The Company incurred substantial indebtedness in connection with the
Recapitalization.
Cash flows provided by operating activities were $10.4 million during the 2004
year compared to cash flows used for operating activities of $0.1 million during
the 2003 year. The $10.5 million increase in cash flows from operations was due
to a $6.9 million decrease in net losses, net of non-cash charges, decreased
insurance deposits of $3.4 million and increased working capital amounts of $0.2
million. 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.
Cash flows used for investing activities were $7.4 million during the 2004 year
as compared to $4.1 million during the 2003 year. The $3.3 million increase in
cash flows used for investing activities was due to a $2.8 million increase in
capital expenditures and a $0.5 million decrease in proceeds from the sale of
assets.
Cash flows used for financing activities were $5.5 million during the 2004 year
as compared to $2.3 million during the 2003 year. The $3.2 million increase in
cash used for financing activities was due to an $0.1 million increase in
repayments of term loan and capital lease obligations and a $10.0 million
decrease in net borrowings under the revolving credit agreement, offset by a
$4.3 million increase in proceeds from the issuance of Series B preferred stock,
a $2.1 million increase in bank overdrafts related to the timing of monthly
expense payments, and a $0.5 million decrease in deferred financing costs
21
Cash flows used for operating activities were $0.1 million during the 2003 year
compared to cash flows provided by operating activities of $4.4 million during
the 2002 year. The $4.5 million decrease in cash flows from operations was
mainly due to increased insurance deposits of $1.3 million and increased working
capital amounts of $8.2 million, offset by a $5.0 million decrease in net
losses, net of non-cash charges. 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.
Cash flows used for investing activities were $4.1 million during the 2003 year
as compared to $8.8 million during the 2002 year. The $4.7 million decrease was
due to a $4.0 million decrease in capital expenditures and a $0.7 million
increase in proceeds from sale of assets.
Cash flows used for financing activities were $2.3 million during the 2003 year
compared to cash flows from financing activities of $15.1 million during the
2002 year. The $17.4 million decrease in cash flows for financing activities was
due to a $2.2 million decrease in net borrowings under the revolving credit
agreement, a $1.2 million increase in repayments of debt and capital lease
obligations, and a $14.3 million decrease in proceeds from the issuance of
redeemable preferred stock and warrants, offset by a $0.3 million decrease in
deferred financing costs. During the 2004 year, the Company opened one
Residential-based Academy, and one Employer-based Academy. Employer-based
Academies are generally operated in facilities provided by the employer.
Over each of the past three fiscal 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
July 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 8 to the accompanying
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.
During the 2004 fiscal year, management continued the implementation of measures
initiated in the 2003 fiscal year 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 July 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, 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. In addition, the Company has a
debt service requirement of $38.5 million due in fiscal year 2006. The Company
is currently pursuing various options to restructure or refinance the Company's
long-term indebtedness through an amendment or refinancing of the Credit
Agreement. However, there can be no assurance that the Company will be able to
amend or refinance the Credit Agreement in a timely manner or on satisfactory
terms, if at all, prior to being required to make the debt service payment
required in fiscal year 2006.
CAPITAL EXPENDITURES
Total capital expenditures for the 53 weeks ended July 3, 2004 and the 52 weeks
ended June 28, 2003 were $8.4 million and $5.6 million, respectively. The
increase in total capital expenditures was a result of increased 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 53
weeks ended July 3, 2004 and the 52 weeks ended June 28, 2003 were maintenance
capital expenditures. For fiscal year 2005, the Company expects capital
expenditures to be approximately $8.5 million and $0.5 million for maintenance
capital expenditures and new school development, respectively.
22
In addition to maintenance capital expenditures, the Company expends additional
funds to ensure that its facilities are in good working condition. Such funds
are expensed in the periods in which they are incurred. The amounts of such
expenses for the 53 weeks ended July 3, 2004 and the 52 weeks ended June 28,
2003 and June 29, 2002, were $15.1 million, $15.1 million, and $13.0 million,
respectively.
CONTRACTUAL COMMITMENTS
The Company has certain contractual obligations and commercial commitments.
Contractual obligations are those that will require cash payments in accordance
with the term of a contract, such as borrowing or lease agreements. Commercial
commitments represent obligations for cash performance in the event of demands
by third parties or other contingent events, such as lines of credit.
Contractual obligations and commercial commitments at July 3, 2004 were as
follows, in thousands of dollars:
Fiscal Year
----------------------------------------------------------------------------------------
Total 2005 2006 2007 2008 2009 Thereafter
---------- ---------- ---------- ---------- ---------- ---------- ----------
Long-term debt(a) $ 189,002 $ 5,500 $ 38,502 $ - $ 145,000 $ - $ -
Capital lease
obligations 1,600 945 430 177 48 - -
Operating leases 195,268 41,812 36,576 27,827 21,288 15,881 51,884
Letters of credit 5,040 5,040 - - - - -
Severance - - - - - - -
agreement(b) 702 200 200 200 102 - -
---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 391,612 $ 53,497 $ 75,708 $ 28,204 $ 166,438 $ 15,881 $ 51,884
========== ========== ========== ========== ========== ========== ==========
(a) Long-term debt consists of the term loan and revolving credit facility
under the Credit Agreement and Senior Notes.
(b) Commitments under a Separation Agreement the Company's former Chief
Executive Officer and President entered into on December 11, 2002.
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 significant accounting policies, see "Item 8.
Financial Statements and Supplementary Data, Note 2. Summary of Significant
Accounting Policies." The following accounting estimates and related policies
are considered critical to the preparation of the Company's financial statements
due to the business judgment and estimation processes involved in their
application.
Revenue recognition. Tuition revenues, net of discounts, and other revenues are
recognized as services are performed. Certain fees may be received in advance of
services being rendered, in which case the fee revenue is deferred and
recognized over the appropriate time period. The Company's net revenues meet the
criteria of SAB No. 101, including the existence of an arrangement, the
rendering of services, a determinable fee and probable collection.
Accounts receivable. Accounts receivable are comprised primarily of tuition due
from governmental agencies, parents and employers. Accounts receivable are
presented at estimated net realizable value. The company use estimates in
determining the collectibility of its accounts receivable and must rely on its
evaluation of historical trends, governmental funding levels, specific customer
issues and current economic trends to arrive at appropriate allowances. Material
differences may result in the amount and timing of bad debt expense if actual
experience differs significantly from management estimates.
23
Long-lived assets. Under the requirements of Statement of Financial Accounting
Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the Company assesses the potential impairment of property and
equipment whenever events or change in circumstances indicate that the carrying
value may not be recoverable. An asset's value is impaired if the Company's
estimate of the aggregate future cash flows, undiscounted and without interest
charges, to be generated by the asset are less than the carrying value of the
asset. Such estimates consider factors such as expected future operating income
and historical trends, as well as the effects of demand and competition. To the
extent impairment has occurred, the loss will be measured as the excess of the
carrying amount of the asset over the fair value of the asset. Such estimates
require the use of judgment and numerous subjective assumptions, which, if
actual experience varies, could result in material differences in the
requirements for impairment charges. Impairment charges of $0.7 million were
recorded in fiscal 2004 and were shown separately as asset impairment expense in
the financial statements.
Self-insurance obligations. The Company self-insures a portion of its general
liability, workers' compensation, auto, property and employee medical insurance
programs. The Company purchases stop loss coverage at varying levels in order to
mitigate its potential future losses. The nature of these liabilities, which may
not fully manifest themselves for several years, requires significant judgment.
The Company estimates the obligations for liabilities incurred but not yet
reported or paid based on available claims data and historical trends and
experience, as well as future projections of ultimate losses, expenses, premiums
and administrative costs. The accrued obligations for these self-insurance
programs were $15.3 million and $15.1 million at July 3, 2004 and June 28, 2003,
respectively, see "Item 8. Financial Statements and Supplementary Data, Note 2.
Summary of Significant Accounting Policies, Self-insurance Programs." The
Company's internal estimates are reviewed annually by a third party actuary.
While the Company believes that the amounts accrued for these obligations are
sufficient, any significant increase in the number of claims and costs
associated with claims made under these programs could have a material adverse
effect on the Company's financial position, cash flows or results of operations.
Income taxes. Accounting for income taxes requires the Company to estimate its
income taxes in each jurisdiction in which it operates. Due to differences in
the recognition of items included in income for accounting and tax purposes,
temporary differences arise which are recorded as deferred tax assets or
liabilities. The Company estimates the likelihood of recovery of these assets,
which is dependent on future levels of profitability and enacted tax rates. The
Company determined that, based on cumulative historical pretax losses, it was
more likely than not that the deferred tax assets as of July 3, 2004 and June
28, 2003 would not be realized. Therefore, the Company recorded a valuation
allowance to fully reserve those deferred tax assets at both fiscal 2004 and
2003 year-end. The provision for income taxes at July 3, 2004 includes a $2.5
million reduction of the valuation allowance and the provision for income taxes
at June 28, 2003 includes a $6.3 million increase to the valuation allowance.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2003, the Financial Accounting Standards Board ("FASB") issued 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 consolidated balance sheet as of July 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 53 weeks ended July 3, 2004, the Company
recognized $10.5 million in dividends and accretion on the Series A preferred
stock as interest expense, while during the 52 weeks ended June 28, 2003, the
Company recognized a $9.0 million
24
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 consolidated balance sheet
as of July 3, 2004, the Series B 5% convertible redeemable participating
preferred stock continues to be classified between liabilities and equity.
SEASONALITY
See "Item 1. Business -Seasonality."
GOVERNMENTAL LAWS AND REGULATIONS
See "Item 1. Business -Regulation and Government Involvement."
INFLATION AND GENERAL ECONOMIC CONDITION
During the past three years (a period of low inflation) the Company implemented
selective increases in tuition rates based on geographic market conditions and
class capacity utilization. During the 2004 year, the Company experienced
inflationary pressures on average wage rates, as hourly rates increased
approximately 1.2%. Management believes this is occurring industry wide and
there is no assurance that such wage rate increases can be recovered through
future increases in tuition. A sustained recession with high unemployment may
have a material adverse effect on the Company's operations.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Under the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995, the Company cautions investors that any forward-looking statements or
projections made by the Company, including those made in this document, are
subject to risks and uncertainties that may cause actual results to differ
materially from those projected or discussed in these forward looking
statements.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this report contain forward-looking statements
that are based on management's current expectations, estimates and projections.
Words such as "expects," "projects," "may," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," variations of these words and similar
expressions are intended to identify these forward-looking statements. Certain
factors, including but not limited to those listed below, may cause actual
results to differ materially from current expectations, estimates, projections
and from past results.
- Economic factors, including changes in the rate of inflation,
business conditions and interest rates.
- Operational factors, including the Company's ability to open and
profitably operate Academies and the Company's ability to satisfy
its obligations and to comply with the covenants contained in the
Credit Agreement and the indenture.
- Demand factors, including general fluctuations in demand for early
childhood education and care services and seasonal fluctuations.
- Competitive factors, including: (a) pricing pressures primarily from
local nursery schools and childcare centers and other large,
national for-profit childcare companies, (b) the hiring and
retention of trained and qualified personnel, (c) the ability to
maintain well-equipped facilities and (d) any adverse publicity
concerning alleged child abuse at the Company's childcare centers or
at its Academies.
- Governmental action including: (a) new laws, regulations and
judicial decisions related to state and local regulations and
licensing requirements, (b) changes in the Federal assistance and
funding of childcare services and (c) changes in the tax laws
relating to La Petite's operations.
- Changes in accounting standards promulgated by the Financial
Accounting Standards Board, the Securities and Exchange Commission
or the Public Company Accounting Oversight Board.
25
- 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 complete the implementation of plans
designed to improve the Company's operating results, cash flows and
financial position and to improve the disclosure controls and
procedures of the Company.
No assurance can be made that any expectation, estimate or projection contained
in a forward-looking statement can be achieved. Readers are cautioned not to
place undue reliance on such statements, which speak only as of the date made.
The Company undertakes no obligation to release publicly any revisions to
forward-looking statements as the result of subsequent events or developments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Indebtedness as of July 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 $33.0 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 $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 $0.4 million per year.
The Company had no derivative instruments at July 3, 2004.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements:
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets as of July 3, 2004 and June 28, 2003.
Consolidated Statements of Operations and Comprehensive Loss for the 53
weeks ended July 3, 2004, and the 52 weeks ended June 28, 2003, and June
29, 2002.
Consolidated Statements of Stockholders' Deficit for the 53 weeks ended
July 3, 2004, and the 52 weeks ended June 28, 2003, and June 29, 2002.
Consolidated Statements of Cash Flows for the 53 weeks ended July 3, 2004,
and the 52 weeks ended June 28, 2003, and June 29, 2002.
Notes to Consolidated Financial Statements
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
LPA Holding Corp.
We have audited the accompanying consolidated balance sheets of LPA Holding
Corp. and subsidiaries (the "Company") as of July 3, 2004 and June 28, 2003, and
the related consolidated statements of operations and comprehensive loss,
stockholders' deficit, and cash flows for each of the three years in the period
ended July 3, 2004. Our audits also included the financial statement schedules
listed in the Index at Item 14. (a). 2. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of LPA Holding Corp. and subsidiaries
as of July 3, 2004 and June 28, 2003, and the results of their operations and
their cash flows for each of the three years in the period ended July 3, 2004,
in conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity," as of June 29, 2003.
Deloitte & Touche LLP
Chicago, Illinois
September 22, 2004
27
LPA HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
JULY 3, JUNE 28,
2004 2003
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,991 $ 9,526
Accounts receivable, net of allowance for
doubtful accounts of $501 and $496, respectively 11,470 11,024
Insurance deposits 3,415 2,951
Supplies inventory 3,949 3,075
Other prepaid expenses 887 905
Refundable taxes 39 56
------------ ------------
Total current assets 26,751 27,537
Property and equipment, at cost:
Land 5,442 5,442
Buildings and leasehold improvements 81,479 77,349
Furniture and equipment 30,658 27,958
Construction in progress 60 -
------------ ------------
117,639 110,749
Less accumulated depreciation 79,474 72,635
------------ ------------
Property and equipment, net 38,165 38,114
Insurance deposits (Note 3) 5,613 5,042
Other assets (Note 3) 5,333 7,396
------------ ------------
Total assets $ 75,862 $ 78,089
============ ============
(continued)
28
LPA HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
JULY 3, JUNE 28,
2004 2003
--------- ---------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Overdrafts due banks $ 3,789 $ 3,055
Accounts payable 7,690 8,445
Current maturities of long-term debt and capital lease 5,871 2,499
obligations (Note 4)
Accrued salaries, wages and other payroll costs 20,434 17,954
Accrued insurance liabilities 5,857 5,141
Accrued property and sales taxes 4,041 4,313
Accrued interest payable 1,997 1,982
Reserve for closed schools 1,002 2,137
Other current liabilities 8,578 6,548
--------- ---------
Total current liabilities 59,259 52,074
Long-term liabilities:
Long-term debt and capital lease obligations (Note 4) 184,731 197,908
Other long-term liabilities (Note 5) 8,676 11,401
Series A 12% mandatorily redeemable preferred stock (Note 8) 79,866 -
--------- ---------
Total long-term liabilities 273,273 209,309
Series A 12% mandatorily redeemable preferred stock (Note 8) - 69,378
Series B 5% convertible redeemable participating preferred stock
($0.01 par value per share); 13,645,000 shares authorized,
9,541,968 and 7,241,490 shares issued and outstanding as
of July 3, 2004 and June 28, 2003, respectively; aggregate
liquidation preference of $22.7 million and $16.7 million,
respectively 22,747 16,739
Stockholders' deficit:
Class A common stock ($0.01 par value per share);
17,500,000 shares authorized; and 773,403 shares issued
and outstanding as of July 3, 2004 and June 28, 2003 8 8
Class B common stock ($0.01 par value per share); 20,000
shares authorized, issued and outstanding as of July 3, 2004
and June 28, 2003
Common stock warrants 8,596 8,596
Accumulated other comprehensive income 74 160
Accumulated deficit (288,095) (278,175)
--------- ---------
Total stockholders' deficit (279,417) (269,411)
--------- ---------
Total liabilities and stockholders' deficit $ 75,862 $ 78,089
========= =========
See notes to consolidated financial statements.
