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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 JUNE 29, 2002
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 [ ]
There are no shares of voting stock of La Petite Academy, Inc. held by
non-affiliates.
As of January 31, 2003, LPA Holding Corp. had outstanding 564,985 shares of
Class A Common Stock (par value, $.01 per share) and 20,000 shares of Class B
Common Stock (par value, $.01 per share). As of January 31, 2003, the additional
registrant had the number of outstanding shares, shown on the following table.
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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, $.01 per share)
2
LPA HOLDING CORP.
INDEX
PAGE
----
PART I.
Item 1. Business 4
Item 2. Properties 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 30
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 59
PART III.
Item 10. Directors and Executive Officers of the Registrant 60
Item 11. Executive Compensation 63
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 66
Item 13. Certain Relationships and Related Transactions 68
Item 14. Controls and Procedures 68
PART IV.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 70
SIGNATURES 80
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PART I.
ITEM 1. BUSINESS
RECENT DEVELOPMENTS
Restatement. Subsequent to the issuance of the Company's Annual Report on Form
10-K/A for the fiscal year end June 30, 2001, the Company determined that
certain asset, liability, revenue and expense items were incorrectly reported or
recognized in previously issued quarterly and annual financial statements. The
correction of these errors resulted in total charges to current and prior year
earnings of approximately $32.5 million, on an after-tax basis. The Company has
restated its balance sheet as of June 30, 2001 and statements of operations and
comprehensive loss and cash flows for each of the 52 weeks ended June 30, 2001
and July 1, 2000. See Note 2 to the consolidated financial statements included
at Item 8 of this report for further information. The cumulative after-tax
effect for periods prior to the 52 weeks ended July 1, 2000 has been reflected
as a charge to accumulated deficit at July 3, 1999 in the consolidated
statements of stockholders' deficit. Unaudited selected quarterly financial data
for each of the 52 weeks ended June 29, 2002 and June 30, 2001, as shown in Note
16 of the consolidated financial statements included in Item 8 of this report,
have also been restated from amounts shown in prior quarterly reports. Except as
otherwise stated herein, all financial information presented in this Form 10-K
for those periods gives effect to the restatement.
Asset Impairment. During the fourth quarter of fiscal year 2002, the Company
recognized impairment losses of $57.4 million, of which $52.3 million related to
goodwill and $5.1 million related to property and equipment. For additional
information regarding the Company's asset impairment losses, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations - 2002
Compared to 2001 Results - Asset Impairments" and Note 15 to the consolidated
financial statements included in Item 8 of this report.
New Executive Officers. On December 12, 2002, the Company promoted Gary A.
Graves from Chief Operating Officer to Chief Executive Officer and President.
Judith A. Rogala, the former President and Chief Executive Officer of the
Company had resigned to pursue other business opportunities in her home state of
California. The Company and Ms. Rogala have entered into a Separation Agreement
dated December 11, 2002. In addition, in September 2002, the Company appointed
Michael F. Czlonka as its Chief Financial Officer.
Amendment to Credit Agreement. The Company was not in compliance with certain of
the financial and informational covenants contained in the Credit Agreement for
various periods throughout fiscal 2002 and 2003. On February 10, 2003, the
Company entered into Amendment No. 5 to the Credit Agreement. Pursuant to this
amendment, the senior secured lenders agreed to waive the Company's existing
defaults, to extend the final maturity of the Credit Agreement by one year to
May 11, 2006 and to revise and set, as applicable, financial covenant targets
for fiscal years 2003 through 2006. As a condition to the effectiveness of this
amendment, the Company's parent was required to obtain contingent equity
commitments from its existing stockholders for an amount equal to $14.5 million.
For additional information regarding the amendment to the Credit Agreement, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -Liquidity and Capital Resources.
ORGANIZATION
Vestar/LPA Investment Corp. (Parent), a Delaware corporation, was formed in 1993
for the purpose of holding the capital stock of La Petite Holdings Corp.
(Holdings), a Delaware corporation. Holdings, which has no assets or operations,
was formed in 1993 for the purpose of holding the capital stock of La Petite
Acquisition Corp. (Acquisition). On July 23, 1993, as a result of a series of
transactions, Holdings acquired all the outstanding shares of common stock, par
value $.01 (the Common Stock), of La Petite Academy, Inc., a Delaware
corporation (La Petite). The transaction
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was accounted for as a purchase. On May 31, 1997, Holdings was merged with and
into La Petite with La Petite as the surviving corporation. On August 28, 1997,
LPA Services, Inc. (Services), a wholly owned subsidiary of La Petite, was
incorporated. Services provides third party administrative services on insurance
claims to La Petite.
On March 17, 1998, LPA Investment LLC (LPA), a Delaware limited liability
company, and Parent, which was renamed LPA Holding Corp., 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 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. In the Recapitalization, all of the then
outstanding shares of preferred stock and common stock of Parent (other than the
shares of common stock retained by Vestar/LPT Limited Partnership and management
of La Petite) owned by the existing stockholders of Parent (the Existing
Stockholders) were converted into cash. As part of the Recapitalization, LPA
purchased $72.5 million (less the value of options retained by management) of
common stock of the Parent and $30 million of Series A redeemable preferred
stock (Series A preferred stock) of Parent (collectively, the Equity
Investment). In addition, in connection with the purchase of Series A preferred
stock of Parent, LPA received warrants to purchase up to 6.0% of Parent's common
stock on a fully diluted basis. The Recapitalization was completed on May 11,
1998.
On July 21, 1999, La Petite acquired all the outstanding shares of Bright Start,
Inc. (Bright Start) for $10.4 million in cash and assumed approximately $2.0
million in debt. Bright Start operated 43 preschools in the states of Minnesota,
Wisconsin, Nevada, and New Mexico.
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 3% of
Parent's common stock on a fully-diluted basis at that time. The $15.0 million
proceeds received by Parent were contributed to La Petite as common equity.
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 in the aggregate $15.0 million of Series B preferred
stock of Parent and warrants to purchase 562,500 shares of common stock of
Parent as follows: (a) on November 15, 2001, Parent issued $3.4 million of
Series B preferred stock and 452,343 warrants, (b) on December 21, 2001, Parent
issued $2.3 million of Series B preferred stock and 110,157 warrants and (c) on
May 14, 2002, Parent issued an additional $9.3 million of Series B preferred
stock of Parent. All of the proceeds received by Parent from the sale of Series
B preferred stock and warrants were contributed to La Petite and were used by La
Petite for general working capital and liquidity purposes.
As of January 31, 2003, LPA beneficially owns 90.7% of the common stock of
Parent on a fully diluted basis, $45 million of Series A preferred stock of
Parent and approximately $15.0 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.
Parent, consolidated with La Petite, Bright Start and Services, is referred to
herein as the Company.
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 child care 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
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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 June 29, 2002, the Company operated 715 Academies including 652
residential Academies, 31 employer-based Academies and 32 Montessori schools
located in 37 states and the District of Columbia. For the 52 weeks ended June
29, 2002, the Company had an average attendance of approximately 74,600 full and
part-time children.
CURRICULUM
Residential and Employer-Based Academies. La Petite Academy, utilizing both
internal and external educational experts, designed and developed curriculum and
program materials for each developmental age grouping served.
All of La Petite's programs are developmentally appropriate, using an integrated
approach to learning and giving children opportunities to learn through all of
their senses while stimulating development and learning in all areas. Children
progress at their own pace, building skills and abilities in a logical pattern.
Each program includes a parent component, built-in training, carefully selected
age appropriate materials, equipment assessment and activities, and a
well-planned and developed environment.
Each program provides a balance of teacher-directed and child-directed
activities that address both the physical and intellectual development of young
children. Physical activities are designed to increase physical and mental
dexterity, specifically hand-eye and large and small muscle coordination.
Importance is also placed on creative and expressive activities such as
painting, crafts and music. Intellectual activities are designed to promote
language development, pre-reading, writing and thinking skills, and imagination
through role-playing, pretending and problem solving.
For infants and toddlers, activities are planned for a variety of developmental
areas such as listening and talking, physical development, creativity and
learning from the world around them. As infants become toddlers, more activities
focus on nurturing their need for independence and practicing small motor skills
that help them learn to feed themselves, walk and communicate with others.
Songs, fingerplays, art ideas, storytelling tips, building activities and many
activities to develop the bodies of toddlers through climbing, pushing and
pulling are included. These activities also build the foundation for social
skills such as how to get along with others and how to share.
The two-year-old curriculum includes fifty-two weeks worth of activities that
provide guidance and practice in developing all-important social and emotional
skills as well as emerging cognitive skills. An operational manual provides
guidance for environmental considerations, growth information and classroom
management techniques. Creativity and art continue to be reinforced through
drawing, gluing, dancing, singing and other appropriate expressive activities.
For preschoolers, typically 3 and 4 year old children, the Journey(R) curriculum
was developed. The Journey(R) curriculum is designed to maximize children's
cognitive development and provide a positive learning experience for the
children. The Company believes the Journey(R) curriculum is unsurpassed by the
educational materials of any of the major child care providers or its other
competitors, many of whom only provide curriculum materials for a portion of the
child's day. Journey covers the entire day. Learning occurs throughout six
Learning Centers that focus on different skills and areas of development. In
addition, Journey enables the children to experience the world around them
through geography, Spanish, mathematics and sensorial activities.
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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 9-12 month program
includes an emphasis on reading readiness; literacy appreciation; math; science;
character education; other social and emotional development areas and physical
strength and skills. An important component of this program utilizes
Scholastic's Building Language for Literacy program, used in all
pre-kindergarten classrooms. Careful assessment and development of individual
children's portfolios provide necessary flexibility and accountability on
learning and developmental appropriateness.
The private kindergarten program provides a balanced educational approach that
rivals any school district's program. This program meets or exceeds each state's
requirements, where it is in place. 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 program and curriculum for school age children, typically
children ages 5 through 12, consists of ten fun stations with appropriate
activities in each. These stations range from Study Hall, for completing
homework to Recreation Station, for fun indoors games to Sports Port, utilizing
outdoor areas for sports and other related activities. Social interactions with
children of their own age and participation in enrichment activities such as
arts and crafts and fitness round out this clubhouse-type program. 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 our 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 attractive,
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 enrolled children foreign
language and computer learning.
ACADEMY NETWORK
The Company operates three types of child care 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 child care 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 implements company policies and procedures, but has the
autonomy to individualize local operations. Responsibilities of Academy
Directors include 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 42 Managing Directors. Managing Directors
have an average of 13 years of experience with the Company, typically are
responsible for six to 30 Academies and report to one of three Divisional Vice
Presidents. Managing Directors visit their Academies regularly and are in
frequent contact to help make decisions and improvements to program quality and
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profitability. The Divisional Vice Presidents have an average of 21 years of
experience with the Company.