29
LPA HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(IN THOUSANDS OF DOLLARS)
53 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JULY 3, 2004 JUNE 28, 2003 JUNE 29, 2002
--------------- --------------- ---------------
Revenue $ 383,491 $ 390,165 $ 391,205
Operating expenses:
Salaries, wages and benefits 214,844 214,414 215,572
Facility lease expense 44,924 45,652 45,554
Depreciation and amortization 8,776 10,372 14,664
Restructuring charges (recoveries) (Note 12) (864) 4,908 3,208
Asset impairments (Note 13) 692 3,057 57,436
Provision for doubtful accounts 2,490 2,802 2,951
Other 91,165 103,280 110,130
--------------- --------------- ---------------
Total operating expenses 362,027 384,485 449,515
--------------- --------------- ---------------
Operating income (loss) 21,464 5,680 (58,310)
Interest expense
Interest on debt 19,865 21,509 21,902
Dividends and accretion on Series A preferred stock
(Note 8) 10,489 - -
--------------- --------------- ---------------
Total interest expense 30,354 21,509 21,902
Interest income (43) (127) (204)
--------------- --------------- ---------------
Net interest expense 30,311 21,382 21,698
--------------- --------------- ---------------
Loss before income taxes (8,847) (15,702) (80,008)
Provision (benefit) for income taxes 66 246 (3,236)
--------------- --------------- ---------------
Net loss (8,913) (15,948) (76,772)
--------------- --------------- ---------------
Other comprehensive loss:
Derivative adjustments reclassified into operations (86) (86) (85)
--------------- --------------- ---------------
Total other comprehensive loss (86) (86) (85)
--------------- --------------- ---------------
Comprehensive loss $ (8,999) $ (16,034) $ (76,857)
=============== =============== ===============
See notes to consolidated financial statements.
30
LPA HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS OF DOLLARS)
CLASS A AND B
-----------------------
COMMON STOCK
----------------------- ACCUMULATED TOTAL
NUMBER ACCUMULATED OTHER COMPRE- STOCKHOLDERS'
OF SHARES AMOUNT WARRANTS DEFICIT HENSIVE INCOME DEFICIT
--------- ---------- ---------- ------------ -------------- -------------
Balance, June 30, 2001 584,985 $ 6 $ 8,596 $ (167,704) $ 331 $ (158,771)
========= ========== ========== ============ ============ ============
Amounts reclassified into operations (85) (85)
Preferred stock dividend and accretion (8,026) (8,026)
Net loss (76,772) (76,772)
--------- ---------- ---------- ------------ ------------ ------------
Balance, June 29, 2002 584,985 6 8,596 (252,502) 246 (243,654)
========= ========== ========== ============ ============ ============
Amounts reclassified into operations (86) (86)
Exercise of stock options 208,418 2 2
Preferred stock dividend and accretion (9,725) (9,725)
Net loss (15,948) (15,948)
--------- ---------- ---------- ------------ ------------ ------------
Balance, June 28, 2003 793,403 $ 8 $ 8,596 $ (278,175) $ 160 $ (269,411)
========= ========== ========== ============ ============ ============
Amounts reclassified into operations (86) (86)
Preferred stock dividend and accretion (1,007) (1,007)
Net loss (8,913) (8,913)
--------- ---------- ---------- ------------ ------------ ------------
Balance, July 3, 2004 793,403 $ 8 $ 8,596 $ (288,095) $ 74 $ (279,417)
========= ========== ========== ============ ============ ============
See notes to consolidated financial statements
31
LPA HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
53 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JULY 3, 2004 JUNE 28, 2003 JUNE 29, 2002
------------ ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,913) $ (15,948) $ (76,772)
Adjustments to reconcile net loss to net cash from operating activities
Asset impairments 692 3,057 57,436
Restructuring (recoveries) charges (864) 4,908 3,208
Depreciation and amortization 8,776 10,372 14,664
Dividends and accretion on Series A preferred stock (Note 8) 10,489 -
Loss on sales and disposals of property and equipment 211 90 29
Other non cash items 948 1,925 867
Changes in assets and liabilities:
Accounts receivable (446) 201 595
Insurance deposits (1,035) (4,477) (3,154)
Supplies inventory (874) (120) 3,391
Other prepaid expenses 18 612 1,438
Refundable taxes 17 472 53
Accounts payable (755) 376 621
Accrued salaries, wages and other payroll costs 2,276 1,210 235
Accrued property and sales taxes (272) 260 246
Accrued interest payable 15 (137) (108)
Other current liabilities 2,030 (2,206) 2,171
Accrued insurance liabilities 144 2,861 2,177
Reserve for closed schools (1,972) (3,268) (3,238)
Other changes in assets and liabilities, net (108) (308) 542
------------ ------------ ------------
Net cash provided by (used for) operating activities 10,377 (120) 4,401
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (8,373) (5,594) (9,629)
Proceeds from sale of assets 1,001 1,487 838
------------ ------------ ------------
Net cash used for investing activities (7,372) (4,107) (8,791)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of term loan and capital lease obligations (3,180) (3,083) (1,917)
Net (repayments) borrowings under the Revolving Credit Agreement (8,095) 1,931 4,164
Deferred financing costs - (496) (745)
Proceeds from issuance of common stock, redeemable preferred
stock and warrants, net of expenses 5,001 745 15,000
Overdrafts due bank 734 (1,436) (1,434)
------------ ------------ ------------
Net cash (used for) provided by financing activities (5,540) (2,339) 15,068
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,535) (6,566) 10,678
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,526 16,092 5,414
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,991 $ 9,526 $ 16,092
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 18,854 $ 19,585 $ 19,917
Income taxes 49 138 184
Non-cash investing and financing activities:
Capital lease obligations 1,470 1,400 801
See notes to consolidated financial statements.
32
LPA HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
The consolidated financial statements presented herein include LPA Holding
Corp. (Parent), and its wholly owned subsidiary, La Petite Academy, Inc.
(La Petite), and La Petite's wholly owned subsidiaries: Bright Start Inc.
(Bright Start), and LPA Services, Inc. (Services). Parent, consolidated
with La Petite, Bright Start and Services, is referred to herein as the
Company.
On March 17, 1998, LPA Investment LLC (LPA), a Delaware limited liability
company, and Parent entered into an Agreement and Plan of Merger pursuant
to which a wholly owned subsidiary of LPA was merged into Parent (the
Recapitalization). LPA is the direct parent company of Parent and an
indirect parent La Petite. LPA is owned by an affiliate of J.P. Morgan
Partners LLC (JPMP) and by an entity controlled by Robert E. King, a
director of La Petite and Parent.
The Company offers educational, developmental and childcare programs that
are available on a full-time or part-time basis, for children between six
weeks and twelve years old. The Company's Academies are located in 36
states and the District of Columbia, primarily in the southern, Atlantic
coastal, mid-western and western regions of the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - Over each of the past three years the Company has
experienced significant losses before income taxes. In addition, as shown
in the accompanying financial statements, the Company has a working
capital and stockholders' deficit as of July 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 8 to the accompanying 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 July 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, 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. In
addition, the Company has a debt service requirement of $38.5 million due
in fiscal year 2006. The Company is currently pursuing various options to
restructure or refinance the Company's long-term indebtedness through an
amendment or refinancing of the Credit Agreement. However, there can be no
assurance that the Company will be able to amend or refinance the Credit
Agreement in a timely manner or on satisfactory terms, if at all, prior to
being required to make the debt service payment required in fiscal year
2006.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Parent and its wholly-owned subsidiary, La Petite,
and La Petite's wholly-owned subsidiaries, Bright Start and Services,
after elimination of all significant inter-company accounts and
transactions.
33
FISCAL YEAR END - The Company utilizes a 52 or 53-week fiscal year ending
on the Saturday closest to June 30. Fiscal year 2004 was a 53 week year
ended July 3, 2004.
USE OF ESTIMATES - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Significant
estimates include the reserve for bad debts, reserve for closed schools,
asset impairments, self insurance reserves, and depreciation and
amortization.
CASH EQUIVALENTS - The Company's cash equivalents consist of commercial
paper and money market funds with original maturities of three months or
less.
INSURANCE DEPOSITS - 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.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - The Company calculates allowances for
estimated losses resulting from the inability of customers to make
required payments. The Company assesses the credit worthiness of its
customers based on multiple sources of information and analyzes such
factors as historical bad debt experience, publicly available information
regarding customers and the inherent credit risk related to them, current
economic trends and changes in customer payment terms or payment patterns.
SUPPLIES INVENTORY- The Company's inventory consists primarily of various
supplies, such as food, books, small equipment and office supplies, which
are used in the operation of the Academies. The Company estimates the
value of supplies on hand based on recent purchases and the related usage
periods of those supplies.
PROPERTY AND EQUIPMENT - Buildings, furniture and equipment are
depreciated over the estimated useful lives of the assets using the
straight-line method. Leasehold improvements are depreciated over the
lesser of the estimated useful lives of the assets or the remaining life
of the lease using the straight-line method. For financial reporting
purposes, buildings are generally depreciated over 29 to 40 years,
furniture and equipment over three to 10 years and leasehold improvements
over five to 15 years.
Maintenance and repairs are charged to expense as incurred. The cost of
additions and improvements is capitalized and depreciated over the
remaining useful lives of the assets. The cost and accumulated
depreciation of assets sold or retired are removed from the accounts, and
any gain or loss is recognized in the year of disposal, except gains and
losses on property and equipment that have been sold and leased back,
which are recognized over the terms of the related lease agreements.
GOODWILL - The excess of the purchase price over the fair value of assets
and liabilities acquired related to the acquisitions of La Petite and
Bright Start were being amortized over periods of 30 years and 20 years,
respectively, on the straight-line method. As discussed in Note 13, the
Company wrote-off the unamortized goodwill balance in fiscal year 2002.
OTHER ASSETS - Other assets include real estate property held for sale,
the deferred loss on real estate sale-leaseback transactions, deposits for
rent and utilities, and deferred financing costs. The loss on
sale-leaseback transactions is being amortized over the lease term.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews long-lived assets
and certain identifiable intangibles for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. If the carrying amount is not recoverable
34
and the fair value is less than the carrying amount of the asset, a loss
is recognized for the difference. Fair value is determined based on market
quotes, if available, or is based on valuation techniques (See Note 13).
INCOME TAXES - The Company uses the asset and liability method of
accounting for deferred income taxes. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. This method also requires the recognition
of future tax benefits such as net operating loss carry forwards, to the
extent that realization of such benefits is more likely than not. Deferred
tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
FINANCIAL INSTRUMENTS - At July 3, 2004, the carrying values of the
Company's financial instruments, with the exception of the Company's
Senior Notes, preferred stock, and convertible redeemable participating
preferred stock, approximate fair value. The estimated fair value of the
Senior Notes was $107.3 million and $87.0 million at July 3, 2004 and June
28, 2003, respectively. Estimates of fair value for the Senior Notes are
obtained from independent broker quotes. There is not an active market for
the Company's preferred stock. Management estimates that the Series A and
Series B preferred stock had no fair value at July 3, 2004 and June 28,
2003.
RECOGNITION OF REVENUES AND PRE-OPENING EXPENSES - Tuition revenue, net of
discounts, and other revenues are recognized as services are performed.
Certain fees and tuition revenue may be received in advance of services
being rendered, in which case the fee revenue is deferred and recognized
over the expected service period. At July 3, 2004 and June 28, 2003,
deferred registration fees and tuition revenue were $4.4 million and $3.1
million, respectively. Expenses associated with opening new Academies are
charged to expense as incurred.
ADVERTISING COSTS - The Company expenses the production costs of
advertising the first time the advertising takes place, except for prepaid
advertising, which is capitalized and amortized over its expected period
of future benefits. At July 3, 2004, the Company had $0.3 million in
advertising assets. At June 28, 2003, the Company had no advertising
assets. Advertising expense was $4.4 million, $4.3 million and $7.3
million for the 53 weeks ended July 3, 2004 and the 52 weeks ended June
28, 2003 and June 29, 2002, respectively.
SELF-INSURANCE PROGRAMS - The Company is self-insured for certain levels
of general liability, workers' compensation, auto and employee medical
coverage. Estimated costs of these self-insurance programs are accrued at
the value of projected settlements for known and anticipated claims
incurred.
STOCK-BASED COMPENSATION - The Company accounts for stock compensation
awards under Accounting Principles Board ("APB") Opinion No. 25 that
requires compensation cost to be recognized based on the excess, if any,
between the market price of the stock at the date of grant and the amount
an employee must pay to acquire the stock. The Company has disclosed the
pro forma net income (loss) determined under the fair value method in
accordance with Statement of Financial Accounting Standards ("SFAS) No.
123.
There were no options granted in fiscal 2004. The weighted average fair
value at date of grant for options granted during fiscal year 2003 was
$0.00. Had compensation cost for these options been recognized as
prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," it
would not have had a material effect on the Company's results of
operations. The Company is privately owned and there is no market for its
stock. The estimated compensation element is based on the time value of
money at the U.S. Treasury rates assuming that the value of the stock will
be at least equal to the grant price when fully exercisable. The estimated
compensation expense is assumed to be amortized over the vesting periods.
35
SEGMENT REPORTING - The Company has determined that it currently operates
entirely in one segment.
DERIVATIVE FINANCIAL INSTRUMENTS - Effective July 2, 2000, the Company
adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, which establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. All
derivatives, whether designated in hedging relationships or not, are
required to be recorded on the balance sheet at fair value. If the
derivative is designated as a fair value hedge, the changes in the fair
value of the derivative and of the hedged item attributable to the
effective portion of the hedged risk are recognized in earnings. If the
derivative is designated as a cash flow hedge, the effective portion of
changes in the fair value of the derivative are recorded in other
comprehensive income and are recognized in the income statement when the
hedged item affects earnings. Ineffective portions of changes in the fair
value of cash flow hedges are recognized in earnings. Changes in fair
value of derivative instruments that do not meet hedge accounting criteria
are recorded as a component of current operations. The deferred gains or
losses are reflected on the balance sheet in other current and noncurrent
liabilities or assets. Upon early termination of a financial instrument,
gains or losses are deferred and amortized as adjustments to the hedged
asset or liability, as it affects the income statement, over the period
covered by the terminated financial instrument.
Derivative financial instruments were utilized by the Company in the
management of its interest rate exposures. The Company did not use
derivative financial instruments for trading or speculative purposes. The
Company was exposed to credit risk on derivative instruments, limited to
the net interest receivable and the fair market value of the derivative
instrument had the counter-party failed. Credit risk was managed through
an evaluation of the credit worthiness of counter-parties and continuing
review and monitoring of counter-parties. The Company was also exposed to
market risk from derivative instruments when adverse changes in interest
rates occurred. Market risk was monitored and controlled through adherence
to financial risk policies and periodic review of open positions. The
adoption of SFAS No. 133 on July 2, 2000 resulted in a transition gain
recorded in other comprehensive income of $0.8 million ($0.5 million net
of taxes) resulting from the fair value adjustment of interest rate
collars that were used to hedge cash flows associated with variable rate
debt (see Note 4b). Additionally, the fair value adjustment to record an
interest rate swap and related collar resulted in a $3.5 million ($2.1
million net of tax) charge to earnings which was offset by a corresponding
gain of $3.5 million ($2.1 million net of tax) on fixed rate senior notes
(see Note 4a).
The aforementioned interest rate agreements did not qualify for hedge
accounting on an ongoing basis. Accordingly, such contracts were marked to
market subsequent to the adoption of SFAS No. 133. The adjustment recorded
upon transition to the carrying value of the fixed rate debt was being
amortized to interest expense through May 15, 2003. The variable rate debt
transition gain recorded as the only component of accumulated other
comprehensive income is reclassified into interest expense over the
remaining life of the related contract, which matures on May 2005.
During both fiscal years ended July 3, 2004 and June 28, 2003,
approximately $86,000 net of taxes, was reclassified from accumulated
other comprehensive income into interest expense.
The Company had no derivative financial instruments as of July 3, 2004.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In May 2003, the Financial
Accounting Standards Board ("FASB") issued 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
36
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 consolidated balance sheet as of July 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 53
weeks ended July 3, 2004, the Company recognized $10.5 million in
dividends and accretion on the Series A preferred stock as interest
expense, while during the 52 weeks ended June 28, 2003, the Company
recognized a $9.0 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 consolidated
balance sheet as of July 3, 2004, the Series B 5% convertible redeemable
participating preferred stock continues to be classified between
liabilities and equity.
RECLASSIFICATIONS - Certain reclassifications to prior year amounts have
been made in order to conform to the current year presentation.
3. NON-CURRENT ASSETS
Insurance deposits represent cash held by insurance carriers as security
for the self-insured portion of the Company's workers compensation,
general liability and automobile insurance coverage.
Other non-current assets consist of the following in thousands of dollars:
JULY 3, JUNE 28,
2004 2003
--------- --------
Deferred financing costs $ 10,010 $ 10,010
Accumulated amortization (6,642) (5,501)
-------- --------
3,368 4,509
Other (a) 1,965 2,887
-------- --------
$ 5,333 $ 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.
37
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following in
thousands of dollars:
JULY 3, JUNE 28,
2004 2003
--------- ---------
Senior Notes, 10.0% due May 15, 2008 (a) $ 145,000 $ 145,000
Borrowings under Credit Agreement (b) 44,002 53,588
Capital lease obligations 1,600 1,819
--------- ---------
190,602 200,407
Less current maturities of long-term
debt and capital lease obligations (5,871) (2,499)
--------- ---------
$ 184,731 $ 197,908
========= =========
a) The Senior Notes mature on May 15, 2008. Interest is payable semi-annually
on May 15 and November 15 of each year. Commencing May 15, 2003, the
Senior Notes are redeemable at various redemption prices at Parent and La
Petite's option. The Senior Notes are joint and several obligations of
Parent and its 100% owned subsidiary, La Petite, as co-issuers, and are
fully and unconditionally guaranteed on a joint and several basis by all
of La Petite's 100% owned subsidiaries, namely, Bright Start and Services.
Parent has no independent assets or operations. The Senior Notes contain
certain covenants that, among other things, limit La Petite's ability to
incur additional debt, pay cash dividends to Parent, transfer or sell
assets, incur liens, enter into transactions with affiliates and merge
with or into, consolidate with or transfer all or substantially of its
assets to, other persons. In addition, the Senior Notes limit Parent's
ability to merge with or into, consolidate with or transfer all or
substantially all of its assets to, other persons. Except for these
provisions in the Senior Notes and the provisions in the Credit Agreement
described in the next paragraph, there are no restrictions on the ability
of Parent or La Petite to obtain funds from its subsidiaries by dividend
or loan.
b) On May 11, 1998 the Company entered into an agreement (the Credit
Agreement) providing for a term loan facility in the amount of $40.0
million and a revolving credit agreement for working capital and other
general corporate purposes in the amount of $25 million. Borrowings under
the Credit Agreement are secured by substantially all of the assets of
Parent, La Petite and its subsidiaries. Loans under the Credit Agreement
bear an interest rate per annum equal to (at the Company's option): (i) an
adjusted London inter-bank offered rate (LIBOR) not to be less than an
amount equal to 2.5% per annum, plus a percentage based on the Company's
financial performance or (ii) a rate equal to the higher of The Chase
Manhattan Bank's published prime rate, a certificate of deposit rate plus
1%, or the Federal Funds rate plus 1/2 of 1% plus in each case a
percentage based on the Company's financial performance. The Company is
required to pay fees of 0.5% per annum of the unused portion of the Credit
Agreement plus letter of credit fees, annual administration fees and agent
arrangement fees. The Credit Agreement contains certain covenants that,
among other things, limit La Petite's and Parent's ability to incur
additional debt, and limit La Petite's ability to pay cash dividends or
make certain other restricted payments. In particular under the Credit
Agreement, Parent may not incur any intercompany indebtedness and La
Petite's ability to pay dividends to Parent is limited to dividends which
are used by Parent to pay (i) expenses for administrative, legal and
accounting services in an amount not to exceed $500,000 per year and (ii)
franchise fees and taxes.
The Company was not in compliance with certain of the financial and
informational covenants during the first quarter of fiscal year 2003 and
each of the quarterly periods in fiscal year 2002. The Company received
limited waivers of noncompliance with the foregoing financial and
informational covenants through February 7, 2003. Amendment No. 5 to the
Credit Agreement dated as of February 10, 2003 permanently waived such
defaults.
38
On February 10, 2003, Parent, La Petite and its senior secured lenders
entered into Amendment No. 5 to the Credit Agreement. The amendment waived
the existing defaults for the first quarter of fiscal year 2003 as well as
existing defaults in fiscal years 1999 through 2002 of Parent and La
Petite, extended the final maturity of the Credit Agreement by one year to
May 11, 2006, revised the amortization schedule to account for the
additional one-year extension and revised and set, as applicable,
financial covenants (such as maximum leverage ratio and minimum fixed
charge coverage ratio) for fiscal years 2003 through 2006. As a condition
to the effectiveness of Amendment No. 5, Parent was required to obtain
contingent equity commitments from its existing stockholders for an amount
equal to $14,500,000 (see Note 8 to the consolidated financial
statements). Pursuant to Amendment No. 5, none of the proceeds, if any,
received by Parent as a result of the contingent equity commitments is
required to be used to prepay the term loans outstanding under the Credit
Agreement.
During fiscal year 2003, the Company was not in compliance with certain of
the informational covenants contained in the Credit Agreement. The Company
obtained limited waivers of non-compliance with such informational
covenants through July 31, 2003. Amendment No. 6 to the Credit Agreement
dated as of July 31, 2003, permanently waived such defaults.
On July 31, 2003, Parent, La Petite and its senior secured lenders entered
into Amendment No. 6 to the Credit Agreement. The amendment permanently
waived existing third and fourth quarter fiscal 2003 defaults of Parent
and La Petite in connection with (a) the failure to deliver timely
financial information to the senior secured lenders; (b) the failure to
deliver timely information regarding purchases of material assets to the
senior secured lenders; and (c) the failure to file certain reports with
the Securities and Exchange Commission. Additionally, Amendment No. 6
revised the definition of Consolidated EBITDA in the Credit Agreement.
As of July 3, 2004, the Credit Agreement had a maturity date of May 2006
and principal payments due under the term loan are $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 percentage of excess cash flow (as defined). As
July 3, 2004, there was $11.0 million outstanding under the Revolving
Credit Facility. La Petite had outstanding letters of credit in an
aggregate amount of $5.0 million, and $9.0 million available for working
capital purposes under the Revolving Credit Facility.
Scheduled maturities and mandatory prepayments of long-term debt and capital
lease obligations during the five years subsequent to July 3, 2004, adjusted for
the impact of the amendment of the Credit Agreement, are as follows (in
thousands of dollars):
CAPITAL LEASES
-------------------------- LONG-TERM
FISCAL YEAR ENDING: COMPUTERS VEHICLES DEBT TOTAL
2005 $ 11 $ 934 $ 5,500 $ 6,445
2006 2 428 38,502 38,932
2007 - 177 - 177
2008 - 48 145,000 145,048
2009 and thereafter - - - -
------------ ------------ ------------ ------------
$ 13 $ 1,587 $ 189,002 $ 190,602
============ ============ ============ ============
39
5. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following in thousands of
dollars:
JULY 3, JUNE 28,
2004 2003
---------- --------
Unfavorable leases (a) $ 638 $ 831
Reserve for closed schools (b) 573 2,329
Deferred severance (c) 502 705
Long-term insurance liabilities (d) 6,963 7,536
---------- --------
$ 8,676 $ 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
amortized over the average remaining life of the leases.
(b) The reserve for closed schools includes the long-term liability related
primarily to leases for schools that were closed and are no longer
operated by the Company.
(c) On December 11, 2002, the Company entered into a Separation Agreement with
the Company's former Chief Executive Officer and President. The long-term
portion of the Company's total contractual obligations pursuant to the
Separation Agreement is $0.5 million as of July 3, 2004.
(d) Long-term insurance liabilities reflect the Company's obligation for
reported but not paid, and incurred but not reported, workers'
compensation, auto and general liability claims.
6. INCOME TAXES
The provision (benefit) for income taxes recorded in the Consolidated
Statements of Operations and Comprehensive Loss consisted of the following
(in thousands of dollars):
53 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JULY 3, JUNE 28, JUNE 29,
2004 2003 2002
---------- ---------- ----------
Current:
Federal $ - $ 46 $ (3,412)
State 66 200 176
---------- ---------- ----------
Total 66 246 (3,236)
---------- ---------- ----------
Deferred:
Federal - - -
State - - -
---------- ---------- ----------
Total - - -
---------- ---------- ----------
$ 66 $ 246 $ (3,236)
========== ========== ==========
40
A reconciliation between the statutory federal income tax rate and the
effective income tax rate is as follows (in thousands of dollars):
53 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JULY 3, JUNE 28, JUNE 29,
2004 2003 2002
-------- -------- --------
Expected tax benefit at federal statutory
rate of 35% $ (3,097) $ (5,495) $(28,003)
State income tax benefit, net of federal income
tax effect 77 (879) (4,480)
Goodwill amortization and impairment - - 22,593
Change in effective rate 1,268 - -
Preferred stock dividend 3,671 - -
Tax credits (91) (154) (526)
Valuation allowance adjustment (2,538) 6,316 6,255
Other 776 458 925
-------- -------- --------
Total $ 66 $ 246 $ (3,236)
======== ======== ========
Deferred income taxes result from differences between the financial
reporting and income tax basis of the Company's assets and liabilities.
The sources of these differences and their cumulative tax effects at July
3, 2004 and June 28, 2003 are estimated as follows (in thousands of
dollars):
JULY 3, JUNE 28,
2004 2003
-------- --------
Current deferred taxes:
Accruals not currently deductible $ 6,939 $ 6,280
Supplies (1,494) (1,078)
Prepaids and other 211 249
-------- --------
Gross current deferred tax assets 5,655 5,451
Noncurrent deferred taxes:
Unfavorable leases 249 337
Insurance reserves 2,716 3,059
Reserve for closed academies 224 946
Operating losses and tax credit carry forwards 13,934 14,656
Property and equipment 6,675 7,472
Intangible assets 252 264
Original issue discount 572 899
Derivative financial instruments 105 (257)
Other 521 614
-------- --------
Gross noncurrent deferred tax assets 25,247 27,990
-------- --------
Total gross deferred tax assets 30,903 33,441
Less valuation allowance (30,903) (33,441)
-------- --------
Net deferred tax assets $ - $ -
======== ========
The Company determined that based on cumulative historical pretax losses,
it was more likely than not that the deferred tax assets as of July 3,
2004 and June 28, 2003 would not be realized. Therefore, the Company has
recorded a valuation allowance to fully reserve those deferred tax assets
at both fiscal 2004 and 2003 year-end. The provision for income taxes at
July 3, 2004 includes a $2.5 million reduction of the valuation allowance
and the provision for income taxes at June 28, 2003 includes a $6.3
million increase in the valuation allowance.
The Company has federal net operating loss carry-forwards and tax credit
carry-forwards of $29.8 million and $2.3 million, respectively. These
carry-forwards expire in fiscal years 2005 through 2024.
41
7. LEASES
Academy facilities are leased for terms ranging from 15 to 20 years. The
leases provide renewal options and require the Company to pay utilities,
maintenance, insurance and property taxes. Some leases provide for annual
increases in the rental payment and many leases require the payment of
additional rentals if operating revenue exceeds stated amounts. These
additional rentals range from 2% to 10% of operating revenue in excess of
the stated amounts and are recorded as rental expense. Vehicles are also
rented under various lease agreements, most of which are cancelable within
30 days after a one-year lease obligation. Substantially all facility
leases and 68% of the vehicle leases are operating leases. Rental expenses
for these leases were $46.9 million, $48.7 million, and $50.9 million, for
the 53 weeks ended July 3, 2004 and the 52 weeks ended June 28, 2003, and
June 29, 2002, respectively. Contingent rental expense of $1.6 million,
$1.5 million, and $2.0 million were included in rental expense for the 53
weeks ended July 3, 2004 and the 52 weeks ended June 28, 2003, and June
29, 2002, respectively.
Aggregate minimum future rentals payable under facility leases as of July
3, 2004 were as follows (in thousands of dollars):
Fiscal year ending:
2005 $ 41,812
2006 36,576
2007 27,827
2008 21,288
2009 15,881
2010 and thereafter 51,884
----------
$ 195,268
----------
While the Company is liable for maintenance, insurance and other similar
costs under most of its leases, such costs are not included in the future
minimum lease payments.
8. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
The authorized stock of Parent as of July 3, 2004 consists of:
(i) 45,000 shares of Series A 12% mandatorily redeemable preferred
stock, $0.01 par value, (Series A preferred stock) all of which were
issued and outstanding as of July 3, 2004 and June 28, 2003. 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 $86.9 million and $77.2
million as of July 3, 2004 and June 28, 2003, respectively. Accrued
dividends were $41.9 million and $32.2 million at July 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.
42
As discussed in Note 2 above, as of July 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 53 weeks
ended July 3, 2004, the Company recognized $10.5 million in
dividends and accretion on the Series A preferred stock as interest
expense, while in the 52 weeks ended June 28, 2003, the Company
recognized a $9.0 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.
(ii) 13,645,000 shares of Series B 5% convertible participating
redeemable preferred stock, $0.01 par value, (Series B preferred
stock) of which 9,541,968 and 7,241,490 shares were issued and
outstanding as of July 3, 2004 and June 28, 2003, respectively. The
Series B preferred stock votes on an "as-converted" basis with the
Class A common stock and is redeemable at the holders' option, at
any time on or after May 11, 2009. Dividends at the rate of 5.0% per
annum are cumulative and if not paid on the June 30 or December 31
semi-annual preferred stock dividend dates are added to the
liquidation value. The liquidation value was $22.7 million and $16.7
million as of July 3, 2004 and June 28, 2003, respectively. Accrued
dividends were $2.0 million and $1.0 million at July 3, 2004 and
June 28, 2003, respectively. The Series B preferred stock may be
converted into shares of the Company Class A common stock at any
time at the then applicable conversion price, as defined in the
purchase agreement, and all shares will automatically convert into
shares of the Company Class A common stock (i) upon an election to
so convert by holders of a majority of the Series B preferred stock
or (ii) immediately prior to the consummation of a qualified initial
public offering of common stock. The conversion rate was $2.174 as
of July 3, 2004. 13,645,000 shares of Class A common stock has been
reserved for the conversion of the Series B preferred stock. The
Series B preferred stock contains certain restrictive provisions
that limit the ability of Parent to pay cash dividends.
(iii) 17,500,000 shares of Class A common stock, $0.01 par value, (Class A
common stock) of which 773,403 shares were issued and outstanding as
of July 3, 2004 and June 28, 2003. At July 3, 2004, 526,582 shares
of Class A common stock were reserved for issuance under the 1998
Stock Option Plan and the 1999 Non Employee Director Stock Option
Plan. The Class A common stock contains certain restrictive
provisions that limit the ability of Parent to pay cash dividends.
(iv) 20,000 shares of Class B common stock, $0.01 par value, (Class B
common stock) of which 20,000 shares were issued and outstanding as
of July 3, 2004 and June 28, 2003. The Class B common stock votes
together with the Class A common stock as a single class, with the
holder of each share of common stock entitled to cast one vote. The
holders of the Class B common stock have the exclusive right, voting
separately as a class, to elect one member to the Board of Directors
of Parent. Each share of the Class B common stock is convertible at
the option of the holder, at any time, into one share of Class A
common stock.
The outstanding warrants of Parent as of July 3, 2004 consist of:
(i) Warrants to purchase 64,231 shares of Class A common stock at a
purchase price of $0.01 per share any time on or before May 11,
2008. The warrants were issued in connection with the sale of Series
A preferred stock; the Company recognized discounts on the Series A
preferred stock by allocating $8.6 million to the warrants
representing the fair value of the warrants when issued.
(ii) Warrants to purchase 562,500 shares of Class A common stock at a
purchase price of $0.01 per share any time on or before May 11,
2009. The warrants were issued in connection with the sale of Series
B preferred stock in fiscal year 2002. The Company did not recognize
discounts on the Series B preferred stock, as the warrants had no
fair value when issued.