Residential Academies. As of June 29, 2002, the Company operated 652 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 child care 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 June 29, 2002, the Company operated 31
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, however they are opened to support businesses,
government, hospitals and universities with large, single site employee
populations. Employer-based Academies are located on business owner property and
the business owner sponsors and usually supports 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 June 29, 2002, the Company operated 32 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.
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. Several Academies in certain geographic markets have a backlog of
children waiting to attend; however, this backlog is not material to the overall
attendance throughout the system.
NEW ACADEMY DEVELOPMENT
The Company intends to expand within existing markets and enter new markets with
Academies concentrated in clusters. In existing markets, management believes it
has developed an effective selection process to identify attractive markets for
prospective Academy sites. 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
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residential Academies. The Company targets Metropolitan Statistical Areas with
benchmark demographics which indicate parent education levels and family incomes
combined with high child population growth, and considers the labor supply, cost
of marketing and the likely speed and ease of development of Academies in the
area. When entering new markets, in addition to the demographic study, a
detailed analysis of any competitors past and future exposure within the market
is analyzed.
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 special
compensation for the Academy Director who opens the new site and investment in
local marketing prior to the opening.
During the 2002 year, the Company opened six employer-based Academies and two
Journey-based Academy annexes.
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 and
competition. The Company also provides various tuition discounts primarily
consisting of sibling, staff, and Preferred Employer Program. The Company
adjusts tuition for Academy programs by child age group and program schedule
within each Academy on an annual basis each September. Parents also pay an
annual registration fee, which is reduced for families with more than one child
attending an Academy. 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 Accelerated Pre-Kindergarten and Private Kindergarten programs.
Management estimates that state governments pay the tuition for approximately
21% of the children under its care.
MARKETING AND ADVERTISING
The Company continues to focus on retention as the greatest asset to business
stability and growth. The innovative employee cash incentive bonus program,
launched in July 2000, rewards Academy employees for achieving utilization
targets and in-turn, providing high levels of customer service. The Company
believes that parents view the program as a highly positive means of improving
teacher retention and adding value to the Company. Since 2000, additional
programs designed to enhance communication between parents and teachers and
further build these important relationships were implemented. The Parent
Advisory Liaison, (PAL) 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) our education
professionals are committed to exceeding the customer's expectations and (ii)
for the Company's newly enrolled customers, after 90 days, if we do not meet
their expectations, the Company will guarantee to refund the customer's last
registration fee.
During 2002 the branding and marketing initiative, developed earlier to enhance
the value of the La Petite Academy name, continued through various promotional
activities, including direct mail, Internet, website, radio, print and local
grass roots efforts. Our Enhanced VIP Program continues to be highly successful
in driving new enrollments into our Academies. Through this program, current
customers who refer new customers are rewarded, and the new customer receives a
discount for enrolling.
A heavy emphasis has been placed on expanding corporate partner relationships
and growing the Preferred Employer Program. This Program allows the Company to
build quality relationships with
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large corporations by providing preferred pricing for their employees who enroll
their children at the Company's Academies.
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.
This year all Academies received new personal computers and an improved backup
process was implemented. To improve voice communications from the corporate
locations, a new telephone switch was installed. The new switch provides
increased functionality as well as new voice mail. Both data and voice
communication from academies were improved by the implementation of new hardware
and software.
COMPETITION
The United States preschool education and child care industry is highly
fragmented and competitive. The Company's competition consists principally of
local nursery schools and child care 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 child care centers generally charge less for
their services. Many religious-affiliated and other non-profit child care
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 our 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 our
Academies. The competition also consists of other large, national, for profit
child care 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, well-equipped facilities and additional services such as
transportation. In addition, the Company offers a challenging and sophisticated
program that emphasizes the individual development of the child. Based on focus
group research, the majority of parents rank the qualities of staff as the most
important deciding factor in choosing a child care facility. Following teacher
qualification were such items as safety, cleanliness, programs, and curriculum.
Price typically played a minimal role in the decision process, assuming price
was within a reasonable variance. For some potential customers, the non-profit
status of certain competitors may be a significant factor in choosing a child
care provider.
REGULATION AND GOVERNMENT INVOLVEMENT
Child care 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 greatly 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 and compliance with health and safety
standards. In certain jurisdictions, new legislation or regulations have been
enacted or are being considered which establish requirements for employee
background checks or other clearance procedures for new employees of child care
centers.
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In most jurisdictions, governmental agencies conduct scheduled and unscheduled
inspections of child care 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 our other Academies located in
the same jurisdiction. In addition, this type of action could lead to negative
publicity extending beyond that jurisdiction.
Management believes the Company is in substantial compliance with all material
regulations and licensing requirements applicable to our businesses. 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 unforeseen changes in regulations and
licensing requirements, such as changes in the required ratio of child center
staff personnel to enrolled children that could have material adverse effect on
our operations.
Certain tax incentives exist for child care programs. Section 21 of the Internal
Revenue Code provides a federal income tax credit ranging from 20% to 30% of
certain child care expenses for "qualifying individuals" (as defined in the
Code). The fees paid to the Company for child care services by eligible
taxpayers qualify for the tax credit, subject to the limitations of Section 21
of the Code. In addition to the federal tax credits, various state programs
provide child care assistance to low income families. Management estimates
approximately 21% 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.
Government, at both the federal and state levels, is actively involved in
expanding the availability of child care services. Federal support is delivered
at the state level through government-operated educational and financial
assistance programs. Child care services offered directly by states include
training for child care providers and resource and referral systems for parents
seeking child care. In addition, the state of Georgia has an extensive
government-paid private sector preschool program in which the Company
participates. Other states are looking at the Georgia preschool model.
The Federal Americans with Disabilities Act (the "Disabilities Act") prohibits
discrimination on the basis of disability in public accommodations and
employment. The Disabilities Act became effective as to public accommodations in
January 1992 and as to employment in July 1992. Since effectiveness of the
Disabilities Act, the Company has not experienced any material adverse impact as
a result of the legislation.
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 1,275 fifteen-passenger vans and
120 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 new NHTSA requirements, all new fleet additions or replacements will
meet school bus standards.
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.
11
TRADEMARKS
The Company has various registered trademarks 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, Parent's Partner, SuperStars and
Montessori Unlimited(R). 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. In addition the Company has registered various
trademarks in Japan, Taiwan and the Peoples Republic of China. Management
believes that the Company name and logos are important to its operations and
intends to continue to renew the trademark registrations thereof.
INSURANCE AND CLAIMS ADMINISTRATION
The Company maintains insurance covering comprehensive general liability,
automotive liability, workers' compensation, property and casualty, crime and
directors and officers insurance. The policies provide for a variety of
coverage, are subject to various limits, and include substantial deductibles or
self-insured retention. There is no assurance that claims in excess of, or not
included within, coverage will not be asserted, the effect of which could have a
material adverse effect on the Company.
EMPLOYEES
As of June 29, 2002, the Company employed approximately 13,500 Associates. 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 June 29, 2002, the Company operated 715 Academies, 631 of which were
leased under operating leases, 68 of which were owned and 16 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, 6,700, 7,800
or 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
because of different licensing requirements.
The following table summarizes Academy openings and closings for the indicated
periods.
FISCAL YEAR 2002 2001 2000 1999 1998
- ----------- ---- ---- ---- ---- ----
Academies;
Open at Beginning of Period 734 752 743 736 745
Opened During Period 8 6 59 13 1
Closed During Period (27) (24) (50) (6) (10)
--- --- --- --- ---
Open at End of Period 715 734 752 743 736
=== === === === ===
12
During the 2002 year, the Company opened six employer-based Academies and two
Journey-based Academy annexes. During that same period, the Company closed 27
schools. Thirteen of the closures resulted from management's decision to close
certain schools located in areas where the demographic conditions no longer
supported economically viable operations, and the remaining 14 closures were due
to management's decision not to renew the leases or contracts of certain
schools.
The following table shows the number of locations operated by the Company as of
June 29, 2002:
Alabama (14) Indiana (18) Nevada (17) Tennessee (27)
Arizona (24) Iowa (7) New Jersey (2) Texas (107)
Arkansas (5) Kansas (22) New Mexico (20) Utah (4)
California (53) Kentucky (4) New York (1) Virginia (35)
Colorado (22) Louisiana (1) North Carolina (26) Washington, DC (1)
Connecticut (1) Maryland (15) Ohio (16) Washington (14)
Delaware (1) Minnesota (5) Oklahoma (21) Wisconsin (14)
Florida (84) Mississippi (3) Oregon (7) Wyoming (1)
Georgia (43) Missouri (23) Pennsylvania (5)
Illinois (23) Nebraska (10) South Carolina (19)
The leases have initial terms expiring as follows:
YEARS INITIAL LEASE TERMS EXPIRE NUMBER OF ACADEMIES
2003 144
2004 133
2005 77
2006 91
2007 82
2008 and later 104
---
631
---
At June 29, 2002, the Company leased 631 Academies from approximately 381
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
business. In management's opinion, no litigation in which the Company is
currently involved will result in liabilities that will have a material adverse
effect on its financial condition, liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
13
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Parent is not publicly traded. As of January 31, 2003,
LPA owned 89.6% of the Parent's outstanding common stock, Vestar/LPT Limited
Partnership owned 3.6%, management owned 1.6% and former management owned 5.2%.
No cash dividends were declared or paid on the Parent's common stock during the
2002 and 2001 years. The Company's 10% Series B Senior Notes due 2008 (Senior
Notes) and preferred stock (see Note 5 and Note 9 to the consolidated financial
statements) contain certain covenants that, among other things, do not permit La
Petite to pay cash dividends on its common or preferred stock now or in the
immediate future.
As of January 31, 2003, there were 13 holders of record of Parent's common
stock.
14
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 selected financial data
contains certain financial information that has been restated. See "Item 1.
Business - Restatement" and Note 2 to the consolidated financial statements
included in Item 8 of this report for further discussion of this matter.
AS RESTATED (a)
-----------------------------------------------------
52 WEEKS 52 WEEKS 52 WEEKS 44 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
JUNE 29, JUNE 30, JULY 1, JULY 3, AUGUST 29,
2002 2001 (b) 2000 1999 (b) 1998
INCOME STATEMENT DATA
Operating revenue $ 391,205 $ 384,924 $ 371,265 $ 281,307 $ 316,199
Operating expenses, exclusive of
recapitalization costs,
restructuring
charges and asset impairments 388,871 374,051 359,382 266,032 299,714
Recapitalization costs (c) 8,724
Restructuring charges (d) 3,208 2,455 7,705 110 124
Asset impairments (e) 57,436
--------- ---------- ---------- ---------- ----------
Total operating expenses 449,515 376,506 367,087 266,142 308,562
--------- ---------- ---------- ---------- ----------
Operating (loss) income (58,310) 8,418 4,178 15,165 7,637
Interest expense (f) 21,902 20,487 20,880 16,144 14,126
Minority interest in net
income of subsidiary 2,849
Interest income (204) (85) (163) (153) (885)
--------- ---------- ---------- ---------- ----------
Loss before income taxes
and extraordinary item (80,008) (11,984) (16,539) (826) (8,453)
Provision (benefit) for income
taxes (3,236) 16,204 (5,453) 579 (415)
--------- ---------- ---------- ---------- ----------
Loss before extraordinary item (76,772) (28,188) (11,086) (1,405) (8,038)
Extraordinary loss on early
retirement of debt (g) (5,525)
--------- ---------- ---------- ---------- ----------
Net loss (76,772) (28,188) (11,086) (1,405) (13,563)
Other comprehensive income:
Derivative adjustments, net 492
Amounts reclassified into operations (85) (161)
--------- ---------- ---------- ---------- ----------
Comprehensive loss $ (76,857) $ (27,857) $ (11,086) $ (1,405) $ (13,563)
========= ========== ========== ========== ==========
BALANCE SHEET DATA (AT END OF PERIOD)
Total assets $ 91,568 $ 148,665 $ 165,935 $ 171,927 $ 162,414
Total long-term debt and capital lease 196,963 193,211 182,319 187,999 185,727
obligation
Preferred stock 78,624 54,941 47,314 29,310 25,625
Stockholders' deficit (246,629) (161,089) (125,604) (111,595) (105,936)
OTHER DATA
EBITDA (h) $ 16,998 $ 25,839 $ 28,062 $ 28,096 $ 33,423
Cash flows from operating activities 2,967 4,619 771 15,362 8,146
Cash flows from investing activities (8,791) (14,313) (7,828) (19,148) (10,838)
Cash flows from financing activities 16,502 11,100 6,493 1,490 (14,411)
Depreciation and amortization 14,664 14,966 16,179 12,821 16,938
Capital expenditures 9,629 14,502 20,899 31,610 13,470
Proceeds from sale of assets 838 189 23,432 12,462 2,632
Ratio of earnings to fixed charges (i) (i) (i) (i) (i) (i)
Academies at end of period 715 734 752 743 736
FTE utilization during the period (j) 63% 63% 63% 65% 65%
15
a) See Note 2 to the consolidated financial statements included at Item 8
of this report for further discussion of the restatements.
b) 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. On June 10,
1999, the Company changed its fiscal year to be the period starting on
the first Saturday in July and ending on the first Saturday of July of
the subsequent year, resulting in a 44-week year for fiscal 1999 (see
Note 3 to the consolidated financial statements included in Item 8 of
this report).
c) Recapitalization costs consist principally of transaction bonuses of
$1.5 million and payments for the cancellation of options of $7.2
million, both of which were inclusive of payroll taxes.
d) Restructuring charges resulted from management's decision to close
certain Academies located in areas where the demographic 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, real estate
taxes, common area maintenance charges, and utilities, net of
anticipated sublease income, the write-off of goodwill associated with
closed Academies, and the write-down of fixed assets to fair market
value. See Note 14 to the consolidated financial statements included in
Item 8 of this report for further discussion.
e) During the fourth quarter of fiscal 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.
f) Interest expense includes $1.1 million, $1.1 million, $1.1 million,
$0.8 million, and $0.8 million of amortization of deferred financing
costs for fiscal years 2002, 2001, 2000, 1999, and 1998, respectively.
g) On May 11, 1998, the Company incurred a $5.5 million extraordinary loss
related to (i) the retirement of all the outstanding $85.0 million
principal amount of 9 5/8% Senior Notes due in 2001, (ii) the exchange
of all outstanding shares of La Petite's Class A preferred stock for
$34.7 million in aggregate principal amount of La Petite's 12 1/8%
Subordinated Exchange Debentures due in 2003, and (iii) the retirement
of all the 12 1/8% Subordinated Exchange Debentures and the 6.5%
Convertible Debentures. The loss principally reflects the write-off of
premiums and related deferred financing costs, net of applicable income
tax benefit.
h) EBITDA is defined as income before extraordinary items, minority
interest, recapitalization costs, restructuring charges, asset
impairments, net interest cost, taxes, depreciation and amortization.
The following table (in thousands of dollars) reconciles the
differences between net loss, as prepared in conformity with generally
accepted accounting principles in the United States of America, and
EBITDA:
16
52 WEEKS 52 WEEKS 52 WEEKS 44 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
JUNE 29, JUNE 30, JULY 1, JULY 3, AUGUST 29,
2002 2001 2000 1999 1998
-------------------------------------------------------------------
Net loss $ (76,772) $(28,188) $ (11,086) $ (1,405) $ (13,563)
Extraordinary loss 5,525
Provision (benefit) for income (3,236) 16,204 (5,453) 579 (415)
taxes
Minority interest 2,849
Interest income (204) (85) (163) (153) (885)
Interest expense 21,902 20,487 20,880 16,144 14,126
Recapitalization costs 8,724
Restructuring charge 3,208 2,455 7,705 110 124
Asset impairments 57,436
Depreciation and amortization 14,664 14,966 16,179 12,821 16,938
---------- -------- --------- --------- ---------
EBITDA $ 16,998 $ 25,839 $ 28,062 $ 28,096 $ 33,423
========== ======== ========= ========= =========
EBITDA should not be considered in isolation or as a substitute for net
income, cash flows from operating activities and other consolidated
income or cash flow statement data prepared in conformity with
accounting principles generally accepted in the United States of
America or as a measure of the Company's profitability or liquidity.
EBITDA may not be comparable to similarly titled measures used by other
companies.
i) 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 52 weeks ended June 29, 2002, June 30, 2001, July 1,
2000, the 44 weeks ended July 3, 1999 and the 52 weeks ended August 29,
1998, earnings were inadequate to cover fixed charges by $80.0 million,
$12.0 million, $16.5 million, $0.8 million and $8.5 million,
respectively.
j) 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.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 Management's Discussion and Analysis of Financial Condition and
Results of Operations presented below reflects certain restatements to
previously reported results of operations for these periods. See Note 2 to the
consolidated financial statements included at Item 8 of this report for further
discussion of the restatements.
On April 18, 2001, the Company changed its fiscal year end from the 52/53-week
period ending on the first Saturday in July to the 52/53-week period ending on
the Saturday closest to June 30 (See Note 3 of the consolidated financial
statements). The tables below present the results of the 52 weeks ended June 29,
2002, the results of the 52 weeks ended June 30, 2001, and the results of the 52
weeks ended July 1, 2000 (herein referred to as the 2002 year, the 2001 year,
and the 2000 year).
New educational facilities (New Academies), as defined by the Company, are
Academies opened within the current or previous fiscal year. These schools
typically generate operating losses during the first few months of operation
until the Academies achieve normalized occupancies.
Full-time equivalent (FTE) attendance, as defined by the Company, is not a
measure of the absolute number of students attending the Company's Academies,
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.
2002 COMPARED TO 2001 RESULTS (IN THOUSANDS OF DOLLARS)
52 WEEKS ENDED 52 WEEKS ENDED
---------------------------- ---------------------------
June 29, Percent of June 30, Percent of
2002 Revenue 2001 Revenue
----------- ---------- ---------- ----------
Operating revenue $ 391,205 100.0% $ 384,924 100.0%
Operating expenses:
Salaries, wages and benefits 215,572 55.1 216,297 56.2
Facility lease expense 45,554 11.6 44,815 11.6
Depreciation and amortization 14,664 3.7 14,966 3.9
Restructuring charge 3,208 0.8 2,455 0.6
Asset impairments 57,436 14.7 0 0.0
Provision for doubtful accounts 2,951 0.8 4,665 1.2
Other 110,130 28.2 93,308 24.2
----------- ----- ---------- -----
Total operating expenses 449,515 114.9 376,506 97.8
----------- ----- ---------- -----
Operating income (loss) $ (58,310) -14.9% $ 8,418 2.2%
=========== ===== ========== =====
During the 2002 year, the Company opened 8 new schools and closed 27 schools. As
a result, the Company operated 715 schools on June 29, 2002. Thirteen of the
closures resulted from management's decision to close certain schools located in
areas where the demographic conditions no longer supported economically viable
operations, and the remaining 14 closures were due to management's decision not
to renew the leases or contracts of certain schools.
Operating revenue. Operating revenue increased $6.3 million or 1.6% during the
2002 year as compared to the 2001 year. The operating revenue increase is the
result of a $14.5 million increase at established schools (schools which were
open prior to the 2001 year), and a $2.6 million increase at new schools, most
18
of which were opened in the first half of the 2002 year, offset by $10.8 million
of reduced operating revenue at closed schools. Tuition revenue increased 1.6%
during the 2002 year as compared to the 2001 year. The increase in tuition
revenue reflects an increase in the average weekly FTE tuition rates of 7.4%
offset by a decrease in full time equivalent (FTE) attendance of 5.3%.
The increase in average weekly FTE tuition rates was principally due to
selective price increases, which were put into place in September 2000 and
September 2001, based on geographic market conditions and class capacity
utilization. The decrease in FTE attendance was due to a 2.9% decline at
established schools and an 85.8% decline in schools closed during 2001 and 2002,
offset by a 275.8% increase at our new schools.
Salaries, wages and benefits. Salaries, wages and benefits decreased $0.7
million or 0.3% during the 2002 year as compared to the 2001 year. As a
percentage of revenue, labor costs were 55.1% for the 2002 year as compared to
56.2% for the 2001 year. The decrease in salaries, wages and benefits includes
reduced labor costs at closed schools of $6.4 million, and reduced bonus costs
of $0.4 million offset by increased labor costs at established schools of $2.2
million, increased labor costs at new schools of $1.9 million, increased field
management and corporate administration labor costs of $1.5 million, and
increased benefit costs of $0.5 million. The increase in labor costs at
established schools was mainly due to a 4.3% increase in average hourly wage
rates offset by a 3.3% 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 $0.7 million or 1.6%
during the 2002 year as compared to the 2001 year. The increase in facility
lease expense was mainly due to a $0.8 million decrease in sublease income and a
$0.2 million increase related to the new corporate office, offset by a $0.3
million reduction in lease payments for facilities with contingent rent
provisions.
Depreciation and amortization. Depreciation expense decreased $0.3 million or
2.0% during the 2002 year as compared to the 2001 year. This decrease was mainly
due to asset write-offs resulting from the 2001 year school closings that
occurred mainly in the fourth quarter.