43
(iii) Warrants to purchase 1,692,423 shares of Class A common stock at a
purchase price of $0.01 per share any time on or before May 11,
2009. The warrants were issued in connection with the commitment by
LPA and other electing shareholders to purchase Series B preferred
stock. The Company did not recognize discounts on the Series B
preferred stock, as the warrants had no fair value when issued.
Pursuant to the terms of the Securities Purchase Agreement dated February
10, 2003, entered into by Parent and its stockholders who have elected to
exercise their respective preemptive rights (the "Electing Stockholders"),
as amended by Amendment No. 1 to the Securities Purchase Agreement dated
July 31, 2003, Parent may issue up to 6,669,734 shares of its Series B
convertible preferred stock. In connection with such prospective issuance,
Parent issued warrants to purchase 1,692,423 shares of its class A common
stock, pro rata to each Electing Stockholder. All of the proceeds received
by Parent from the issuance of the Series B preferred stock will be
contributed to La Petite as common equity and are expected to be used by
La Petite for general working capital and liquidity purposes.
The Electing Stockholders are only required to purchase shares of Series B
preferred stock if (a) the fixed charge coverage ratio at the end of a
fiscal quarter (calculated in accordance with the terms of the Credit
Agreement) is less than the fixed charge coverage ratio target set forth
in the Credit Agreement with respect to such fiscal quarter (a "Fixed
Charge Purchase"), (b) from time to time, the cash account of Parent and
its subsidiaries is negative (as calculated in accordance with the
provisions of Amendment No. 1 to the Securities Purchase Agreement) over a
historical 4 or 5 week review period (a "Cash Shortfall Purchase"), or (c)
(i) a payment default shall occur and be continuing under the Credit
Agreement or (ii) following payment in full of the obligations under the
Credit Agreement, a payment default shall occur and be continuing under
the Indenture for the Senior Notes (a "Payment Default Purchase"). The
aggregate number of shares to be purchased, if any, by the Electing
Stockholders pursuant to a Fixed Charge Purchase shall be purchased within
ten business days following the date that Parent is required to deliver
its quarterly or annual, as applicable, financial information to the
senior lenders pursuant to the terms of the Credit Agreement, and shall
equal the quotient obtained by dividing (x) the amount of cash which would
have been needed to increase the Parent's consolidated EBITDAR (as defined
in the Credit Agreement) to an amount which would have satisfied the fixed
charge coverage ratio target set forth in the Credit Agreement by (y)
$2.174. The aggregate number of shares to be purchased, if any, by the
Electing Stockholders pursuant to a Cash Shortfall Purchase shall be made
on the tenth business day after the end of each review period, and shall
equal (A) the sum of (x) the cash deficit and (y) $500,000, divided by (B)
$2.174, less (C) the number of shares purchased pursuant to Cash Shortfall
Purchases and Fixed Charge Purchases during the applicable review period.
The aggregate number of shares to be purchased by the Electing
Stockholders pursuant to a Payment Default Purchase shall be purchased
within five (5) business days after notice of such default is delivered to
the Electing Stockholders and shall equal (A) the amount of funds
necessary to cure the payment default under the Credit Agreement or the
Indenture for the Senior Notes, as applicable, divided by (B) $2.174. The
Electing Stockholders have the right to purchase shares of Series B
preferred stock at any time, in which case the aggregate number of shares
of Series B preferred stock to be purchased by the Electing Stockholders
with respect to a particular fiscal quarter or review period, as
applicable, shall be reduced by the number of shares of Series B preferred
stock purchased prior to the expiration of such fiscal quarter or review
period. The obligation of each Electing Stockholder to purchase shares of
Series B preferred stock shall expire on the earlier of (a) the date the
Electing Stockholders purchase an aggregate of 6,669,734 shares of Series
B preferred stock; and (b) the date the obligations (other than contingent
obligations and liabilities) of Parent and its subsidiaries under (i) the
Credit Agreement and (ii) the Indenture dated as of May 11, 1998, among
the Corporation and certain of its subsidiaries and PNC Bank, National
Association as trustee (as amended) are terminated.
LPA has committed to purchase, in accordance with the terms of the
Securities Purchase Agreement, 6,658,636 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
44
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 July 3, 2004,
the remaining contingent equity commitment from the stockholders of Parent
has been reduced to $8.8 million.
9. BENEFIT PLAN
The Company sponsors a defined contribution plan that was established on
January 1, 2001 (the "2001 Plan") for substantially all employees.
Eligible participants may make contributions to the 2001 Plan from 0% to
15% of their compensation (as defined). The Company may make contributions
at the discretion of the Board of Directors. The Company made no
contributions for fiscal years 2004 and 2003.
10. COMMITMENTS AND CONTINGENCIES
The Company has litigation pending which arose in the ordinary course of
business. Litigation is subject to many uncertainties and the outcome of
the individual matters is not presently determinable. It is management's
opinion that this litigation will not result in liabilities that would
have a material adverse effect on the Company's financial position, annual
results of operations or annual cash flows. The Company has employment
contracts with certain executive officers.
11. STOCK-BASED COMPENSATION
On August 27, 1995, the Board of Directors of Parent adopted the
"Non-Qualified Stock Option Agreement" (1995 Plan). Under the terms of the
1995 Plan, the Board of Directors in their sole discretion granted
non-qualified options for common stock of Parent to key executives of the
Company. Options were granted pursuant to an agreement at the time of
grant, and typically became exercisable in equal cumulative installments
over a five-year period beginning one year after the date of grant. All
such options granted expire on the tenth anniversary of the grant date. No
market existed for the common stock of Parent, but options were granted at
prices that, in the opinion of the Board of Directors, were equal to or
greater than the fair value of the stock at the time of grant.
Effective May 11, 1998, the Board of Directors of Parent adopted the "1998
Stock Option Plan" (1998 Plan). The 1998 Plan provides for the granting of
Tranche A and Tranche B options to purchase up to 60,074 shares of the
Parent's common stock. During the 2001 year, the Board of Directors of
Parent amended the 1998 Plan, increasing to 230,000 the number of shares
of the Parent's common stock that may be purchased. During the 2002 year,
the Board of Directors of Parent amended the 1998 Plan, increasing to
725,000 the number of shares of the Parent's common stock that may be
purchased. Tranche A options expire ten years from the date of grant and
become exercisable ratably over 48 months. Tranche B options expire ten
years from the date of grant and are exercisable only in the event of a
change in control or a registered public offering of common stock which
provides certain minimum returns (as defined).
On August 19, 1999, Parent adopted the 1999 Stock Option Plan for
Non-Employee Directors (1999 Plan). Under the terms of the 1999 Plan,
10,000 shares of Parent's common stock are reserved for issuance to
non-employee directors at prices that approximate the fair value of a
share of Parent's common stock at the date of issuance. Options vest
ratably on the last day of each month over four years following the date
of grant, if the person is a director on that day.
On August 26, 2002, the Company granted options to purchase 180,254 shares
of common stock of Parent at an exercise price of $0.01 to its then Chief
Operating Officer (subsequently promoted to Chief Executive Officer). On
August 26, 2002, the Company also granted options to purchase 270,381
shares of common stock of Parent at an exercise price of $0.01 to its
Chief Executive
45
Officer. In return for the grant of new options, the Chief Executive
Officer forfeited all previous option grants. In February 2003, the former
Chief Executive Officer exercised options to purchase 208,418 shares of
common stock of LPA Holding at an exercise price of $0.01 and 61,963
options were cancelled.
The 1995 Plan, the 1998 Plan, and the 1999 Plan were approved by the
shareholders of Parent.
Stock option transactions during the past three years have been as
follows:
1998 PLAN 1998 PLAN
----------------------- ---------------------
1995 PLAN TRANCHE A TRANCHE B 1999 PLAN
---------------------- ------------------------ ---------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
OPTIONS AVG. PRICE OPTIONS AVG. PRICE OPTIONS AVG. PRICE OPTIONS AVG. PRICE
------- ---------- ------- ---------- ------- ---------- ------- ----------
Options outstanding
at June 30, 2001 3,213 $ 21.97 189,610 $ 66.92 600 $ 133.83 3,900 $ 66.92
----- --------- ------- --------- ------ --------- ----- ---------
Granted
Exercised
Canceled 70,000 $ 66.92
----- --------- ------- --------- ------ --------- ----- ---------
Options outstanding
at June 29, 2002 3,213 $ 21.97 119,610 $ 66.92 600 $ 133.83 3,900 $ 66.92
----- --------- ------- --------- ------ --------- ----- ---------
Granted 450,635 $ 0.01
Exercised 208,418 $ 0.01
Canceled 131,773 $ 35.46
----- --------- ------- --------- ------ --------- ----- ---------
Options outstanding
at June 28, 2003 3,213 $ 21.97 230,054 $ 14.49 600 $ 133.83 3,900 $ 66.92
===== ========= ======= ========= ====== ========= ===== =========
Granted
Exercised
Canceled
----- --------- ------- --------- ------ --------- ----- ---------
Options outstanding
at July 3, 2004 3,213 $ 21.97 230,054 $ 14.49 600 $ 133.83 3,900 $ 66.92
===== ========= ======= ========= ====== ========= ===== =========
Options exercisable
at July 3, 2004 3,213 135,703 3,900
===== ======= ====== =====
Options available for
grant at June 3, 2004 271,512 14,416 6,100
===== ======= ====== =====
46
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------------------------------------------------------------------------------------------
1995 Plan:
$ 18.00 2,463 1.2 years $ 18.00 2,463 $ 18.00
$ 35.00 750 2.5 years $ 35.00 750 $ 35.00
- -------------------------------------------------------------------------------------------------
$ 18.00 to $ 35.00 3,213 1.5 years $ 21.97 3,213 $ 21.97
=================================================================================================
1998 Tranche A:
$ 66.92 49,800 5.8 years $ 66.92 49,331 $ 66.92
$ 0.01 180,254 8.8 years $ 0.01 86,372 $ 0.01
- -------------------------------------------------------------------------------------------------
$ 66.92 230,054 8.1 years $ 14.49 135,703 $ 24.33
=================================================================================================
1998 Tranche B
$133.83 600 3.9 years $133.83
=================================================================================================
1999 Plan
$ 66.92 3,900 5.1 years $ 66.92 3,900 $ 66.92
=================================================================================================
The Company accounts for all opt ions in accordance with APB Opinion No.
25, which requires compensation cost to be recognized only on the excess,
if any, between the fair value of the stock at the date of grant and the
amount an employee must pay to acquire the stock. Under this method, no
compensation cost has been recognized for stock options granted.
12. RESTRUCTURING CHARGES
In the 2004 year, the Company recorded adjustments to its previously
established restructuring reserves, which had the net effect of reducing
the reserves by $0.9 million. These adjustments included restructuring
charges of $0.5 million, primarily due to 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. In the 2004 year, the Company also recognized
restructuring charges of $0.1 million in connection with the closure of 6
schools. In the 2003 year, the Company recognized restructuring charges of
$7.4 million in connection with the closure of 73 schools and $0.4 million
in connection with the write-down to fair market value of real estate
properties held for disposal, offset by recoveries of $2.9 million
principally due to settlement of lease liabilities for less than the
recorded reserves. In the 2002 year, the Company recognized a
restructuring charge of $3.2 million in connection with the closure of
seven Academies and one divisional office. The charges consisted
principally of the present value of rent (net of anticipated sublease
income), real estate taxes, common area maintenance charges, and
utilities, the write-off of goodwill associated with closed Academies, and
the write-down of fixed assets to fair market value. Included in the
restructuring charges, were non-cash charges of $0.0 million, $1.7 million
and $1.6 million in fiscal years 2004, 2003 and 2002 respectively. As of
July 3, 2004, the remaining reserves for closed schools primarily reflect
the present value of future rent payments for closed facilities. The
leases on the closed facilities expire between fiscal year 2005 and 2014.
47
A summary of the restructuring reserve activity is as follows, with
dollars in thousands:
CLOSED SCHOOL
RESERVE
-------
Balance at June 30, 2001 $ 6,565
Reserves recorded in fiscal year 2002 3,208
Recoveries recorded in fiscal year 2002 -
Amount utilized in fiscal year 2002 (5,175)
-------
Balance at June 29, 2002 4,598
Reserves recorded in fiscal year 2003 7,788
Recoveries recorded in fiscal year 2003 (2,880)
Amount utilized in fiscal year 2003 (5,040)
-------
Balance at June 28, 2003 4,466
Reserves recorded in fiscal year 2004 620
Recoveries recorded in fiscal year 2004 (1,484)
Amount utilized in fiscal year 2004 (2,026)
-------
Balance at July 3, 2004 $ 1,576
=======
On the consolidated balance sheet, the current portion of the
restructuring reserve is presented in the reserve for closed academies
line item, and the long-term portion is included in the other long-term
liabilities line item.
13. ASSET IMPAIRMENTS
During fiscal years 2004 and 2003, the Company identified conditions,
including a projected current year operating loss as well as negative cash
flows in certain of the Company's schools, as indications that the
carrying amount of certain long-lived assets may not be recoverable. In
accordance with the Company's policy, management assessed the
recoverability of long-lived assets at these schools using a cash flow
projection based on the remaining useful lives of the assets. Based on
this projection, the cumulative cash flow over the remaining depreciation
or amortization period was insufficient to recover the carrying value of
the assets at certain of these schools. As a result, the Company
recognized impairment losses of $0.7 million and $3.1 million related to
property and equipment in fiscal 2004 and 2003, respectively. During
fiscal year 2002, the Company recognized asset impairment losses of $57.4
million. The Company identified conditions, including a projected current
year consolidated operating loss as well as negative cash flows in certain
of the Company's regional and division operations, as an indication that
the carrying amount of certain long-lived assets, primarily goodwill, may
not be recoverable. In accordance with the Company's policy, management
assessed the recoverability of those long-lived assets using a cash flow
projection based on the remaining useful life. Based on this projection,
the cumulative cash flow over the remaining depreciation or amortization
period was insufficient to recover the carrying value of the assets. In
addition, the Company evaluated the carrying-value of its remaining
goodwill in accordance with Accounting Principles Board Opinion No. 17 and
determined that the goodwill was fully impaired. As a result, the Company
recognized impairment losses of $57.4 million related to the long-lived
assets, of which $52.3 million related to goodwill and $5.1 million
related to property and equipment in fiscal 2002.
48
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of amounts reported in the Company's Quarterly
Reports on Form 10-Q.
13 WEEKS 12 WEEKS 12 WEEKS 16 WEEKS
ENDED ENDED ENDED ENDED
FISCAL YEAR 2004 JULY 3, APRIL JANUARY OCTOBER
IN THOUSANDS OF DOLLARS 2004 3, 2004 10, 2004 18, 2003
--------- --------- --------- ---------
Revenue $ 99,262 $ 90,617 $ 82,881 $ 110,731
Operating expenses:
Salaries, wages and benefits 55,081 50,342 45,859 63,563
Facility lease expense 10,557 10,427 10,426 13,514
Depreciation 2,092 1,996 2,016 2,672
Restructuring charges (recoveries) 180 (221) (857) 34
Asset impairments 692 - - -
Provision for doubtful accounts 608 394 772 716
Other 21,053 20,352 20,020 29,739
--------- --------- --------- ---------
Total operating expenses 90,263 83,290 78,236 110,238
--------- --------- --------- ---------
Operating income 8,999 7,327 4,645 493
Interest expense
Interest on debt 4,661 4,546 4,557 6,101
Dividends and accretion on Series 2,669 2,458 2,261 3,101
A preferred stock
Interest income (12) (11) (9) (11)
--------- --------- --------- ---------
Net interest expense 7,318 6,993 6,809 9,191
--------- --------- --------- ---------
Income (loss) before income taxes 1,681 334 (2,164) (8,698)
Provision (benefit) for income taxes (5) (66) 59 78
--------- --------- --------- ---------
Net income (loss) $ 1,686 $ 400 $ (2,223) $ (8,776)
========= ========= ========= =========
(continued)
49
12 WEEKS 12 WEEKS 12 WEEKS 16 WEEKS
ENDED ENDED ENDED ENDED
FISCAL YEAR 2003 JUNE 28, APRIL JANUARY OCTOBER
IN THOUSANDS OF DOLLARS 2003 5, 2003 11, 2003 19, 2002
--------- --------- --------- ---------
Revenue $ 93,128 $ 93,546 $ 86,653 $ 116,838
Operating expenses:
Salaries, wages and benefits 50,077 49,744 48,561 66,032
Facility lease expense 10,378 10,680 10,633 13,961
Depreciation and amortization 2,288 2,407 2,442 3,235
Restructuring charges 1,046 2,186 428 1,248
Asset impairments 3,057 - - -
Provision for doubtful accounts 605 649 710 838
Other 22,821 21,968 22,264 36,227
--------- --------- --------- ---------
Total operating expenses 90,272 87,634 85,038 121,541
--------- --------- --------- ---------
Operating income (loss) 2,856 5,912 1,615 (4,703)
Interest expense
Interest on debt 4,808 4,977 5,013 6,711
Interest income (14) (17) (22) (74)
--------- --------- --------- ---------
Net interest expense 4,794 4,960 4,991 6,637
--------- --------- --------- ---------
Income (loss) before income taxes (1,938) 952 (3,376) (11,340)
Provision (benefit) for income taxes (42) 59 151 78
--------- --------- --------- ---------
Net income (loss) $ (1,896) $ 893 $ (3,527) $ (11,418)
========= ========= ========= =========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
The Company maintains a set of disclosure controls and procedures (the
"Disclosure Controls") that are designed to ensure that information required to
be disclosed in the reports and filed under the Securities Exchange Act of 1934,
as amended ("Exchange Act"), is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms. The Company's
Disclosure Controls include, without limitation, those components of internal
controls over financial reporting ("Internal Controls") that provide reasonable
assurances that transactions are recorded as necessary to permit preparation of
the Company's financial statements in accordance with generally accepted
accounting principles.