Restructuring charges. The Company recognized a restructuring charge of $3.2
million in the 2002 year in connection with the closure of seven Academies and
one divisional office. All of those Academies and the divisional office were
closed during the 2002 year. In the 2001 year, the Company recognized a
restructuring charge of $2.5 million in connection with the closure of 15
Academies and two regional offices. Nine of the 15 Academies and both regional
offices closed in the 2001 year, while the remainder closed in the 2002 year.
The restructuring charges consisted principally of the present value of rent,
real estate taxes, common area maintenance charges, and utilities, net of
anticipated sublease income, the write-off of goodwill associated with closed
Academies, and the write-down of fixed assets to fair market value.
Asset impairments. During the fourth quarter of fiscal 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 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.
Provision for doubtful accounts. The provision for doubtful accounts decreased
$1.7 million or 36.7% during the 2002 year as compared to the 2001 year. The
decrease in the provision for doubtful accounts is principally the result of
improved collection efforts over the prior year.
19
Other operating costs. Other operating costs increased $16.8 million or 18.0%
during the 2002 year as compared to the 2001 year. Other operating costs include
repair and maintenance, utilities, insurance, real estate taxes, food,
transportation, marketing, supplies, travel, professional fees, recruitment,
training and other miscellaneous costs. In the 2002 year, supply costs increased
$2.7 million due to a change in estimates related to the determination of supply
inventories on hand. The other increases were due primarily to higher expenses
in utilities, insurance, marketing, travel, bank charges and shortages, school
activity costs, management meetings, professional fees, and recruitment costs,
offset by decreases in training, postage, data processing and printing costs. As
a percentage of revenue, other operating costs increased to 28.2% in the 2002
year as compared to 24.2% in the 2001 year.
Operating income. As a result of the foregoing, the operating loss was $58.3
million for the 2002 year as compared to operating income of $8.4 million for
the 2001 year. Excluding restructuring charges in both years and the 2002 year
asset impairment, operating income decreased $8.5 million or 78.5% in the 2002
year as compared to the 2001 year. The decrease was principally due to the
change in estimate related to the determination of supply inventories on hand
and higher other operating costs offset by higher revenue.
Interest expense. Net interest expense increased $1.3 million or 6.4% during the
2002 year as compared to the 2001 year. The increase was principally due to a
nonrecurring $2.1 million mark-to-market credit adjustment for derivative
instruments in the 2001 year, a $0.2 million increase resulting from additional
borrowing, and a $0.3 million increase in debt fees, offset by $1.2 million in
accretion of the fair value discount to the carrying value of the Senior Notes
and a $0.1 million increase in interest income.
Income tax rate. The 2002 year income tax benefit was $3.2 million, or 4% of
pretax loss compared with the 2001 year income tax expense of $16.2 million or
135% of the $12.0 million pretax loss. Due to a change in certain federal tax
laws during fiscal 2002, the Company was able to file for and receive a refund
of income taxes paid in prior years. This refund of approximately $3.2 million
was recorded as a benefit in the current year. Excluding the impact of this
refund, the effective tax rate in fiscal 2002 was 0% due to the current period
operating loss and the Company's provision of a full valuation allowance against
deferred tax assets created in the current year. The principal factors impacting
the effective income tax rate in the 2001 year were state income taxes,
nondeductible goodwill amortization, write-off of goodwill related to closed
schools, and the creation of $20.9 million deferred tax asset valuation
allowance.
2001 COMPARED TO 2000 RESULTS (IN THOUSANDS OF DOLLARS)
52 WEEKS ENDED 52 WEEKS ENDED
---------------------------- ----------------------------
June 30, Percent of July 1, Percent of
2001 Revenue 2000 Revenue
----------- ---------- ------------ ----------
Operating revenue $ 384,924 100.0% $ 371,265 100.0%
Operating expenses:
Salaries, wages and benefits 216,297 56.2 206,151 55.5
Facility lease expense 44,815 11.6 46,649 12.6
Depreciation and amortization 14,966 3.9 16,179 4.4
Restructuring charge 2,455 0.6 7,705 2.1
Provision for doubtful accounts 4,665 1.2 2,931 0.8
Other 93,308 24.2 87,472 23.6
----------- ----- ------------ -----
Total operating expenses 376,506 97.8 367,087 98.9
----------- ----- ------------ -----
Operating income $ 8,418 2.2% $ 4,178 1.1%
=========== ===== ============ =====
During the 2001 year, the Company opened 6 new schools and closed 24 schools. As
a result, the Company operated 734 schools on June 30, 2001. Five of the
closures resulted from management's decision in the 2000 year to close certain
schools located in areas where the demographic conditions no
20
longer supported an economically viable operation, nine of the closures resulted
from management's decision in the 2001 year to close certain schools located in
areas where the demographic conditions no longer supported an economically
viable operation, and the remaining 10 closures were due to management's
decision not to renew the leases or contracts of certain schools.
Operating revenue. Operating revenue increased $13.7 million or 3.7% during the
2001 year as compared to the 2000 year. The increase in operating revenue
includes $18.3 million of incremental revenue from established schools and $7.7
million of incremental revenue from the new schools, most of which were opened
late in the 1999 year or early in the 2000 year, offset by $12.3 million of
reduced revenue from closed schools. Tuition revenue increased 3.8% during the
2001 year as compared to the 2000 year. The increase in tuition revenue reflects
an increase of the average weekly FTE tuition rates of 9.9% offset by a decrease
in full time equivalent (FTE) attendance of 5.6%. The increase in average weekly
FTE tuition rates was principally due to selective price increases, which were
put into place in February 1999 and in September 2000, based on geographic
market conditions and class capacity utilization. The decrease in FTE attendance
was due to a 3.4% decline at our established schools (schools which were open
prior to the 2000 year) and a 74.9% decline in schools closed during the 2000
and 2001 years, offset by a 41.8% increase at our new schools.
Salaries, wages and benefits. Salaries, wages and benefits increased $10.1
million or 4.9% during the 2001 year as compared to the 2000 year. As a
percentage of revenue, labor costs were 56.2% for the 2001 year as compared to
55.5% during the 2000 year. The increase in salaries, wages and benefits
includes incremental labor costs at established schools of $12.3 million,
incremental labor costs at new schools of $3.2 million, increased field
management and corporate administration labor costs of $0.8 million, increased
benefit costs of $2.0 million, and increased bonus costs of $1.1 million, offset
by reduced labor costs at closed schools of $9.3 million. The increase in labor
costs at established schools was mainly due to an 8.0% increase in average
hourly wage rates, as labor hours were flat with the prior year. New schools
experience higher labor costs relative to revenue as compared to the established
schools.
Facility lease expense. Facility lease expense decreased $1.8 million or 3.9%
during the 2001 year as compared to the 2000 year. The decrease in facility
lease expense was mainly due to the closures late in the 2000 year, offset by
slightly increased lease expense on lease renewals.
Depreciation and amortization. Depreciation expense decreased $1.2 million or
7.5% during the 2001 year as compared to the 2000 year. This decrease was mainly
due to the closings that occurred late in the 2000 year.
Provision for doubtful accounts. The provision for doubtful accounts increased
$1.7 million or 59.2%. The increase in the provision for doubtful accounts is
principally a result of increasing revenue, and higher write-offs.
Restructuring charges. The Company recognized a restructuring charge of $2.5
million in the 2001 year in connection with the closure of 15 Academies and two
regional offices. Nine of the 15 Academies and both regional offices closed in
the 2001 year, while the remainder closed in the 2002 year. In the 2000 year,
the Company recognized a restructuring charge of $7.7 million in connection with
the closure of 49 Academies. Thirty-eight of the 49 Academies closed in the 2000
year, five closed in the 2001 year and six schools remained open. The
restructuring charges consisted principally of the present value of rent, real
estate taxes, common area maintenance charges, and utilities, net of anticipated
sublease income, the write-off of goodwill associated with closed Academies, and
the write-down of fixed assets to fair market value.
Other operating costs. Other operating costs increased $5.8 million or 6.7%
during the 2001 year as compared to the 2000 year. Other operating costs include
repair and maintenance, utilities, insurance, real estate taxes, food,
transportation, marketing, supplies, travel, professional fees, recruitment,
training and other miscellaneous costs. The increase was due primarily to higher
expenses in repairs and maintenance, utilities, insurance, real estate taxes,
marketing, travel, data processing, professional fees, and other miscellaneous
costs, offset by decreases in transportation, supplies, petty cash expenses,
training, and school activity costs. As a percentage of revenue, other operating
costs increased to 24.2% in the 2001 year
21
as compared to 23.6% in the 2000 year.
Operating income. As a result of the foregoing, operating income was $8.4
million for the 2001 year as compared to $4.2 million during the 2000 year.
Excluding restructuring costs, operating income decreased $1.0 million or 8.5%
in the 2001 year as compared to the 2000 year. The decrease in operating income
is principally due to higher labor costs and other operating costs offset by
increased revenue, lower facility lease expense and lower depreciation and
amortization.
Interest expense. Net interest expense for the 2001 year decreased $0.3 million
from the 2000 year. The decrease was principally due to a $2.1 million
mark-to-market credit adjustment for derivative instruments and $0.3
reclassification from other comprehensive income into operations, offset by $1.2
million in accretion of the fair value discount to the carrying value of the
senior notes, a $0.3 million increase resulting from additional borrowings, $0.4
million in interest on the closed school reserve and a $0.1 million decrease in
interest income.
Income tax rate. The 2001 year income tax expense was $16.2 million, or 135% of
the $12.0 million pretax loss compared with the 2000 year income tax benefit of
$5.5 million or 33% of the pretax loss. The valuation allowance provision of
$20.9 million for fiscal 2001 is the primary difference between the 2001 year
expense and the 2000 year benefit. The principal factors impacting the effective
income tax rate in the 2001 year were state income taxes, nondeductible goodwill
amortization, write-off of goodwill related to closed schools, and the creation
of a $20.9 million deferred tax asset valuation reserve. The principal factors
impacting the effective income tax rate in the 2000 year were state income
taxes, nondeductible goodwill amortization, and the write-off of goodwill
related to closed schools.
EBITDA
EBITDA is being presented because management believes that certain investors
find EBITDA to be a useful tool for measuring the Company's ability to service
its debt. In addition, EBITDA is being presented because it is an important
measure that is used in the calculation of the covenants under the Company's
indenture and Credit Agreement. However, EBITDA is not necessarily a measure of
the Company's ability to fund its cash needs and should not be construed as
being more important than the generally accepted accounting principles (GAAP)
financial information disclosed under "-Results of Operations." EBITDA is not
calculated under GAAP and therefore it is not necessarily comparable to
similarly titled measures reported by other companies.
EBITDA is defined as income before restructuring charges, asset impairments,
extraordinary items, net interest cost, taxes, depreciation and amortization.
The following table (in thousands of dollars) reconciles the differences between
net loss, as prepared in conformity with GAAP in the United States of America,
and EBITDA:
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JUNE 29, JUNE 30, JULY 1,
2002 2001 2000
-------------------------------------
Net loss $ (76,772) $ (28,188) $ (11,086)
Provision (benefit) for income (3,236) 16,204 (5,453)
taxes
Interest income (204) (85) (163)
Interest expense 21,902 20,487 20,880
Restructuring charge 3,208 2,455 7,705
Asset impairments 57,436
Depreciation and amortization 14,664 14,966 16,179
----------- --------- ---------
EBITDA $ 16,998 $ 25,839 $ 28,062
=========== ========= =========
During the 2002 year, EBITDA decreased $8.8 million or 34.2% as compared to the
2001 year. The 2002 year decrease was principally due to the change in estimate
related to the determination of supply
22
inventories on hand and higher other operating costs offset by higher revenue.
During the 2001 year, EBITDA decreased $2.2 million or 7.9% as compared to the
2000 year. The 2001 year decrease was principally due to higher labor costs and
other operation costs offset by increased revenue, and lower facility lease
expense. EBITDA as a percentage of revenue was 4.3%, 6.7% and 7.6% in the 2002,
2001 and 2000 years respectively.
LIQUIDITY AND CAPITAL RESOURCES
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 Parent. The Company's principal uses of
funds are debt service requirements, capital expenditures and working capital
needs. The Company incurred substantial indebtedness in connection with the
Recapitalization.
Parent and La Petite have entered into the Credit Agreement, as amended,
consisting of the $40 million Term Loan Facility and the $25 million Revolving
Credit Facility. Parent and La Petite borrowed the entire $40 million available
under the Term Loan Facility in connection with the Recapitalization. The
borrowings under the Credit Agreement, together with the proceeds from the sale
of the Senior Notes and the Equity Investment, were used to consummate the
Recapitalization and to pay the related fees and expenses.
The Credit Agreement, as amended, will terminate on May 11, 2006. Payments due
under the amortization schedule for the term loan are $1.0 million per year in
fiscal years 2003 and 2004, $5.5 million in fiscal year 2005, and $28.8 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 June 29, 2002, there was $36.3 million outstanding on
the term loan and $17.2 million outstanding on the Revolving Credit Facility. La
Petite had outstanding letters of credit in an aggregate amount of $7.4 million,
and $0.4 million was available for working capital purposes under the Revolving
Credit Facility. The Company's Credit Agreement, Senior Notes and preferred
stock contain certain covenants that limit the ability of the Company to incur
additional indebtedness, pay cash dividends or make certain other restricted
payments
On July 21, 1999, the Company acquired all the outstanding shares of Bright
Start for $10.4 million in cash and assumed approximately $2.0 million in debt.
Bright Start operated 43 preschools in the states of Minnesota, Wisconsin,
Nevada, and New Mexico.
On December 15, 1999, Parent issued $15.0 million of Series A preferred stock
and warrants to purchase an additional 3.0% of the Parent's outstanding common
stock on a fully diluted basis at that time. The proceeds of that investment
were contributed to La Petite as common equity. In connection with such purchase
and contribution, the banks waived their right under the Credit Agreement to
require that such proceeds be used to repay amounts outstanding under the Credit
Agreement. The proceeds of such equity contribution were used to repay
borrowings under the revolving credit facility that were incurred to finance the
Bright Start acquisition.
On November 14, 2001, Parent, La Petite and certain of its senior secured
lenders entered into an amendment to the Credit Agreement. The amendment waived
existing defaults of Parent and La Petite in connection with the failure to
satisfy certain financial covenants for the quarterly periods ended June 30,
2001 and September 30, 2001, and the failure to deliver timely financial
information to the senior secured lenders. Additionally, the amendment revised
certain financial covenant targets for fiscal years 2002, 2003 and 2004. The
amendment also addressed specific waivers necessary to permit the issuance of a
new class of convertible redeemable participating preferred stock (Series B
preferred stock) of Parent. In consideration for the waiver and amendments,
Parent was required to issue additional equity in the amount of $15.0 million in
a series of closings through May 14, 2002. In connection with such issuances,
the banks waived their right under the Credit Agreement to require that the
proceeds be used to repay amounts outstanding under the Credit Agreement.
23
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 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 in the aggregate $15.0 million of its Series B preferred stock and
issued warrants to purchase 562,500 shares of its common stock as follows: (a)
on November 15, 2001, Parent issued $3.4 million of Series B preferred stock and
452,343 warrants, (b) on December 21, 2001, Parent issued $2.3 million of Series
B preferred stock and 110,157 warrants and (c) on May 14, 2002, Parent issued an
additional $9.3 million of its Series B preferred stock. All of the proceeds
were contributed to La Petite as common equity and were used by La Petite for
general working capital and liquidity purposes.
As of January 31, 2003, LPA beneficially owns 90.7% of the common stock of
Parent on a fully diluted basis, $45 million of Series A preferred stock of
Parent and approximately $15.0 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.
The Company was not in compliance with certain of the financial and
informational covenants contained in the Credit Agreement for the third quarter
ended April 6, 2002 and the fourth quarter ended June 29, 2002. Furthermore,
following the restatement of the Company's financial information for the fiscal
years 1999, 2000 and 2001, the Company was not in compliance with certain of the
financial covenants for each of the quarters ending in fiscal years 1999, 2000
and 2001 and the first two quarters of fiscal year 2002. In addition, the
Company was not in compliance with certain of the financial and informational
covenants for the first quarter of fiscal year 2003. The Company received
limited waivers of noncompliance with the foregoing financial and informational
covenants through February 7, 2003. The amendment to the Credit Agreement dated
as of February 10, 2003, permanently waived such defaults and an expected
default for the second quarter of fiscal year 2003.
On February 10, 2003, Parent, La Petite and its senior secured lenders entered
into Amendment No. 5 to the Credit Agreement. The amendment waived existing
defaults of Parent and La Petite in connection with (a) the failure to satisfy
certain financial covenants for the quarterly periods ended (i) during 1999,
2000, 2001, and 2002 and (ii) nearest to September 30, 2002, and December 31,
2002; (b) the failure to deliver timely financial information to the senior
secured lenders; (c) the failure to file reports with the Securities and
Exchange Commission; (d) the failure to obtain the consent of the senior lenders
prior to the disposition of certain assets; and (e) the failure to deliver
required documents to the senior lenders prior to the disposition of other
assets. Additionally, the amendment 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 are required
to be used to prepay the term loans 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"), Parent may
issue up to 6,669,733 shares of its series B convertible preferred stock and
warrants to purchase shares representing up to 10% of its class A common stock.
Parent will issue a pro rata portion of the warrants to each Electing
Stockholder. All of the proceeds received by Parent from the issuance of the
series B preferred stock, if any, 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 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
24
to such fiscal quarter. 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,
the aggregate number of shares to be purchased by the Electing Stockholders, if
any, 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
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 shall be reduced by the number of shares of series B
preferred stock purchased prior to the expiration of such fiscal quarter. 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 6,669,733 shares of series B preferred stock; (b) the
date the obligations (other than contingent obligations and liabilities) of
Parent and its subsidiaries under the Credit Agreement are terminated; and (c)
the date the lenders under the Credit Agreement agree to release the Electing
Stockholders from their obligations under the Securities Purchase Agreement.
LPA has agreed to commit to purchase, in accordance with the terms of the
Securities Purchase Agreement, 96.2% of the series B preferred stock being
offered and will receive warrants to purchase shares of Parent's class A common
stock in connection with such commitment. LPA has committed to purchase, in
accordance with the terms of the Securities Purchase Agreement, the respective
pro rata amount of each stockholder of Parent that exercises less than 100% of
their respective preemptive right to acquire the series B preferred stock.
Management is instituting a series of plans and actions designed to improve the
Company's operating results and cash flow and to strengthen the Company's
financial position. These plans include cost reductions resulting from continued
academy closures and personnel reductions, as well as targeted reductions in
certain overhead costs and optimization of the Company's real estate portfolio.
Since June 29, 2002, the Company has closed 45 Academies.
Management believes that implementation of their plans to improve operations and
cash flows, coupled with the amendment of the financial covenants contained in
the credit agreement and the additional contingent equity commitments provided
by LPA and other stockholders of Parent, if any, will allow the Company to
comply with its required financial covenants, meet its obligations as they come
due and provide adequate liquidity to operate the business for the next twelve
months. However, there can be no assurance in this regard. Furthermore, there
can be no assurance that the Company's lenders will waive any future violations
of the Credit Agreement that may occur or agree to future amendments of the
Credit Agreement. There also can be no assurance that the Company can obtain
additional funding from Parent beyond that as noted above or any other external
source.
Cash flows from operating activities were $3.0 million during the 2002 year as
compared to $4.6 million during the 2001 year. The $1.6 million decrease in cash
flows from operations was mainly due to $3.8 million increase in net losses, net
of non-cash charges, partially offset by decreased working capital amounts.
Cash flows used for investing activities were $8.8 million during the 2002 year
as compared to $14.3 million during the 2001 year. The $5.5 million decrease was
due to a $4.9 million decrease in capital expenditures and a $0.6 million
increase in proceeds from sale of assets.
Cash flows from financing activities were $16.5 million during the 2002 year
compared to $11.1 million during the 2001 year. The $5.4 million increase in
cash flows from financing activities was principally due a $15.0 million
increase in proceeds from the issuance of Series B preferred stock and warrants
partially offset by an $8.8 million reduction in net borrowings under the
revolving credit agreement and a $0.7 million increase in deferred financing
costs.
25
Cash flows from operating activities were $4.6 million during the 2001 year as
compared $0.8 million during the 2000 year. The $3.8 million increase in cash
flows from operations was mainly due to $7.9 million decrease in working capital
amounts, partially offset by a $4.1 increase in net losses, net of non-cash
charges.
Cash flows used for investing activities were $14.3 million during the 2001 year
as compared $7.8 million during the 2000 year. The $6.5 million increase was due
to a $23.3 million decrease in proceeds from sale of assets, partially offset by
a $10.4 million decrease in cash paid for acquisitions and a $6.4 million
decrease in capital expenditures.