As of July 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") and the Chief Financial Officer ("CFO"). This evaluation resulted in the
identification of certain material weaknesses in the Company's Internal Controls
primarily related to the lack of consistent understanding and compliance with
the Company's policies and procedures at several of its field locations, and
weaknesses in the information technology control environment.
50
Over the past year the Company has implemented compensating controls to mitigate
these weaknesses to ensure that information required to be disclosed in this
Annual Report on Form 10-K has been recorded, processed, summarized and reported
to its senior management. These compensating controls include, but are not
necessarily limited to, (i) increasing field academy management policy and
system training, (ii) increasing the number and the scope of financial field
audits of academies, (iii) implementation of a centralized sales audit function,
(iv) increasing divisional financial staff accountability to ensure field
adherence to financial policies and internal controls, and (v) the performance
of additional reconciliations and analytical reviews.
The Company is committed to continuing the process of identifying, evaluating
and implementing corrective actions, including enhancements to the Company's
field reporting systems and its information technology controls, where required
to improve the effectiveness of its Disclosure Controls on an overall basis.
The Company's Disclosure Controls, including the Company's Internal Controls,
are designed to provide a reasonable level of assurance that the stated
objectives are met. The Company's management, including the CEO and CFO, does
not expect that the Company's Disclosure Controls or Internal Controls will
prevent all errors and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
Based upon the Controls Evaluation, the CEO and CFO have concluded that, to the
best of their knowledge and after giving effect to the 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.
Other than the continuing impact of the corrective actions discussed above,
there have been no changes in the Company's internal control over financial
reporting that occurred during the Company's most recent fiscal quarter (the
Company's fourth fiscal quarter in the case of the annual report) that has
materially affected, or is reasonably likely to materially affect the Company's
internal control over financial reporting.
* * * * * * *
51
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and current position held by the
persons who are the directors and executive officers of the Company:
Name Age Position
- ---- --- --------
Stephen P. Murray ............................... 42 Chairman of the Board and Director
Gary A. Graves................................... 44 Chief Executive Officer, President, Chief Operating Officer and Director
Glenn H. Gage ................................... 62 Director
Terry D. Byers .................................. 50 Director
Robert E. King .................................. 69 Director
Kevin G. O'Brien ................................ 38 Director
Ronald L. Taylor ................................ 60 Director
Neil P. Dyment .................................. 49 Senior Vice President, Chief Financial Officer
Hugh W. Tracy ................................... 42 Vice President, Chief Information Officer
William C. Buckland ............................. 57 Vice President, People
Paul G. Kreuser ................................. 43 Vice President, Field Support Services
Gregory S. Davis ............................... 42 Vice President, General Counsel and Secretary
William H. Van Huis ............................. 47 Vice President, Chief Revenue Officer
Lisa J. Miskimins ............................... 43 Vice President, Central Region
Lawrence Appell ................................. 54 Vice President, Western Region
Stephanie L. Pasche.............................. 41 Vice President, Texas
Leah L. Oliva.................................... 42 Vice President, Florida
Rebecca L. Perry ................................ 49 Vice President, Montessori and Governmental Affairs
The business experience during the last five years and other information
relating to each executive officer and director of the Company is set forth
below.
Stephen P. Murray became the Chairman of the Board in January 2000 and has been
a Director of the Company since May 1998. Mr. Murray has been a General Partner
of J.P. Morgan Partners, LLC (JPMP) since 1994. From 1988 to 1994 Mr. Murray was
a Principal at JPMP. Prior thereto, he was a Vice President with the
Middle-Market Lending Division of Manufacturers Hanover. Mr. Murray has a BA
from Boston College and a MBA from Columbia Business School. He also serves as a
director of Cornerstone Brands, ERisk, The Excite Network, National Waterworks,
Inc., Pinnacle Foods Group, Inc., and Strongwood Holdings, Zoots, Inc. and is a
Board Observer at Cabela's Inc.
Gary A. Graves joined La Petite Academy in August 2002 as the Chief Operating
Officer and became President and Chief Executive Officer in December 2002. Prior
to joining the Company, Mr. Graves was Chief Operating Officer of InterParking,
Inc. from 1998 to 2001. From 1996 to 1998, he was Executive Vice President for
Boston Market, Inc. From 1989 to 1996, Mr. Graves held various positions in
Operations for PepsiCo. Prior to joining PepsiCo, Mr. Graves was a consultant
for McKinsey and Company. He has a BS in Chemical Engineering from the
University of Michigan and a MBA from the University of Chicago. Mr. Graves also
serves on the board for the Make-A-Wish Foundation of Illinois, having been
elected to the board in 2003.
Glenn H. Gage has been a Director of the Company since March 2003. From August
1998 until March 2001, Mr. Gage was the Senior Vice President and Chief
Financial Officer of National Steel Corporation. From 1995 until 1998, Glenn was
the Senior Vice President and Chief Financial Officer of Uarco Incorporated,
where he also served as a member of the Board of Directors. Until 1995, Mr. Gage
was a Partner with Ernst & Young. Mr. Gage has an MS in Accounting from the
University of California at Los Angeles and a BS in Accounting from the
California State University at Fresno. He is a CPA.
52
Terry D. Byers has been a Director of the Company since December 1998. Ms. Byers
has more than 20 years experience in information technology ranging from
hands-on systems design and development to executive management. She has
extensive experience in designing and architecting enterprise-level IT
Infrastructures, developing and integrating business information systems,
implementing large ERP applications, and developing and deploying
technology-based solutions to clients. Since 1996, Ms. Byers has been an
Executive Vice President and the Chief Technology Officer for Teleflora, LLC.
She holds a Bachelors of Business Administration degree in Computer Science from
the University of Central Oklahoma.
Robert E. King has been a Director of the Company since May 1998. Mr. King is
Chairman of Salt Creek Ventures, LLC, a private equity company he founded in
1994. Salt Creek Ventures, LLC is an organization specializing in equity
investments in technology and education companies. Mr. King is also Chairman of
Deltak edu, Inc. a company that invests in career-oriented for-profit colleges.
Mr. King has been involved over the past 33 years as a corporate executive and
entrepreneur in technology-based companies. From 1983 to 1994, he was President
and Chief Executive Officer of The Newtrend Group. Mr. King has participated as
a founding investor in five companies. Mr. King has a BA from Northwestern
University.
Kevin G. O'Brien has been a Director of the Company since May 2002. Mr. O'Brien
has been a Principal of JPMP since 2000. From 1994 to 2000, Mr. O'Brien was a
Vice President in the High Yield Capital Markets and High Yield Corporate
Finance Groups at Chase Securities Inc. (and prior to merging in 1996, Chemical
Securities, Inc.). From 1988 to 1992 he was a commissioned officer in the U.S.
Navy. Mr. O'Brien has a BA from the University of Notre Dame and a MBA from the
Wharton School of the University of Pennsylvania. He also serves as director of
National Waterworks, Inc and Pinnacle Foods Group, Inc.
Ronald L. Taylor has been a Director of the Company since April 1999. Mr. Taylor
has been President and CO-CEO of DeVry, Inc. since 1987 and, on July 1, 2004,
became CEO of DeVry, Inc. He is Chairman of the Proprietary Schools Advisory
Committee for the Illinois Board of Higher Education; a member of the Board of
Trustees for the Higher Learning Commission of the North Central Association of
Colleges and Schools. He serves on the Board of Directors of DeVry, Inc. and the
Better Business Bureau of Chicago & Northern Illinois, Inc. Mr. Taylor has a BA
from Harvard University and received his MBA from Stanford University.
Neil P. Dyment joined the Company in August 2003 as the Chief Financial Officer.
Prior to joining La Petite, Mr. Dyment was employed by Argus Management
Corporation from 2001 to 2003 providing financial consulting and interim
financial management services to companies undergoing restructuring. Mr. Dyment
served as interim Corporate Controller at the Company from June 2002 to December
2002 and has been providing other financial advisory services to the Company
since. Prior to joining Argus Management Corporation, Mr. Dyment was Plant
Manager for Chemfab Corporation from 1996 to 2000. Prior to rejoining Chemfab
Corporation in 1996, Mr. Dyment served in a variety of financial capacities for
various companies including Corporate Controller at Chemfab from 1986 - 1991 and
a variety of financial positions at Textron Corporation (formerly AVCO
Corporation) from 1977 to 1984. He has a BS in Business Administration with an
accounting major from Northeastern University.
Hugh W. Tracy joined the Company as the Chief Information Officer in July 2003.
Prior to joining La Petite, Mr. Tracy was the Chief Information Officer at
InterPark, Inc. from 1999-2002. From 1989-1998, Mr. Tracy held various positions
in Information Technology and Operations for McDonalds Corporation and its
licensees. He has a BS in Information and Computer Science from the Georgia
Institute of Technology (Georgia Tech) and an MBA from the Wharton School,
University of Pennsylvania.
William C. Buckland joined the Company in July 2001 as Vice President, People.
From 1993 to 2001, Mr. Buckland was Vice President, Human Resources of Allied
Van Lines, Inc. From 1990 to 1992, he was the Director, Human Resources for
SuperAmerica Group, a subsidiary of Ashland Oil. From 1969 to 1990 Mr. Buckland
held various operating and Human Resources positions with the Montgomery Ward
Company. He has a BBA from the University of Kentucky.
Paul G. Kreuser became Vice President, Field Support Services of the Company in
November of 2002,
53
with responsibility for the purchasing, facilities, engineering and fleet
operations. Mr. Kreuser joined the Company in 2001 as the Director of Operations
Support. From 1999 to 2000, Mr. Kreuser was the Director of Supply Chain for
Amazon.com. Prior to 1999, his experience included senior management positions
with DSC Logistics, Office Depot and Federal Express. Mr. Kreuser has a BS in
Mathematics from the University of Illinois.
Gregory S. Davis joined the Company in May 2003 as the Vice President, General
Counsel. He subsequently assumed the position of Corporate Secretary. Prior to
joining the Company, Mr. Davis was one of three Andersen Partners with lead
responsibility for the international firm's expansions and alliances. From
1991-2001, he was a Partner in Andersen's Legal Group, responsible for
litigation and risk management. Mr. Davis practiced commercial litigation in the
Chicago headquarters of Seyfarth, Shaw, Fairweather & Geraldson from 1987-1991.
He holds a BA from Indiana University and a J.D. from Boston University School
of Law.
William H. Van Huis joined the Company in December 2002 as the Chief Revenue
Officer. Prior to joining La Petite Academy, Mr. Van Huis was the Vice President
of Marketing for Childtime Childcare, Inc., from 1990 to 2001. From 1986 to 1990
Mr. Van Huis was National marketing Manager for Zebart International
Corporation/TKD North America, an automotive aftermarket firm. He holds a BA
from Michigan State University.
Lisa J. Miskimins became the Vice President of the Central Division of the
Company in June 2000. Ms. Miskimins is responsible for the supervision of 147
locations in 12 states. From 1997 to 2000, Ms. Miskimins was an Area Vice
President with supervisory responsibility for the operations of the Company in
eight midwestern states. She was a Divisional Director of 72 schools in three
states from 1994 to 1997. She began her career with the Company in 1983 as a
Preschool Teacher. Ms. Miskimins has a BA in Elementary Education and English.
Lawrence "Larry" Appell joined La Petite Academy as the Western Division Vice
President in January 2003. Mr. Appell is responsible for the supervision of 141
locations in 9 states. Prior to joining La Petite, Mr. Appell served as
President of the International Division of Futurekids, Inc., the world's largest
provider of technology education for children from 2000-2003. From 1995-2000 he
was the President of Westlake Management Co., LLC, a boutique investment capital
and business incubator, From 1983-1995 Mr. Appell held various senior management
positions with The H.J. Heinz Company in their Weight Watchers division and The
Quaker Oats Company in their Pritikin division. Mr. Appell was a management
consultant from 1974-1983. He has a BA from the City University of New York and
a MS in Counselor Education from St. John's University.
Stephanie L. Pasche joined La Petite Academy as the Vice President of the Texas
Division in April 2004. Ms. Pasche is responsible for the supervision of 83
locations in Texas. Ms. Pasche's background includes the position of Director of
Store Operations for Brookstone from 1994 to 2002. Ms. Pasche has a BA in
Business from the University of Northern Iowa.
Leah L. Oliva joined La Petite Academy as the Vice President of the Southeastern
Division in June 2004. Ms. Oliva is responsible for the supervision of 114
locations in Florida, Georgia, and Alabama. Prior to her joining La Petite
Academy, Ms. Oliva has 25 years experience in the Retail field working for
several internationally recognized name brands including London Fog Industries
and Esprit de Corp. Most recently she was with Build A Bear Workshop as
Bearitory Leader for the Florida and North Carolina stores. Ms. Oliva received
her Associate of the Arts from the University of South Florida.
Rebecca L. Perry is the Vice President, Montessori and Governmental Affairs for
the Company, having served in a variety of leadership roles from 2000-2003.
Previously, she was the Executive Vice President of Operations from 1997 to
2000. From 1993 to 1997, Ms. Perry was a Senior Vice President and Eastern
Operating Officer. From 1988 to 1993, she was Assistant Vice President of
Operations with supervisory responsibility for the operations of the Company in
14 southern and midwestern states. From 1985 to 1988, she served as Divisional
Director of Florida and from 1981 to 1985 she served as Regional Director of
Tampa. Prior to joining the Company, Ms. Perry held various positions in the
childcare industry. Ms. Perry studied childhood education at The University of
South Florida.
54
BOARD COMMITTEES AND COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has an Audit Committee consisting of Glenn H. Gage,
Stephen P. Murray and Kevin G. O'Brien, and a Compensation Committee consisting
of Stephen P. Murray and Robert E. King. The Audit Committee reviews the scope
and results of audits and internal accounting controls and all other tasks
performed by the Company's independent public accountants. The Compensation
Committee determines compensation for the executive officers and administers the
1998 Option Plan and the Non-Employee Director Plan. None of the Company's
executive officers has served as a director or member of the compensation
committee (or other committee forming an equivalent function) of any other
entity whose executive officers served as a director of or member of the
Compensation Committee of the Company's Board of Directors.
AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors has determined that Glenn H. Gage is an "audit committee
financial expert" as defined by Item 401(h) of Regulation S-K of the Exchange
Act and that he is "independent" as such term is used in Item 7(d)(iv) of
Schedule 14A under the Exchange Act assuming that the listing standards of the
The Nasdaq Stock Market, Inc. had applied.
COMPENSATION OF DIRECTORS
The members of the Board of Directors are reimbursed for out-of-pocket expenses
related to their service on the Board of Directors or any committee thereof. In
addition, members of the Board of Directors who are neither officers of the
Company nor employed by JPMP or any of its partners are entitled to receive an
attendance fee of $1,500 for each meeting attended.