Cash flows from financing activities were $11.1 million during the 2001 year
compared to cash flows from financing activities of $6.5 million during the 2000
year. The $4.6 million increase in cash flows from financing activities was
principally due to a $13.0 million increase in net borrowings under the
revolving credit agreement, a $6.3 million reduction in repayment of debt and
capital lease obligations, partially offset by a $15.0 million reduction of
proceeds from the issuance of preferred stock and warrants.
During the 2002 year, the Company opened six employer-based Academies and two
Journey-based Academy annexes. Employer-based Academies are generally operated
in facilities provided by the employer. The cost to open a new Journey school
ranges from $1.0 million to $2.0 million.
Total capital expenditures for the 52 weeks ended June 29, 2002 and June 30,
2001 were $9.6 million and $14.5 million, respectively. The Company views all
capital expenditures, other than those incurred in connection with the
development of new schools, to be maintenance capital expenditures. Maintenance
capital expenditures for the 52 weeks ended June 29, 2002 and June 30, 2001 were
$8.4 million and $14.2 million, respectively. For fiscal year 2003, the Company
expects total maintenance capital expenditures to be approximately $7.0 million.
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 52 weeks ended June 29, 2002 and June 30, 2001 were $13.0
million and $13.2 million, respectively.
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. Our
contractual obligations and commercial commitments at June 29, 2002 were as
follows, in thousands of dollars:
Fiscal Year
---------------------------------------------------------------------------------------
Total 2003 2004 2005 2006 2007 Thereafter
-------- -------- -------- -------- -------- -------- ----------
Long-term debt (a) $180,204 $ 1,000 $ 1,000 $ 5,500 $ 28,750 $143,954
Revolving credit
facility 17,164 17,164
Capital lease
obligations 1,745 1,150 595
Operating leases 200,921 42,528 35,471 28,355 23,970 15,245 55,352
Letters of credit 7,405 7,405
Employment
agreement (b) 1,000 100 200 200 200 200 100
-------- -------- -------- -------- -------- -------- --------
$408,439 $ 52,183 $ 37,266 $ 34,055 $ 70,084 $ 15,445 $199,406
======== ======== ======== ======== ======== ======== ========
(a) Long-term debt reflects the changes to the amortization schedule
contained in Amendment No. 5 to the Credit Agreement, described in Note
17.
26
(b) On December 11, 2002, the Company entered into a Separation Agreement
with Judith A. Rogala, the Company's former Chief Executive Officer and
President, as described in more detail under Item 10 "Management -
Employment Contracts." Pursuant to the Separation Agreement, the
Company's total contractual obligations are $1.0 million, of which $0.1
million is payable in fiscal year 2003, $0.2 million per year is
payable in fiscal years 2004 through 2007 and $0.1 million is payable
thereafter.
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 our significant accounting policies, see "Item 8. Financial
Statements and Supplementary Data, Note 3. Summary of Significant Accounting
Policies." The following accounting estimates and related policies are
considered critical to the preparation of our 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. Our 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. Our accounts receivable are comprised primarily of tuition
due from governmental agencies, parents and employers. Accounts receivable are
presented at estimated net realizable value. We use estimates in determining the
collectibility of our accounts receivable and must rely on our evaluation of
historical trends, governmental funding levels, specific customer issues and
current economic trends to arrive at appropriate reserves. Material differences
may result in the amount and timing of bad debt expense if actual experience
differs significantly from management estimates.
Long-lived and intangible assets. Under the requirements of Statement of
Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment
of Long-Lived Assets, and Accounting Principles Board Opinion No. 17, Intangible
Assets, we assess the potential impairment of property and equipment,
identifiable intangibles and acquired goodwill whenever events or change in
circumstances indicate that the carrying value may not be recoverable. An
asset's value is impaired if our 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 $57.4 million were recorded in fiscal 2002 and were shown separately
as asset impairment expense in the financial statements. We will adopt SFAS No.
142, Goodwill and Other Intangible Assets, SFAS No. 143, Accounting for Asset
Retirement Obligations and SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, in fiscal year 2003. See "-Recently Issued
Accounting Pronouncements" for further detail.
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
27
and administrative costs. The accrued obligations for these self-insurance
programs were $11.6 million and $9.0 million at June 29, 2002 and June 30, 2001,
respectively, see "Item 8. Financial Statements and Supplementary Data, Note 3.
Summary of Significant Accounting Policies, Self-insurance Programs." Our
internal estimates are reviewed annually by a third party actuary. While we
believe 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 our 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 June 29, 2002 and June
30, 2001 would not be realized. Therefore, the Company has recorded a valuation
allowance to fully reserve those deferred tax assets at both fiscal 2001 and
2002 year-end. The provision for income taxes at June 29, 2002 and June 30, 2001
includes $6.2 million and $20.9 million, respectively to record these valuation
allowances.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") approved SFAS
No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 will require business combinations entered into after June
30, 2001 to be accounted for using the purchase method of accounting.
Specifically identifiable intangible assets having finite lives acquired, other
than goodwill, will be amortized over their estimated useful economic life. SFAS
No. 142 requires that goodwill and indefinite lived intangible assets not be
amortized, but instead be tested for impairment at least annually. SFAS No. 142
is effective for fiscal years beginning after December 15, 2001 for all goodwill
and other intangible assets recognized in an entity's statement of financial
position at that date, regardless of when those assets were initially
recognized. As of June 29, 2002, the net book value of the Company's goodwill is
$0. Therefore, the Company believes that the adoption of this standard will not
have a material impact on the Company's financial condition or results of
operations.
Also, in June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. This Statement addresses financial accounting and
reporting for obligations associated with retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and (or) the normal operation of a
long-lived assets, except for certain obligations of lessees. The Company has
determined that the adoption of this standard did not have a material impact on
the Company's financial condition or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 modified the financial accounting
and reporting for long-lived assets to be disposed of by sale, and it broadens
the presentation of discontinued operations to include more disposal
transactions. The Company believes that the implementation of this Statement,
which is effective for the Company's 2003 fiscal year, will not have a material
impact on the Company's financial condition. The Company believes that the
impact, if any, on the Company's results of operations will be limited to the
presentation of results between continuing operations and discontinued
operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and supercedes
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS No. 146 is effective
for exit or disposal activities that are initiated after December 31, 2002.
28
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 2002 year, the Company experienced
inflationary pressures on average wage rates, as hourly rates increased
approximately 4.3%. 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 our ability to open and profitably
operate Academies.
- Demand factors, including general fluctuations in demand for child care
services and seasonal fluctuations.
- Competitive factors, including: (a) pricing pressures primarily from
local nursery schools and child care centers and other large, national
for-profit child care companies, (b) the hiring and retention of
trained and qualified personnel, (c) and the ability to maintain
well-equipped facilities.
- Governmental action including: (a) new laws, regulations and judicial
decisions related to state and local regulations and licensing
requirements, (b) changes in the Federal assistance and funding of
child care services and (c) changes in the tax laws relating to La
Petite's operations.
- Changes in accounting standards promulgated by the Financial Accounting
Standards Board, the Securities and Exchange Commission or the American
Institute of Certified Public Accountants.
- Changes in costs or expenses, changes in tax rates, the effects of
acquisitions, dispositions or other events occurring in connection with
evolving business strategies.
- Management's ability to implement plans designed to improve the
Company's operating results, cash flows and financial position and to
improve the disclosure controls and procedures of the Company.
- Risk factors identified in the Company's Registration Statement on Form
S-4 (File No. 333-56239).
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.
29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative financial instruments were utilized by the Company in the management
of its interest rate exposures. The Company does not use derivative financial
instruments for trading or speculative purposes.
Current indebtedness 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 $36.3 million at June 29, 2002 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 Chase Manhattan
Bank's published prime rate, a certificate of deposit rate plus 1% 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 ABR
loans. The Senior Notes will mature in May 2008 and the Credit Agreement will
mature in May 2006. Payments due under the term loan are $1.0 million per year
in fiscal years 2003 and 2004, $5.5 million in fiscal year 2005 and $28.8
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).
To reduce the impact of interest rate changes on the term loan, the Company
entered into interest rate collar agreements during the second quarter of fiscal
year 1999. The collar agreements covered the LIBOR interest rate portion of the
term loan, effectively setting maximum and minimum interest rates of 9.5% and
7.9%, respectively. On December 19, 2001, the interest rate collar agreement on
the term loan was terminated effective as of January 28, 2002. Pursuant to the
termination, the Company paid the counter party $0.8 million in satisfaction of
an accrued mark-to-market obligation under the interest rate collar agreement.
To reduce interest expense on the $145 million Senior Notes, the Company entered
into an interest rate swap transaction of the same notional amount and an
interest rate collar during the third quarter of fiscal year 1999. The effect of
this transaction was that the fixed rate debt was essentially exchanged for a
variable rate arrangement based on LIBOR plus a fixed percentage. The interest
rate collar covered the LIBOR portion of variable rate swap, effectively setting
maximum and minimum interest rates of 10.9% and 9.2%, respectively. On January
11, 2001, the Company entered into an agreement with the counter party to
terminate the interest rate swap on the Senior Notes. The termination agreement
required the Company to pay the counter party $575,000 on February 28, 2001,
which was recorded as interest expense.
There were no initial costs associated with either the swap or the interest rate
collar agreements as the floor and cap rates were priced to offset each other.
Any differential paid or received based on the swap/collar agreements was
recognized as an adjustment to interest expense. With the termination of the
interest rate collar on the term loan, effective January 28, 2002, the Company
has no remaining derivative instruments.
A 1% increase in the applicable index rate would result in an interest expense
increase of $0.5 million per year. A 1% decrease in the applicable index rate
would result in an interest expense decrease of $0.5 million per year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements:
Independent Accountants' Report
Consolidated Balance Sheets as of June 29, 2002 and June 30, 2001, as
restated
30
Consolidated Statements of Operations and Comprehensive Loss for the 52
weeks ended June 29, 2002, June 30, 2001, as restated, and July 1,
2000, as restated
Consolidated Statements of Stockholders' Deficit for the 52 weeks ended
June 29, 2002, June 30, 2001, as restated, and July 1, 2000, as
restated
Consolidated Statements of Cash Flows for the 52 weeks ended June 29,
2002, June 30, 2001, as restated, and July 1, 2000, as restated
Notes to Consolidated Financial Statements
31
INDEPENDENT ACCOUNTANTS' REPORT
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 June 29, 2002 and June 30, 2001,
and the related consolidated statements of operations and comprehensive loss,
stockholders' deficit, and cash flows for the years ended June 29, 2002, June
30, 2001 and July 1, 2000. Our audits also included the financial statement
schedules listed in the Index at Item 15.(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 auditing standards generally accepted
in the United States of America. 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 June 29, 2002 and June 30, 2001, and the results of their operations and
their cash flows for the years ended June 29, 2002, June 30, 2001 and July 1,
2000, 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, the accompanying 2001 and 2000 financial statements, as
well as the related financial statement schedules, have been restated.