On August 19, 1999, Parent adopted the LPA Holding Corp. 1999 Stock Option Plan
for Non-Employee Directors (1999 Plan). The purpose of the plan is to provide a
means for attracting, retaining, and incentivizing qualified directors. Under
the terms of the plan, 10,000 shares of Parent's common stock are reserved for
issuance to non-employee directors.
Non-employee directors may exercise their options to purchase shares of Parent's
common stock once those options have vested. One-forty eighth of the options
become vested on the last day of each month following the date of grant, if the
person is a director on that day. Each option entitles the director to purchase
one share of Parent's common stock. The exercise price will equal the fair
market value on the date of grant of the option to the non-employee director.
Vested options and shares of common stock may be repurchased from any
non-employee director who ceases to be a director for any reason. Any options
that have not vested at the time the non-employee director ceases to be a
director are forfeited
CODE OF ETHICS
The Company has adopted a code of ethics for all Associates, including the chief
executive officer and chief financial officer. The Company undertakes to provide
a copy of such code of ethics to any person, without charge, upon written
request to LPA Holding Corp., 130 South Jefferson Street, Suite 300, Chicago,
Illinois 60661, Attention: General Counsel.
55
ITEM 11. EXECUTIVE COMPENSATION
The following table provides certain summary information concerning compensation
earned for the 53 weeks ended July 3, 2004 (2004), and the 52 weeks ended June
28, 2003 (2003), and June 29, 2002 (2002), by the Company's Chief Executive
Officer and the four other most highly compensated executive officers whose
salary and bonus exceeded $100,000 for the 2004 fiscal year (collectively the
"named executive officers"):
SUMMARY COMPENSATION TABLE
COMPENSATION FOR THE PERIOD
---------------------------
ANNUAL LONG-TERM ALL OTHER
COMPENSATION COMPENSATION COMPENSATION
------------ ------------ ------------
NUMBER OF
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTION/SAR AWARDS
---- ------ ----- -----------------
Gary A. Graves 2004 $411,583 $390,108
Chief Executive Officer, President, 2003 289,423(1) 375,000 180,254
Chief Operating Officer and Director
Neil P. Dyment 2004 216,346(2) 77,668
Senior Vice President, Chief
Financial Officer
Gregory S. Davis 2004 205,808 74,533
Vice President, General Counsel 2003 30,769(3)
and Secretary
Hugh W. Tracy 2004 154,973(4) 57,024 $ 13,048(5)
Vice President, Chief Information
Officer
Lisa J. Miskimins 2004 153,298 55,781 4,607(6)
Vice President, Central Region 2003 144,519 5,413 10,860(6)
2002 121,448
(1) Mr. Graves joined the Company in August 2002. Fiscal 2003 compensation
covers 44 weeks from August 26, 2002 through June 28, 2003.
(2) Mr. Dyment joined the Company in August 2003. Fiscal 2004 compensation
covers 46 weeks from August 18, 2003 through July 3, 2004.
(3) Mr. Davis joined the Company in May 2003. Fiscal 2003 compensation covers
8 weeks from May 5, 2003 through June 28, 2003.
(4) Mr. Tracy joined the Company in July 2003. Fiscal 2004 compensation covers
49 weeks from July 28, 2003 through July 3, 2004.
(5) Represents payments to cover transitional health care costs at time of
hire.
(6) Represents auto allowance.
56
The table below presents information relating to grants to the named executive
officers of options to purchase common stock of Company. There were no
Options/SAR Grants granted in fiscal year 2004.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION/SAR VALUES
NUMBER OF
SECURITIES
UNDERLYING VALUE OF
UNEXERCISED IN-THE-MONEY
OPTIONS/SARs OPTIONS/SARs
AT FY END (#) AT FY END (1)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) REALIZED UNEXERCISABLE UNEXERCISABLE
Gary A. Graves 86,372 / 93,882(2) 0 / 0
Neil P. Dyment None / None n/a / n/a
Gregory S. Davis None / None n/a / n/a
Hugh W. Tracy None / None n/a / n/a
Lisa J. Miskimins 20,000 / 0(3) 0 / 0
(1) The equity of the Company is not traded and there is no market for pricing
the value of the options. "In the Money" calculations are based on the
estimated enterprise value of the Company adjusted for debt, preferred
stock, common shares issued and retired, warrants and options and
adjustments for market liquidity and a control premium.
(2) The Board of Directors granted to certain key executives Tranche A options
at $0.01 per share, an amount that approximates the fair value of a share
of common stock of the Company at the date of the grant. These options
become exercisable ratably over forty-eight months and expire ten years
from the date of grant.
(3) The Board of Directors granted to certain key executives Tranche A options
at $66.92 per share, an amount that approximates the fair value of a share
of common stock of the Company at the date of the grant. These options
become exercisable ratably over forty-eight months and expire ten years
from the date of grant
EMPLOYMENT CONTRACTS
The Company has entered into an employment agreement with Gary A. Graves. The
Employment Agreement provides for Mr. Graves to receive a base salary, subject
to annual performance adjustments, of $350,000 plus a bonus of up to 150% of
base salary. Mr. Graves is also entitled to receive a cash Interim Bonus with
respect to the Company's fiscal year ending in June 2003. Mr. Graves shall also
receive options to purchase 180,254 shares of Company stock at an exercise price
of $0.01 per share. The term of the Employment Agreement is three years subject
to one-year automatic renewals. The Employment Agreement provides that the
executive is entitled to participate in the health and welfare benefit plans
available to the Company's other senior executives. The Employment Agreement
also provides for severance in the case of termination without 'cause' or a
resignation with 'good reason' in an amount equal to one year of base salary
plus a prorated bonus as described in the agreement and a cash lump sum equal to
(a) any compensation payments deferred by Mr. Graves, together with any
applicable interest or other accruals and (b) any unpaid amounts, as of the date
of such termination, in respect of the Bonus for the fiscal year ending before
the fiscal year in which such termination occurs. Included in the severance in
the case of termination without 'cause' or resignation with 'good reason' is one
year of coverage under and participation in the Company's employee benefit
program. The Employment Agreement also contains customary non-disclosure,
non-competition and non-solicitation covenants.
57
1998 OPTION PLAN
The Company adopted the 1998 Plan pursuant to which options, which currently
represent 2.8% of Parent's common stock, on a fully diluted basis, are available
to grant. The 1998 Plan provides for the granting of Tranche A and Tranche B
options to purchase up to 60,074 shares of Parent's common stock. During fiscal
year 2002, the Company amended the 1998 Plan, increasing to 725,000 the number
of options available for grant. The options will be allocated in amounts to be
agreed upon between LPA and Parent. Seventy-five percent of the options will
vest over four years and twenty-five percent of the options will vest if certain
transactions are consummated which generate certain minimum returns to LPA. The
exercise price for the time vesting options will be 50% of the per share price
paid by LPA for its common stock of Parent and the exercise price for the
remaining options will be 100% of the per share price paid by LPA for its common
stock of Parent. The options expire 10 years from the date of grant. Options to
purchase 230,654 shares of Parent's common stock are currently outstanding under
the 1998 Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
All of La Petite's common stock is held by LPA Holding Corp. (Parent). As of
July 3, 2004, LPA Investment LLC (LPA) owned 66.0% of the outstanding common
stock of Parent (approximately 93.8% on a fully diluted basis, including the
warrants described below) and Vestar, the former principal stockholder of the
Company, and La Petite's current and former management own approximately 2.7%,
1.2% and 30.1%, respectively, of the outstanding common stock of Parent
(approximately 0.2%, 2.0% and 1.8%, respectively, on a fully diluted basis). In
connection with the purchases of preferred stock of Parent, described below, LPA
received warrants to purchase shares of Parent's common stock that currently
represents the right to acquire approximately 17.6% of Parent's common stock on
a fully diluted basis.
In connection with the recapitalization, LPA purchased redeemable preferred
stock (Series A preferred stock) of Parent and warrants to purchase 42,180
shares of Parent's common stock on a fully diluted basis for aggregate cash
consideration of $30.0 million, the proceeds of which were contributed by Parent
to common equity. On December 15, 1999, LPA acquired an additional $15.0 million
of Parent's Series A preferred stock and received warrants to purchase an
additional 22,051 shares of Parent's common stock on a fully diluted basis. The
$15.0 million proceeds received by Parent were contributed to common equity.
The Series A preferred stock is not redeemable at the option of the holder prior
to the maturity of the notes and dividends are not payable in cash prior to the
seventh anniversary of the consummation of the transactions. Thereafter, Parent
may pay dividends in cash subject to any restrictions contained in the Company's
indebtedness, including the Credit Agreement and the indenture.
Following the consummation of the recapitalization, Parent and its stockholders,
including all holders of options and warrants, entered into a Stockholder's
Agreement. The Stockholders' Agreement contains restriction on the
transferability of Parent common stock, subject to certain exceptions. The
Stockholder' Agreement also contains provisions regarding the designation of
members of the Board of Directors and other voting arrangements. The
Stockholders' Agreement will terminate at such time as Parent consummates a
qualified public offering.
The Stockholders' Agreement restricts transfers of common stock of Parent by,
among other things (i) granting rights to all stockholders to tag along on
certain sales of stock by LPA and management, (ii) granting rights to LPA to
force the other stockholders to sell their common stock on the same terms as
sales of common stock by LPA, and (iii) granting preemptive rights to all
holders of 2% or more of Parent's common stock in respect of sales by other
stockholders.
The Stockholder's Agreement provides that the Board of Directors of Parent shall
consist of 5 to 8 persons as determined pursuant to the Stockholders Agreement.
The Stockholder's Agreement further provides that LPA is entitled to designate
four of the directors, one of whom is entitled to three votes as a director.
Messrs. Murray, O'Brien and King have been elected as directors pursuant to this
provision with Mr. King being entitled to three votes as a director. On December
11, 2002 the Stockholder's Agreement was
58
amended to provide that the remaining directors will be the Chief Executive
Officer of Parent and up to three other directors designated by the foregoing
directors.
The Stockholders' Agreement also contains covenants in respect of the delivery
of certain financial information to Parent's stockholders and granting access to
Parent's records to holders of more than 2% of Parent's common stock.
A majority of the economic interests of LPA is owned by J.P. Morgan Partners
(23A SBIC), LLC (JPMP SBIC) an affiliate of JPMP, and a majority of the voting
interests of LPA is owned by an entity controlled by Robert E. King, one of
Parent's Directors. However, pursuant to the LPA Operating Agreement, as
amended, if certain triggering events occur and notice is given by JPMP SBIC to
LPA that it is exercising its rights thereunder, JPMP SBIC will have the right
to vote a majority of the voting interests of LPA. Accordingly, if these
triggering events occur and notice is given, through its control of LPA, JPMP
SBIC would be able to elect a majority of the Board of Directors of Parent. As a
licensed small business investment company, or SBIC, JPMP SBIC is subject to
certain restrictions imposed upon SBICs by the regulations established and
enforced by the United States Small Business Administration. Among these
restrictions are certain limitations on the extent to which an SBIC may exercise
control over companies in which it invests. As a result of these restrictions,
unless certain events described in the operating agreement occur, JPMP SBIC may
not own or control a majority of the outstanding voting stock of LPA or
designate a majority of the members of the Board of Directors. Accordingly,
while JPMP SBIC owns a majority of the economic interests of LPA, JPMP SBIC owns
less than a majority of LPA's voting stock. LPA also agreed not to take certain
actions in respect of the common stock of Parent held by LPA without the consent
of JPMP SBIC. At no time prior to the date hereof, has JPMP SBIC exercised such
voting rights.
In connection with the recapitalization, Parent and its stockholders following
consummation of the recapitalization entered into a Registration Rights
Agreement. The Registration Rights Agreement grants stockholders demand and
incidental registration rights with respect to shares of capital stock held by
them and contains customary terms and provisions with respect to such
registration rights.
Pursuant to a pre-emptive offer dated November 13, 2001, Parent offered all of
its stockholders the right to purchase up to their respective pro rata amount of
a newly created class of Series B convertible redeemable participating preferred
stock (Series B preferred stock) and warrants to purchase common stock of
Parent. The Series B preferred stock is junior to the Series A preferred stock
of Parent in terms of dividends, distributions, and rights upon liquidation.
Parent offered and sold $15.0 million of Series B preferred stock of Parent and
warrants to purchase 562,500 shares of common stock of Parent.
All of the proceeds received by Parent from the sale of Series B preferred stock
and warrants have been contributed to La Petite as common equity. In connection
with such purchase, the banks waived their right under the Credit Agreement to
require that the proceeds be used to repay amounts outstanding under the Credit
Agreement.
Pursuant to the terms of the Securities Purchase Agreement dated February 10,
2003, entered into by Parent and its stockholders who have elected to exercise
their respective preemptive rights (the "Electing Stockholders"), as amended by
Amendment No. 1 to the Securities Purchase Agreement dated July 31, 2003, Parent
may issue up to 6,669,734 shares of its Series B convertible preferred stock. In
connection with such prospective issuance, Parent issued warrants to purchase
1,692,423 shares of its class A common stock, pro rata to each Electing
Stockholder. All of the proceeds received by Parent from the issuance of the
Series B preferred stock will be contributed to La Petite as common equity and
will be used by La Petite for general working capital and liquidity purposes.
The Electing Stockholders are only required to purchase shares of Series B
preferred stock if (a) the fixed charge coverage ratio at the end of a fiscal
quarter (calculated in accordance with the terms of the Credit Agreement) is
less than the fixed charge coverage ratio target set forth in the Credit
Agreement with respect to such fiscal quarter (a "Fixed Charge Purchase"), (b)
from time to time, the cash account of Parent and its subsidiaries is negative
(as calculated in accordance with the provisions of Amendment No. 1 to the
Securities Purchase Agreement) over a historical 4 or 5 week review period (a
"Cash Shortfall Purchase"), or (c) (i) a payment default shall occur and be
continuing under the Credit Agreement or (ii) following
59
payment in full of the obligations under the Credit Agreement, a payment default
shall occur and be continuing under the Indenture for the Senior Notes (a
"Payment Default Purchase"). The aggregate number of shares to be purchased, if
any, by the Electing Stockholders pursuant to a Fixed Charge Purchase shall be
purchased within ten business days following the date that Parent is required to
deliver its quarterly or annual, as applicable, financial information to the
senior lenders pursuant to the terms of the Credit Agreement, and shall equal
the quotient obtained by dividing (x) the amount of cash which would have been
needed to increase the Parent's consolidated EBITDAR (as defined in the Credit
Agreement) to an amount which would have satisfied the fixed charge coverage
ratio target set forth in the Credit Agreement by (y) $2.174. The aggregate
number of shares to be purchased, if any, by the Electing Stockholders pursuant
to a Cash Shortfall Purchase shall be made on the tenth business day after the
end of each review period, and shall equal (A) the sum of (x) the cash deficit
and (y) $500,000, divided by (B) $2.174, less (C) the number of shares purchased
pursuant to Cash Shortfall Purchases and Fixed Charge Purchases during the
applicable review period. The aggregate number of shares to be purchased by the
Electing Stockholders pursuant to a Payment Default Purchase shall be purchased
within five (5) business days after notice of such default is delivered to the
Electing Stockholders and shall equal (A) the amount of funds necessary to cure
the payment default under the Credit Agreement or the Indenture for the Senior
Notes, as applicable, divided by (B) $2.174. The Electing Stockholders have the
right to purchase shares of Series B preferred stock at any time, in which case
the aggregate number of shares of Series B preferred stock to be purchased by
the Electing Stockholders with respect to a particular fiscal quarter or review
period, as applicable, shall be reduced by the number of shares of Series B
preferred stock purchased prior to the expiration of such fiscal quarter or
review period. The obligation of each Electing Stockholder to purchase shares of
Series B preferred stock shall expire on the earlier of (a) the date the
Electing Stockholders purchase an aggregate of 6,669,734 shares of Series B
preferred stock; and (b) the date the obligations (other than contingent
obligations and liabilities) of Parent and its subsidiaries under (i) the Credit
Agreement and (ii) the Indenture dated as of May 11, 1998, among the Corporation
and certain of its subsidiaries and PNC Bank, National Association as trustee
(as amended) are terminated.
LPA has committed to purchase, in accordance with the terms of the Securities
Purchase Agreement, 6,658,636 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
July 3, 2004, the remaining contingent equity commitment from the stockholders
of Parent has been reduced to $8.8 million. See Note 8 to the consolidated
financial statements included at Item 8 of this report for further information.
For information regarding securities authorized for issuance under equity
compensation, see Note 11 of the Notes to Consolidated Financial Statements.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
J.P. Morgan Securities Inc., or JPMSI, one of the initial purchasers of the old
Senior Notes, is an affiliate of JPMorgan Chase Bank (formerly known as The
Chase Manhattan Bank), which is an agent and a lender to La Petite under the
Credit Agreement, an affiliate of JPMP, JPMorgan Chase Bank and JPMSI, owns
66.0% of the outstanding common stock of Parent (approximately 93.8% on a fully
diluted basis as of September 24, 2004). LPA owns $45 million of Parent's Series
A preferred stock, $20.7 million of Parent's Series B preferred stock, and
warrants to purchase 17.6% of the common stock of Parent on a fully diluted
basis. Certain employees of JPMP are members of La Petite's Board of Directors
(see Item 10). In addition, JPMSI, JPMorgan Chase Bank and their affiliates
perform various investment banking, trust and commercial banking services on a
regular basis for the Company's affiliates.
In connection with the recapitalization, JPMP SBIC entered into an
Indemnification Agreement with Robert E. King, one of Parents' Directors,
pursuant to which JPMP SBIC has agreed to indemnify
60
Mr. King for any losses, damages or liabilities and all expenses incurred or
sustained by Mr. King in his capacity as a manager, officer or director of LPA
or any of its subsidiaries, including Parent and La Petite.
In December 1999, November 2001, December 2001, May 2002, June 2003, November
2003, and December 2003 Parent sold additional equity to LPA. See "Item 1.
Business -Organization"
The Company entered into an employment agreement with Judith A. Rogala,
President and Chief Executive Officer, in January 2000, which was due to expire
in January 2003. Judith A. Rogala resigned her positions as the President and
Chief Executive Officer of the Company effective as of December 11, 2002. Under
the terms of her Employment Agreement with the Company, such resignation
entitled Ms. Rogala to receive a lump sum payment of $750,000 on January 1,
2004, representing the deferred portion of her signing bonus. In connection with
her resignation and in lieu of such payment, Ms. Rogala has entered into a
Separation Agreement with the Company. Pursuant to the Separation Agreement, Ms.
Rogala is entitled to receive severance payments from the Company at a rate
equal to (a) $380,000 per annum for the period from December 11, 2002 to
December 31, 2002, and (b) $200,000 per annum for the period from January 1,
2003 to December 31, 2007. Such payments will be accelerated if there is a
change in control of the Company or if the Company meets certain EBITDA targets
for any consecutive twelve-month period during the term of the Separation
Agreement. If the Company defaults in any of its payment obligations to Ms.
Rogala under the Separation Agreement, it will make a lump-sum payment to Ms.
Rogala equal to the product of 1.5 and any future payments then owed to her
pursuant to the Separation Agreement. The Separation Agreement allowed Ms.
Rogala to retain her options in the Company, which had vested or will vest on or
prior to January 1, 2003, for a sixty-day period from December 11, 2002. The
Company and Ms. Rogala agreed to standard mutual releases and standard mutual
non-disparagement clauses as part of the Separation Agreement. Ms. Rogala agreed
to a non-compete provision that will expire in 2007.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Deloitte & Touche LLP, an independent registered public accounting firm, audited
the Company's financial statements for the fiscal years ended July 3, 2004 and
June 28, 2003. The chart below sets forth the total amount billed to us by
Deloitte & Touche LLP for services performed in fiscal years 2004 and 2003 and
breaks down these amounts by the category of service:
JULY 3, JUNE 28,
2004 2003
-------- --------
Audit Fees $475,000 $750,000
Audit-Related Fees 111,000 21,000
Tax Fees 3,950 3,600
All Other Fees - -
Audit fees are fees billed for the audit of the fiscal year 2004 and 2003 annual
financial statements and review of the quarterly financial statements.
For fiscal year 2004, audit-related fees included employee benefit plan audits
and audit services related to information technology internal controls. For
fiscal year 2003, audit related fees were primarily for employee benefit plan
audits.
Tax fees in fiscal years 2004 and 2003 were principally for review of the
Company's IRS Forms 5500-Annual Return/Report of Employee Benefit Plans related
to the Company's 401k plan and health and welfare plans.
There were no other fees incurred in fiscal years 2004 or 2003.
The audit committee approves all audit, audit-related services, tax services and
other services provided by Deloitte & Touche LLP. Any services provided by
Deloitte & Touche LLP that are not specifically
61
included within the scope of the audit must be pre-approved by the audit
committee in advance of any engagement.
********
62
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See pages 26 to 50 of this Annual Report on Form 10-K for financial
statements of LPA Holding Corp. as of July 3, 2004 and June 28, 2003
and for the 53 weeks ended July 3, 2004, and the 52 weeks ended June
28, 2003, and June 29, 2002.
(a) 2. Financial Statement Schedules
The following additional financial data should be read in conjunction
with the consolidated financial statements for the 53 weeks ended July
3, 2004, and the 52 weeks ended June 28, 2003, and June 29, 2002. Other
schedules not included with these additional financial statement
schedules have been omitted because they are not applicable or the
required information is contained in the consolidated financial
statements or notes thereto.
SCHEDULES
Schedule I - Condensed Financial Information of Registrants
Schedule II - Valuation and Qualifying Accounts
(a) 3. Exhibits
EXHIBIT
NUMBER DESCRIPTION
3.1(i) Amended and Restated Certificate of Incorporation of LPA
Holding Corp.
3.2(i) Certificate of Designations, Preferences and Rights of
Series A Redeemable Preferred Stock of LPA Holding Corp.
3.3(i) Bylaws of LPA Holding Corp.
3.4(i) Amended and Restated Certificate of Incorporation of La Petite
Academy, Inc.
3.5(i) Bylaws of La Petite Academy, Inc.
3.6(v) Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of LPA Holding Corp. filed on
December 13, 1999.
3.7(v) Certificate of Amendment of the Certificate of Designations,
Preferences and Rights of Series A Redeemable Preferred
Stock of LPA Holdings Corp. filed on December 13, 1999.
3.8(viii) Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of LPA Holding Corp., filed on
November 14, 2001.
3.9(viii) Certificate of Designations, Preferences and Rights of
Series B Convertible Redeemable Participating Preferred
Stock of LPA Holding Corp., filed on November 14, 2001.
3.10(xvi) Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of LPA Holding Corp., filed on
February 10, 2003.
3.11(xvi) Certificate of Amendment to the Certificate of Designations,
Preferences and Rights of Series B Convertible Redeemable
Participating Preferred Stock of LPA Holding Corp., filed on
February 10, 2003.
4.1(i) Indenture among LPA Holding Corp., La Petite Academy, Inc.,
LPA Services, Inc. and PNC Bank, National Association dated as
of May 11, 1998.
4.2(iv) First Supplemental Indenture dated as of July 23, 1999,
among Bright Start, Inc., LPA Holding Corp., La Petite
Academy, Inc., and The Chase Manhattan Bank.
63
EXHIBIT
NUMBER DESCRIPTION
10.1(i) Purchase Agreement among Vestar/LPA Investment Corp., La Petite
Academy, Inc., LPA Services, Inc., Chase Securities Inc. and
NationsBanc Montgomery Securities LLC dated May 6, 1998.
10.2(i) Exchange and Registration Rights Agreement among La Petite Academy,
Inc., LPA Holding Corp., LPA Services, Inc., Chases Securities
Inc., NationsBanc Montgomery Securities LLC dated May 11, 1998.
10.3(i) Merger Agreement by and between LPA Investment LLC and Vestar/LPA
Investment Corp. dated as of March 17, 1998.
10.4(i) Stockholders Agreement among LPA Holding Corp., Vestar/LPT Limited
Partnership, LPA Investment LLC and the management stockholders
dated as of May 11, 1998.
10.5(v) Amendment #1 and Consent of the Stockholders Agreement among LPA
Holding Corp., Vestar/LPT Limited Partnership, LPA Investment LLC
and the management stockholders dated as April 8, 1999.
10.6(i) 1998 Stock Option Plan and Stock Option Agreement for LPA Holding
Corp. dated as of May 18, 1998.
10.7(i) Preferred Stock Registration Rights Agreement between LPA Holding
Corp. and LPA Investment LLC dated May 11, 1998.
10.8(i) Registration Rights Agreement among LPA Holding Corp., Vestar/LPT
Limited Partnership, the stockholders listed therein and LPA
Investment LLC, dated May 11, 1998.
10.9(i) Credit Agreement dated as of May 11, 1998 among La Petite Academy,
Inc., LPA Holding Corp., Nationsbank, N.A., and The Chase Manhattan
Bank.
10.10(i) Pledge Agreement among La Petite Academy, Inc., LPA Holding
Corp., Subsidiary Pledgors and Nationsbank, N.A. dated as of May 11,
1998.
10.11(i) Security Agreement among La Petite Academy, Inc., LPA Holding
Corp., Subsidiary Guarantors and Nationsbank, N.A. dated as of May
11, 1998.
10.12(i) Parent Company Guarantee Agreement among LPA Holding Corp. and
Nationsbank, N.A. dated as of May 11, 1998.
10.13(i) Subsidiary Guarantee Agreement among Subsidiary Guarantor of La
Petite Academy, Inc., LPA Services, Inc. and Nationsbank, N.A.
dated as of May 11, 1998.
10.14(i) Indemnity, Subrogation and Contribution Agreement among La
Petite Academy, Inc., LPA Services, Inc., as Guarantor and
Nationsbank, N.A. dated as of May 11, 1998.
10.15(xvi) 1999 Stock Option Plan for Non-Employee Directors.
10.16(iii) Agreement and Plan of Merger By and Between La Petite Academy,
Inc., LPA Acquisition Co. Inc., and Bright Start, Inc.
10.17(v) Amendment No. 1, Consent and Waiver dated as of December 13, 1999,
to the Credit Agreement dated as of May 11, 1998 among LPA Holding
Corp., La Petite Academy, Inc., Bank of America, N.A. (formerly
known as NationsBank, N.A.) as Administrative Agent, Documentation
Agent and Collateral Agent for the Lenders and The Chase Manhattan
Bank as Syndication Agent.
10.18(v) Warrant No. 2 dated as of December 15, 1999, issued by LPA Holding
Corp. to LPA Investment LLC.
10.19(v) Amendment No. 1 and Consent dated as of April 8, 1999, among LPA
Holding Corp., Vestar/LPT Limited Partnership, LPA Investment LLC
and the management stockholders named therein, to the Stockholders
Agreement dated as of May 11, 1999, among LPA Holding Corp.,
Vestar/LPT Limited Partnership, LPA Investment LLC and the
management stockholders named therein.
10.20(v) Amendment No. 1 to the LPA Holding Corp. 1999 Stock Option Plan for
Non-Employee Directors.
10.21(vii) Employment Agreement among LPA Holding Corp., La Petite Academy,
Inc., and Judith A. Rogala.
64
EXHIBIT
NUMBER DESCRIPTION
10.22(viii) Amendment No. 2, Consent and Waiver dated as of June 29, 2000, to
the Credit Agreement dated as of May 11, 1998, as amended, among
LPA Holding Corp., La Petite Academy, Inc., Bank of America, N.A.
(formerly known as NationsBank, N.A.) as Administrative Agent,
Documentation Agent and Collateral Agent for the Lenders and The
Chase Manhattan Bank as Syndication Agent.
10.23(viii) Amendment No. 3, Consent and Waiver dated as of November 14, 2001,
to the Credit Agreement dated as of May 11, 1998, as amended, among
LPA Holding Corp., La Petite Academy, Inc., Bank of America, N.A.
(formerly known as NationsBank, N.A.) as Administrative Agent,
Documentation Agent and Collateral Agent for the Lenders and Chase
Bank of Texas, National Association (formerly known as The Chase
Manhattan Bank) as Syndication Agent.
10.24(viii) Guarantee, dated as of November 15, 2001, by J.P. Morgan Partners
(23A SBIC), LLC for the benefit of the Lenders (as defined in the
Credit Agreement, dated as of May 11, 1998, as amended), among LPA
Holding Corp., La Petite Academy, Inc., the Lenders party thereto,
Bank of America, N.A. (formerly known as NationsBank, N.A.) as
Administrative Agent, Documentation Agent and Collateral Agent for
the Lenders and Chase Bank of Texas (formerly known as The Chase
Manhattan Bank) as Syndication Agent.
10.25(viii) Securities Purchase Agreement, dated as of November 14, 2001, among
LPA Holding Corp., LPA Investment, LLC and the other parties
thereto.
10.26(viii) Warrant No. 3, dated as of November 14, 2001, issued by LPA Holding
Corp. to LPA Investment, LLC.
10.27(ix) First Limited Waiver dated as of May 20, 2002 to Credit Agreement
dated as of May 11, 1998, as amended, among LPA Holding Corp., La
Petite Academy, Inc., Bank of America, N.A. (formerly known as
NationsBank, N.A.) as Administrative Agent, Documentation Agent and
Collateral Agent for the Lenders and as Issuing Bank and Swingline
Lender and Chase Bank of Texas, National Association, (formerly
known as The Chase Manhattan Bank) as Syndication Agent.
10.28(ix) Second Limited Waiver dated as of August 15, 2002 to Credit
Agreement dated as of May 11, 1998, as amended, among LPA Holding
Corp., La Petite Academy, Inc., Bank of America, N.A. (formerly
known as NationsBank, N.A.) as Administrative Agent, Documentation
Agent and Collateral Agent for the Lenders and as Issuing Bank and
Swingline Lender and Chase Bank of Texas, National Association,
(formerly known as The Chase Manhattan Bank) as Syndication Agent.
10.29(x) Third Limited Waiver dated as of September 30, 2002 to Credit
Agreement dated as of May 11, 1998, as amended, among LPA Holding
Corp., La Petite Academy, Inc., Bank of America, N.A. (formerly
known as NationsBank, N.A.) as Administrative Agent, Documentation
Agent and Collateral Agent for the Lenders and as Issuing Bank and
Swingline Lender and Chase Bank of Texas, National Association,
(formerly known as The Chase Manhattan Bank) as Syndication Agent.
10.30(xi) Extension to Third Limited Waiver dated as of November 1, 2002 to
Credit Agreement dated as of May 11, 1998, as amended, among LPA
Holding Corp., La Petite Academy, Inc., Bank of America, N.A.
(formerly known as NationsBank, N.A.) as Administrative Agent,
Documentation Agent and Collateral Agent for the Lenders and as
Issuing Bank and Swingline Lender and Chase Bank of Texas, National
Association, (formerly known as The Chase Manhattan Bank) as
Syndication Agent.
10.31(xii) Second Extension to Third Limited Waiver dated as of November 15,
2002 to Credit Agreement dated as of May 11, 1998, as amended,
among LPA Holding Corp., La Petite Academy, Inc., Bank of America,
N.A. (formerly known as NationsBank, N.A.) as Administrative Agent,
Documentation Agent and Collateral Agent for the Lenders and as
Issuing Bank and Swingline Lender and Chase Bank of Texas, National
Association, (formerly known as The Chase Manhattan Bank) as
Syndication Agent.
65
EXHIBIT
NUMBER DESCRIPTION
10.32(xiii) Third Extension to Third Limited Waiver dated as of December 2,
2002 to Credit Agreement dated as of May 11, 1998, as amended,
among LPA Holding Corp., La Petite Academy, Inc., Bank of America,
N.A. (formerly known as NationsBank, N.A.) as Administrative Agent,
Documentation Agent and Collateral Agent for the Lenders and as
Issuing Bank and Swingline Lender and Chase Bank of Texas, National
Association, (formerly known as The Chase Manhattan Bank) as
Syndication Agent.
10.33(xiii) Fourth Extension to Third Limited Waiver dated as of December 6,
2002 to Credit Agreement dated as of May 11, 1998, as amended,
among LPA Holding Corp., La Petite Academy, Inc., Bank of America,
N.A. (formerly known as NationsBank, N.A.) as Administrative Agent,
Documentation Agent and Collateral Agent for the Lenders and as
Issuing Bank and Swingline Lender and Chase Bank of Texas, National
Association, (formerly known as The Chase Manhattan Bank) as
Syndication Agent.