Deloitte & Touche LLP
Chicago, Illinois
February 10, 2003
32
LPA HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 29, JUNE 30,
2002 2001
----------- -------------
ASSETS AS RESTATED,
SEE NOTE 2
----------- -------------
Current assets:
Cash and cash equivalents $ 16,092 $ 5,414
Restricted cash investments 3,516 362
Accounts and notes receivable, (net of allowance for
doubtful accounts of $914 and $671) 11,225 11,820
Supplies inventory 2,955 6,346
Other prepaid expenses 1,517 2,955
Refundable taxes 528 581
--------- ----------
Total current assets 35,833 27,478
Property and equipment, at cost:
Land 5,168 5,778
Buildings and leasehold improvements 74,137 80,261
Furniture and equipment 16,151 12,653
Construction in progress 2,794 2,247
--------- ----------
98,250 100,939
Less accumulated depreciation 52,189 44,268
--------- ----------
Property and equipment, net 46,061 56,671
Other assets (Note 4) 9,674 64,516
--------- ----------
Total assets $ 91,568 $ 148,665
========= ==========
(continued)
33
LPA HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 29, JUNE 30,
2002 2001
---------- -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT AS RESTATED,
SEE NOTE 2
---------- -------------
Current liabilities:
Overdrafts due banks $ 4,491 $ 5,925
Accounts payable 8,069 7,448
Current maturities of long-term debt and capital lease 2,150 1,643
obligations (Note 5)
Accrued salaries, wages and other payroll costs 17,450 17,215
Accrued insurance liabilities 2,471 2,631
Accrued property and sales taxes 4,053 3,807
Accrued interest payable 2,119 2,227
Reserve for closed academies 1,833 3,834
Other current liabilities 8,754 6,582
--------- ----------
Total current liabilities 51,390 51,312
Long-term debt and capital lease obligations (Note 5) 196,963 193,211
Other long-term liabilities (Note 6) 11,220 10,290
Series A 12% redeemable preferred stock ($.01 par value per share);
45,000 shares authorized, issued and outstanding as of June 29, 63,397 54,941
2002 and June 30, 2001; aggregate liquidation preference of $68.5
million and $61.2 million, respectively (Note 9)
Series B 5% convertible redeemable participating preferred stock
($.01 par value per share); 6,900,000 shares authorized, 6,899,724 15,227
issued and outstanding as of June 29, 2002; aggregate liquidation
preference of $15.2 million, and no shares authorized, issued and
outstanding as of June 30, 2001 (Note 9)
Stockholders' deficit:
Class A common stock ($.01 par value per share); 14,980,000 shares 6 6
authorized and 564,985 shares issued and outstanding (Note
9)
Class B common stock ($.01 par value per share); 20,000 shares
authorized, issued and outstanding (Note 9)
Common stock warrants (Note 9) 8,596 8,596
Accumulated other comprehensive income 246 331
Accumulated deficit (255,477) (170,022)
--------- ----------
Total stockholders' deficit (246,629) (161,089)
--------- ----------
Total liabilities and stockholder's deficit $ 91,568 $ 148,665
========= ==========
(concluded)
See notes to consolidated financial statements
34
LPA HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(IN THOUSANDS OF DOLLARS)
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JUNE 29, JUNE 30, JULY 1,
2002 2001 2000
------------ ------------ -------------
AS RESTATED, AS RESTATED,
SEE NOTE 2 SEE NOTE 2
------------ -------------
Operating revenue $ 391,205 $ 384,924 $ 371,265
Operating expenses:
Salaries, wages and benefits 215,572 216,297 206,151
Facility lease expense 45,554 44,815 46,649
Depreciation and amortization 14,664 14,966 16,179
Restructuring charges (Note 14) 3,208 2,455 7,705
Asset impairments (Note 15) 57,436
Provision for doubtful accounts 2,951 4,665 2,931
Other 110,130 93,308 87,472
------------ ------------ ----------
Total operating expenses 449,515 376,506 367,087
------------ ------------ ----------
Operating income (loss) (58,310) 8,418 4,178
Interest expense 21,902 20,487 20,880
Interest income (204) (85) (163)
------------ ------------ ----------
Net interest costs 21,698 20,402 20,717
------------ ------------ ----------
Loss before income taxes (80,008) (11,984) (16,539)
Provision (benefit) for income taxes (3,236) 16,204 (5,453)
------------ ------------ ----------
Net loss (76,772) (28,188) (11,086)
------------ ------------ ----------
Other comprehensive income (loss):
Derivative adjustments, net 492
Amounts reclassified into operations (85) (161)
------------ ------------ ----------
Total other comprehensive income (loss) (85) 331
------------ ------------ ----------
Comprehensive loss $ (76,857) $ (27,857) $ (11,086)
============ ============ ==========
See notes to consolidated financial statements.
35
LPA HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS OF DOLLARS)
COMMON STOCK
-------------- ACCUMULATED TOTAL
NUMBER ACCUMULATED OTHER COMPRE- STOCKHOLDERS'
OF SHARES AMOUNT WARRANTS DEFICIT HENSIVE INCOME DEFICIT
------------------- --------- ------------ --------------- --------------
Balance, July 3, 1999, as
previously presented 580,026 $ 6 $ 5,645 $ (115,834) $ (110,183)
Prior period adjustments (1,412) (1,412)
(Note 2)
--------- ------- -------- ---------- ---------- ------------
Balance, July 3, 1999, as
restated 580,026 6 5,645 (117,246) (111,595)
========= ======= ======== ========== ========== ============
Exercise of stock options 4,959 89 89
Issuance of warrants 2,951 2,951
Preferred stock dividend and
accretion (5,963) (5,963)
Net loss, as restated (11,086) (11,086)
--------- ------- -------- ---------- ---------- ------------
Balance, July 1, 2000, as
restated 584,985 6 8,596 (134,206) (125,604)
========= ======= ======== ========== ========== ============
Derivative adjustments, net 492 492
Amounts reclassified into
operations (161) (161)
Preferred stock dividend and
accretion (7,628) (7,628)
Net loss, as restated (28,188) (28,188)
--------- ------- -------- ---------- ---------- ------------
Balance, June 30, 2001,
as restated 584,985 6 8,596 (170,022) 331 (161,089)
========= ======= ======== ========== ========== ============
Amounts reclassified into
operations (85) (85)
Preferred stock dividend and
accretion (8,683) (8,683)
Net loss (76,772) (76,772)
---------- ------- -------- ---------- ---------- ------------
Balance, June 29, 2002 584,985 $ 6 $ 8,596 $ (255,477) $ 246 $ (246,629)
========== ======= ======== ========== ========== ============
See notes to consolidated financial statements.
36
LPA HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JUNE 29, 2002 JUNE 30, 2001 JULY 1, 2000
--------------- --------------- ---------------
AS RESTATED, AS RESTATED,
SEE NOTE 2 SEE NOTE 2
--------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (76,772) $ (28,188) $ (11,086)
Adjustments to reconcile net loss to net cash from
operating activities
Asset impairments 57,436
Restructuring charges 3,208 2,455 7,705
Depreciation and amortization 14,664 14,966 16,179
Loss on sales and disposals of property and equipment 29 93 116
Deferred income taxes 16,520 (5,199)
Other non cash items 867 (2,575) (378)
Changes in assets and liabilities:
Restricted cash investments (3,154) 475 381
Accounts and notes receivable 595 (2,370) 1,178
Supplies inventory 3,391 781 1,368
Other prepaid expenses 1,438 2,641 813
Refundable income taxes 53 (471) 82
Bank overdrafts (1,434) 1,169 (2,693)
Accounts payable 621 (825) 190
Accrued salaries, wages and other payroll costs 235 1,561 2,115
Accrued property and sales taxes 246 176 (161)
Accrued interest payable (108) (341) 180
Other current liabilities 2,171 613 (7,602)
Accrued insurance liabilities 2,177 986 (821)
Reserve for closed academies (3,238) (3,645) (1,186)
Other changes in assets and liabilities, net 543 598 (410)
----------- ------------ --------------
Net cash provided by operating activities 2,967 4,619 771
----------- ------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Bright Start, net of cash acquired (10,361)
Capital expenditures (9,629) (14,502) (20,899)
Proceeds from sale of assets 838 189 23,432
----------- ------------ --------------
Net cash used for investing activities (8,791) (14,313) (7,828)
----------- ------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt and capital lease obligations (1,917) (1,900) (8,242)
Net borrowings under the Revolving Credit Agreement 4,164 13,000
Exercise of stock options 89
Deferred financing costs (745) (346)
Proceeds from issuance of redeemable preferred stock
and warrants, net of expenses 15,000 14,992
----------- ------------ --------------
Net cash provided by financing activities 16,502 11,100 6,493
----------- ------------ --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,678 1,406 (564)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,414 4,008 4,572
----------- ------------ --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,092 $ 5,414 $ 4,008
=========== ============ ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) $19,917 $ 20,866 $ 19,694
Income taxes 184 160 87
Cash received during the period for:
Interest 204 92 156
Income tax refunds 3,303 43 89
Non-cash investing and financing activities:
Capital lease obligations of $801, $1,793 and
$34 were incurred during the 52 weeks ended
June 29, 2002, the 52 weeks ended June 30,
2001 and 52 weeks ended July 1, 2000,
respectively.
See notes to consolidated financial statements.
37
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 child care programs
that are available on a full-time or part-time basis, for children
between six weeks and twelve years old. The Company's Academies are
located in 37 states and the District of Columbia, primarily in the
southern, Atlantic coastal, mid-western and western regions of the
United States.
2. RESTATEMENT
Subsequent to the issuance of the Company's Annual Report on Form
10-K/A for the fiscal year ended June 30, 2001, the Company determined
that certain asset, liability, revenue and expense items were
incorrectly reported or recognized in previously issued quarterly and
annual financial statements. The correction of these errors resulted in
total charges to current and prior year earnings of approximately $32.5
million, on an after-tax basis. Approximately $6.1 million of these
charges were recorded in the Company's results of operations for the 52
weeks June 29, 2002 and approximately $24.5 million and $0.5 million of
these charges were recorded in the Company's results of operations for
the 52 weeks ended June 30, 2001 and July 1, 2000, respectively.
Additional charges aggregating approximately $1.4 million are
attributed to the results of operations for periods ending prior to the
52 weeks ended July 1, 2000.