10.34(xiv) Fourth Limited Waiver dated as of December 16, 2002 to Credit
Agreement dated as of May 11, 1998, as amended, among LPA Holding
Corp., La Petite Academy, Inc., Bank of America, N.A. (formerly
known as NationsBank, N.A.) as Administrative Agent, Documentation
Agent and Collateral Agent for the Lenders and as Issuing Bank and
Swingline Lender and Chase Bank of Texas, National Association,
(formerly known as The Chase Manhattan Bank) as Syndication Agent.
10.35(xv) Extension to Fourth Limited Waiver dated as of December 16, 2002 to
Credit Agreement dated as of May 11, 1998, as amended, among LPA
Holding Corp., La Petite Academy, Inc., Bank of America, N.A.
(formerly known as NationsBank, N.A.) as Administrative Agent,
Documentation Agent and Collateral Agent for the Lenders and as
Issuing Bank and Swingline Lender and Chase Bank of Texas, National
Association, (formerly known as The Chase Manhattan Bank) as
Syndication Agent.
10.36(xvi) Amendment No. 2 and Consent dated as of December 11, 2002 to
Stockholders Agreement among LPA Holding Corp., Vestar/LPT Limited
Partnership, LPA Investment LLC and the management stockholders.
10.37(xiv) Separation Agreement dated as of December 11, 2002 among LPA
Holding Corp., La Petite Academy, Inc. and Judith A. Rogala.
10.38(xvi) Consent, Waiver and Amendment dated as of August 26, 2002 to
Employment Agreement among LPA Holding Corp., La Petite Academy,
Inc. and Judith A. Rogala.
10.39(xvi) Employment Agreement dated August 26, 2002 among LPA Holding Corp.,
La Petite Academy, Inc. and Gary A. Graves.
10.40(xvi) Amendment No. 1 to 1998 Stock Option Plan for LPA Holding Corp
10.41(xvi) Employment Letter Agreement dated as of September 5, 2002 among La
Petite Academy, Inc and Michael F. Czlonka.
10.42(xvi) Amendment No. 5 to Credit Agreement and Waiver dated as of February
10, 2003, among LPA Holding Corp., La Petite Academy, Inc., U.S.
Bank National Association, as Administrative Agent, and the Lenders
signatory thereto.
10.43(xvi) Securities Purchase Agreement dated as of February 10, 2003, among
LPA Holding Corp., LPA Investment LLC, and the other persons
signatory thereto from time to time.
10.44(xvii) Fifth Limited Waiver dated as of April 22, 2003, to Credit
Agreement dated as of May 11, 1998, as amended, among LPA Holding
Corp., La Petite Academy, Inc., U.S. Bank National Association, as
Administrative Agent, Documentation Agent and Collateral Agent for
the Lenders and as Issuing Bank and Swingline Lender.
10.45(xviii) Sixth Limited Waiver dated as of May 30, 2003, to Credit Agreement
dated as of May 11, 1998, as amended, among LPA Holding Corp., La
Petite Academy, Inc., U.S. Bank National Association, as
Administrative Agent, Documentation Agent and Collateral Agent for
the Lenders and as Issuing Bank and Swingline Lender.
10.46(xix) Seventh Limited Waiver dated as of June 30, 2003, to Credit
Agreement dated as of May 11, 1998, as amended, among LPA Holding
Corp., La Petite Academy, Inc., U.S. Bank National Association, as
Administrative Agent, Documentation Agent and Collateral Agent for
the Lenders and as Issuing Bank and Swingline Lender.
66
EXHIBIT
NUMBER DESCRIPTION
10.47 (xx) Amendment No. 6 to Credit Agreement and Waiver dated as of July 31,
2003 among La Petite Academy, Inc., LPA Holding Corp., and U.S.
Bank National Association, as Administrative Agent, Documentation
Agent and Collateral Agent for the Lenders and as Issuing Bank and
Swingline Lender.
10.48(xx) Amendment No. 1, dated as of July 31, 2003, to the Securities
Purchase Agreement dated as of February 10, 2003 among LPA Holding
Corp., LPA Investment LLC, and the other parties signatory thereto.
10.49(xx) Support Center Bonus Plan, effective June 29, 2003
12.1* Statement regarding computation of ratios.
21.1(vi) Subsidiaries of Registrant.
31.1* CFO Section 302 certifications.
31.2* CEO Section 302 certifications.
32* CEO and CFO Section 906 certifications.
(i) Incorporated by reference to the Exhibits to La Petite Academy,
Inc.'s Registration Statement on Form S-4, Registration No.
333-56239, filed with the Securities and Exchange Commission on
June 5, 1998.
(ii) Incorporated by reference to the Exhibits to LPA Holding Corp.'s
Form 10-K for the Fiscal Year ended August 29, 1998, filed with the
Securities and Exchange Commission on November 24, 1998.
(iii) Incorporated by reference to the Exhibits to LPA Holding Corp.'s
Form 8-K, filed with the Securities and Exchange Commission on
December 7, 1999.
(iv) Incorporated by reference to the Exhibits to LPA Holding Corp.'s
Form 10-Q/A for the 16 weeks ended October 23, 1999, filed with the
Securities and Exchange Commission on December 16, 1999.
(v) Incorporated by reference to the Exhibits to LPA Holding Corp.'s
Form 8-K, filed with the Securities and Exchange Commission on
December 21, 1999.
(vi) Incorporated by reference to the Exhibits to LPA Holding Corp.'s
Form S-4 Post Effective Amendment #1, filed with the Securities and
Exchange Commission on December 23, 1999.
(vii) Incorporated by reference to the Exhibits to LPA Holding Corp.'s
Form 8-K, filed with the Securities and Exchange Commission on
February 16, 2000.
(viii) Incorporated by reference to the exhibits to LPA Holding Corp.'s
Form 8-K, filed with the Securities and Exchange Commission on
November 16, 2001.
(ix) Incorporated by reference to the exhibits to LPA Holding Corp.'s
Form 8-K, filed with the Securities and Exchange Commission on
August 21, 2002.
(x) Incorporated by reference to the exhibits to LPA Holding Corp.'s
Form 8-K, filed with the Securities and Exchange Commission on
October 2, 2002.
(xi) Incorporated by reference to the exhibits to LPA Holding Corp.'s
Form 8-K, filed with the Securities and Exchange Commission on
November 5, 2002.
(xii) Incorporated by reference to the exhibits to LPA Holding Corp.'s
Form 8-K, filed with the Securities and Exchange Commission on
November 20, 2002.
(xiii) Incorporated by reference to the exhibits to LPA Holding Corp.'s
Form 8-K, filed with the Securities and Exchange Commission on
December 9, 2002.
(xiv) Incorporated by reference to the exhibits to LPA Holding Corp.'s
Form 8-K, filed with the Securities and Exchange Commission on
December 20, 2002.
(xv) Incorporated by reference to the exhibits to LPA Holding Corp.'s
Form 8-K, filed with the Securities and Exchange Commission on
February 6, 2003.
(xvi) Incorporated by reference to the Exhibits to LPA Holding Corp.'s
Form 10-K for the Fiscal Year ended June 29, 2002 filed with the
Securities and Exchange Commission on February 21, 2003.
(xvii) Incorporated by reference to the exhibits to LPA Holding Corp.'s
Form 8-K, filed with the Securities and Exchange Commission on
April 24, 2003.
67
(xviii) Incorporated by reference to the exhibits to LPA Holding Corp.'s
Form 8-K, filed with the Securities and Exchange Commission on June
4, 2003.
(xix) Incorporated by reference to the exhibits to LPA Holding Corp.'s
Form 8-K, filed with the Securities and Exchange Commission on July
3, 2003.
(xx) Incorporated by reference to the exhibits to LPA Holding Corp.'s
Form 10-K for the Fiscal Year ended June 28, 2003 filed with the
Securities and Exchange Commission on September 26, 2003.
(*) Filed herein
(b) Reports on Form 8-K
None.
(c) Supplemental information to be furnished with reports filed pursuant to
Section 15(d) of the Act by Registrants, which have not registered
securities pursuant to Section 12 of the Act
Except for a copy of this Annual Report on Form 10-K, no annual
report to security holders covering the registrants' last fiscal
year or proxy materials will be sent to security holders.
68
LPA HOLDING CORP.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
JULY 3, JUNE 28,
BALANCE SHEETS 2004 2003
--------- ---------
ASSETS: $ - $ -
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Payable to La Petite Academy, Inc. 34,386 39,387
--------- ---------
Total current liabilities 34,386 39,387
Long-term liabilities:
Equity in net loss of La Petite Academy, Inc in excess of investment 142,418 143,907
Series A 12% mandatorily redeemable preferred stock (Note 8) 79,866
--------- ---------
Total long-term liabilities 222,284 143,907
Series A 12% redeemable preferred stock (Note 8) 69,378
Series B 5% convertible redeemable participating preferred stock
($0.01 par value per share); 13,645,000 shares authorized, 9,541,968 and
7,241,490 shares issued and outstanding as of July 3, 2004 and June 28, 2003,
respectively; aggregate liquidation preference of $22.7 million and $16.7
million, respectively 22,747 16,739
Stockholders' deficit:
Class A common stock ($0.01 par value per share); 17,500,000 shares
authorized; and 773,403 shares issued and outstanding as of
July 3, 2004 and June 28, 2003. 8 8
Class B common stock ($0.01 par value per share); 20,000 shares
authorized, issued and outstanding as of July 3, 2004 and June 28,
2003.
Common stock warrants 8,596 8,596
Accumulated other comprehensive income 74 160
Accumulated deficit (288,095) (278,175)
--------- ---------
Total stockholders' deficit (279,417) (269,411)
--------- ---------
$ - $ -
========= =========
See notes to consolidated financial statements included in Part II of this
Annual Report on Form 10-K.
69
LPA HOLDING CORP.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS OF DOLLARS)
53 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JULY 3, JUNE 28, JUNE 29,
STATEMENTS OF OPERATIONS 2004 2003 2002
--------- ---------- -----------
Equity in net loss of La Petite Academy, Inc. $ 1,576 $ (15,948) $ (76,772)
--------- ---------- ----------
Interest expense
Dividends and accretion on Series A preferred
stock (Note 8) (10,489)
--------- ---------- ----------
Net loss (8,913) (15,948) (76,772)
--------- ---------- ----------
Other comprehensive income (loss):
Derivative adjustments reclassified into operations (86) (86) (85)
--------- ---------- ----------
Total other comprehensive income (loss) (86) (86) (85)
--------- ---------- ----------
Comprehensive loss $ (8,999) $ (16,034) $ (76,857)
========= ========== ==========
See notes to consolidated financial statements included in Part II of this
Annual Report on Form 10-K.
70
LPA HOLDING CORP.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS OF DOLLARS)
53 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JULY 3, JUNE 28, JUNE 29,
STATEMENTS OF CASH FLOWS 2004 2003 2002
------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(8,913) $(15,948) $ (76,772)
Adjustments to reconcile net loss to net cash from operating
activities:
Dividends and accretion on Series A preferred stock
(Note 8) 10,489
Non cash items (86) (86) (85)
Equity in net comprehensive loss of La Petite Academy,
Inc. in excess of investment. (1,490) 16,034 76,857
------- -------- ---------
Net cash from operating activities - - -
------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in La Petite Academy, Inc. (5,001) (745) (15,000)
------- -------- ---------
Net cash used in investing activities (5,001) (745) (15,000)
------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, redeemable preferred 5,001 745 15,000
stock and warrants, net of expenses
------- -------- ---------
Net cash provided by financing activities 5,001 745 15,000
------- -------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS - - -
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD - - -
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ - $ - $ -
======= ======== =========
See Notes to Consolidated Financial Statements included in Part II of this
Annual Report on Form 10-K.
71
LPA HOLDING CORP. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
BALANCE AT CHARGED TO BALANCE AT
JUNE 28, COSTS AND JULY 3,
DESCRIPTION 2003 EXPENSES WRITE-OFFS 2004
---- -------- ---------- ----
Allowance for doubtful accounts $ 496 $ 2,490 $ 2,485 $ 501
--------- --------- ---------- ----------
BALANCE AT CHARGED TO BALANCE AT
JUNE 29, COSTS AND JUNE 28,
DESCRIPTION 2002 EXPENSES WRITE-OFFS 2003
---- -------- ---------- ----
Allowance for doubtful accounts $ 914 $ 2,802 $ 3,220 $ 496
--------- ---------- ---------- -------
BALANCE AT CHARGED TO BALANCE AT
JUNE 30, COSTS AND JUNE 29,
DESCRIPTION 2001 EXPENSES WRITE-OFFS 2002
---- -------- ---------- ----
Allowance for doubtful accounts $ 671 $ 2,951 $ 2,708 $ 914
--------- ---------- ---------- --------
See notes to consolidated financial statements included in Part II of this
Annual Report on Form 10-K
(continued)
72
LPA HOLDING CORP. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
RESERVE FOR CLOSED ACADEMIES
BALANCE AT CHARGED TO BALANCE AT
JUNE 28, COSTS AND CHARGED TO JULY 3,
DESCRIPTION 2003 EXPENSES RESERVE 2004
---- -------- ------- ----
Reserve for Closed Academies $ 4,466 $ (864) $ 2,026 $ 1,576
------- ------ ------- -------
BALANCE AT CHARGED TO BALANCE AT
JUNE 29, COSTS AND CHARGED TO JUNE 28,
DESCRIPTION 2002 EXPENSES RESERVE 2003
---- -------- ------- ----
Reserve for Closed Academies $ 4,598 $ 4,908 $ 5,040 $ 4,466
------- ------- ------- -------
BALANCE AT CHARGED TO BALANCE AT
JUNE 30, COSTS AND CHARGED TO JUNE 29,
DESCRIPTION 2001 EXPENSES RESERVE 2002
---- -------- ------- ----
Reserve for Closed Academies $ 6,565 $ 3,208 $ 5,175 $ 4,598
------- ------- ------- -------
See notes to consolidated financial statements included in Part II of this
Annual Report on Form 10-K
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned; thereunto duly authorized, on September 24, 2004.
LPA Holding Corp.
/s/ Neil P. Dyment
-------------------------------------------
By: Neil P. Dyment
Chief Financial Officer and duly authorized
representative of the registrant
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed by the following persons on
behalf of the registrant and in the capabilities indicated on September 24,
2004.
/s/ Gary A. Graves /s/ Stephen P. Murray
- ------------------------------------- ------------------------------------
By: Gary A. Graves By: Stephen P. Murray
Chief Executive Officer, President, Chairman of the Board and Director
Chief Operating Officer, and Director
/s/ Glenn H. Gage /s/ Terry D. Byers
- ------------------------------------- ------------------------------------
By: Glenn H. Gage By: Terry D. Byers
Director Director
/s/ Robert E. King /s/ Kevin G. O'Brien
- ------------------------------------- ------------------------------------
By: Robert E. King By: Kevin G. O'Brien
Director Director
/s/ Ronald L. Taylor
- -------------------------------------
By: Ronald L. Taylor
Director
74
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned; thereunto duly authorized, on September 24, 2004.
La Petite Academy, Inc.
/s/ Neil P. Dyment
-------------------------------------------
By: Neil Dyment
Chief Financial Officer and duly authorized
representative of the registrant
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed by the following persons on
behalf of the registrant and in the capabilities indicated on September 24,
2004.
/s/ Gary A. Graves /s/ Stephen P. Murray
- ------------------------------------- ------------------------------------
By: Gary A. Graves By: Stephen P. Murray
Chief Executive Officer, President Chairman of the Board and Director
Chief Operating Officer, and Director
/s/ Glenn H. Gage /s/ Terry D. Byers
- ------------------------------------- ------------------------------------
By: Glenn H. Gage By: Terry D. Byers
Director Director
/s/ Robert E. King /s/ Kevin G. O'Brien
- ------------------------------------- ------------------------------------
By: Robert E. King By: Kevin G. O'Brien
Director Director
/s/ Ronald L. Taylor
- -------------------------------------
By: Ronald L. Taylor
Director
75