The Company has restated its balance sheet as of June 30, 2001 and its
statements of operations and comprehensive loss and of cash flows for
each of the 52 weeks ended June 30, 2001 and July 1, 2000. The
cumulative effect for periods prior to the 52 weeks ended July 1, 2000
has been reflected as a charge to accumulated deficit at July 3, 1999
in the consolidated statements of stockholders' deficit. Unaudited
selected quarterly financial data for each of the 52 weeks ended June
29, 2002 and June 30, 2001, as shown in Note 16, have also been
restated from amounts shown in prior quarterly reports. The effects of
the restatements are as follows:
38
June 30, 2001
---------------------------
In thousands of dollars As previously As
reported restated
---------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,078 $ 5,414
Restricted cash investments 91 362
Accounts and notes receivable 9,920 11,820
Supplies inventory 6,346 6,346
Other prepaid expenses 3,475 2,955
Refundable taxes 55 581
--------- ---------
Total current assets 24,965 27,478
Property and equipment, at cost:
Land 5,778 5,778
Buildings and leasehold improvements 85,753 80,261
Equipment 11,491 12,653
Construction in progress 2,280 2,247
--------- ---------
105,302 100,939
Less accumulated depreciation 46,278 44,268
--------- ---------
Property and equipment, net 59,024 56,671
Other assets 65,108 64,516
Deferred income tax asset 16,633 0
--------- ---------
Total assets $ 165,730 $ 148,665
========= =========
(continued)
39
June 30, 2001
---------------------------
As previously As
reported restated
---------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Overdrafts due banks 5,925 5,925
Accounts payable 5,707 7,448
Current maturities of long-term debt 1,255 1,643
and capital lease obligations
Accrued salaries, wages and other 15,495 17,215
payroll costs
Accrued insurance liabilities 2,359 2,631
Accrued property and sales taxes 3,368 3,807
Accrued interest payable 2,487 2,227
Reserve for closed academies 3,100 3,834
Other current liabilities 4,692 6,582
Deferred income tax liability 1,629
--------- ----------
Total current liabilities 46,017 51,312
Long-term debt and capital lease 192,394 193,211
obligations
Other long-term liabilities 7,060 10,290
Series A 12% redeemable preferred 54,941 54,941
stock
Stockholders' deficit:
Class A common stock 6 6
Class B common stock
Common stock warrants 8,596 8,596
Accumulated other comprehensive income 331 331
Accumulated deficit (143,615) (170,022)
--------- ----------
Total stockholders' deficit (134,682) (161,089)
--------- ----------
Total liabilities and stockholders' deficit $ 165,730 $ 148,665
--------- ----------
(concluded)
40
52 weeks ended 52 weeks ended
June 30, 2001 July 1, 2000
------------------------------------------------------------
In thousands of dollars As previously As As previously As
reported restated reported restated
------------- --------- ----------------------------
Operating revenue $ 384,837 $ 384,924 $ 371,037 $ 371,265
Operating expenses:
Salaries, wages and benefits 216,018 216,297 205,665 206,151
Facility lease expense 44,751 44,815 46,573 46,649
Depreciation and amortization 15,252 14,966 16,335 16,179
Restructuring charges 2,455 7,500 7,705
Provision for doubtful accounts 4,531 4,665 2,931 2,931
Other 87,393 93,308 86,948 87,472
------------- --------- ------------- ----------
Total operating expenses 367,945 376,506 365,952 367,087
Operating income 16,892 8,418 5,085 4,178
Interest expense 21,322 20,487 20,880 20,880
Interest income (85) (85) (163) (163)
------------- --------- ------------- ----------
Net interest costs 21,237 20,402 20,717 20,717
Loss before income taxes (4,345) (11,984) (15,632) (16,539)
(Benefit) provision for income taxes (644) 16,204 (5,085) (5,453)
------------- --------- ------------- ----------
Net loss (3,701) (28,188) (10,547) (11,086)
------------- --------- ------------- ----------
Other comprehensive income 331 331
------------- --------- ------------- ----------
Comprehensive loss $ (3,370) $ (27,857) $ (10,547) $ (11,086)
============= ========= ============= ==========
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The Company was not in compliance with certain
of the financial covenants contained in the Credit Agreement for each
of the fiscal quarters ended (i) during 1999, 2000, 2001 and 2002 and
(ii) the first quarter of fiscal 2003. The Company obtained limited
waivers of non-compliance with such financial and informational
covenants from the requisite lenders under the Credit Agreement. The
Company received limited waivers of noncompliance with the foregoing
financial and informational covenants through February 7, 2003. The
amendment to the Credit Agreement dated as of February 10, 2003,
permanently waived such defaults and an expected default for the second
quarter of fiscal year 2003. For additional information on the
amendment to the Credit Agreement dated as of February 10, 2003, see
Note 17 -Subsequent Events.
Management is instituting a series of plans and actions designed to
improve the Company's operating results and cash flow and to strengthen
the Company's financial position. These plans include cost reductions
resulting from continued academy closures and personnel reductions, as
well as targeted reductions in certain overhead costs and optimization
of the Company's real estate portfolio. Management believes that
implementation of their plans to improve operations and cash flows,
coupled with the amendment of the financial covenants contained in the
credit agreement and the additional contingent equity commitments up to
$14.5 million provided by LPA and the other stockholders of Parent, if
any, will allow 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.
41
Furthermore, there can be no assurance that the Company's lenders will
waive any future violations of the Credit Agreement that may occur or
agree to future amendments of the Credit Agreement. There also can be
no assurance that the Company can obtain additional funding from Parent
beyond that as noted above or any other external source.
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 intercompany accounts
and transactions.
FISCAL YEAR END - 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. This change was made to align the Company's business fiscal year
with its tax fiscal year.
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.
CASH EQUIVALENTS - The Company's cash equivalents consist of commercial
paper and money market funds with original maturities of three months
or less.
RESTRICTED CASH INVESTMENTS - The restricted cash investment balance
represents cash deposited in an escrow account as security for the
self-insured portion of the Company's workers compensation and
automobile insurance coverage.
SUPPLIES INVENTORY- The Company's inventory consists primarily of
various supplies, such as 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. During fiscal 2002, the Company
changed its methodology for estimating the usage of supplies. The
change in estimate resulted in a $2.7 million reduction in the supplies
inventory in the fourth quarter of fiscal 2002.
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 15, the Company wrote-off the unamortized goodwill balance in
the fourth quarter of fiscal 2002.
42
OTHER ASSETS - Other assets include real estate property held for sale,
the loss on real estate sale-leaseback transactions, deposits for rent
and utilities, deferred financing costs, and the fair value of
identifiable intangible assets, primarily curriculum, acquired in
connection with the acquisition of La Petite. The loss on
sale-leaseback transactions is being amortized over the lease term, and
the intangible assets are being amortized over periods ranging from 2
to 10 years on the straight-line method.
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 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 15).
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
carryforwards, 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.
DISCLOSURES REGARDING FINANCIAL INSTRUMENTS - At June 29, 2002 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 $76.8 million
and $98.6 million at June 29, 2002 and June 30, 2001, 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 a fair value of $0 at June 29, 2002 and
June 30, 2001.
RECOGNITION OF REVENUES AND PRE-OPENING EXPENSES - The Company operates
preschool education and childcare Academies. Tuition revenue, 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. At June 29, 2002 and June 30, 2001, deferred
registration fees were $1.3 million and $0.4 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
direct-response advertising, which is capitalized and amortized over
its expected period of future benefits. At June 29, 2002 and June 30,
2001, no advertising was reported as an asset. Advertising expense was
$7.3 million, $6.1 million and $5.5 million for the 52 weeks ended June
29, 2002, June 30, 2001 and July 1, 2000, 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
43
forma net income (loss) determined under the fair value method in
accordance with Statement of Financial Accounting Standards ("SFAS) No.
123 (See Note 13).
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 by SFAS Nos. 137 and 138, 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 an 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 5b). 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 5a).
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
is 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 the year ended June 29, 2002, approximately $85,000, net of
taxes, was reclassified from accumulated other comprehensive income
into interest expense. As of June 29, 2002, the Company has no interest
rate collar agreements. The Company estimates that approximately
$85,000, net of taxes, will be reclassified out of accumulated other
comprehensive income into interest expense during fiscal year 2003.
Prior to the adoption of SFAS No. 133, the Company utilized swap and
collar agreements to manage interest rate risks. The Company had
established a control environment that includes policies and procedures
for risk assessment and the approval, reporting, and monitoring of
44
derivative financial instrument activities. Company policy prohibits
holding or issuing derivative financial instruments for trading
purposes. Any differential paid or received based on the swap/collar
agreements was recognized as an adjustment to interest expense. Amounts
receivable or payable under derivative financial instrument contracts,
when recognized, were reported on the Consolidated Balance Sheet as
both current and long term receivables or liabilities. Gains and losses
on terminations of hedge contracts were recognized as other operating
expense when terminated in conjunction with the termination of the
hedged instrument, or to the extent that such instrument remains
outstanding, deferred as other assets or other liabilities and
amortized to interest expense over the remaining life of the position.
The Company had no derivative financial instruments as of June 29, 2002
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In June 2001, the Financial
Accounting Standards Board ("FASB") approved SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 will require business combinations entered into after June
30, 2001 to be accounted for using the purchase method of accounting.
Specifically identifiable intangible assets having finite lives
acquired, other than goodwill, will be amortized over their estimated
useful economic life. SFAS No. 142 requires that goodwill and
indefinite lived intangible assets not be amortized, but instead be
tested for impairment at least annually. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001 for all goodwill and
other intangible assets recognized in an entity's statement of
financial position at that date, regardless of when those assets were
initially recognized. As of June 29, 2002, the net book value of the
Company's goodwill is $0. Therefore, the Company believes that the
adoption of this standard did not have a material impact on the
Company's financial condition or results of operations.
Also, in June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. This Statement addresses financial accounting
and reporting for obligations associated with retirement of tangible
long-lived assets and the associated asset retirement costs. It applies
to legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and
(or) the normal operation of a long-lived assets, except for certain
obligations of lessees. The Company has determined that the adoption of
this standard will not have a material impact on the Company's
financial condition or results of operations.
In August 2001, the FASB issued SFAS No. 144 Accounting for Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 modified the financial
accounting and reporting for long-lived assets to be disposed of by
sale, and it broadens the presentation of discontinued operations to
include more disposal transactions. The Company believes that the
implementation of this Statement, which is effective for the Company's
2003 fiscal year, will not have a material impact on the Company's
financial condition. The Company believes that the impact, if any, on
the Company's results of operations will be limited to the presentation
of results between continuing operations and discontinued operations.
In June 2002, the FASB issued SFAS No. 146 Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and supercedes Emerging Issues Task Force (EITF)
Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring). SFAS 146 is effective for exit or
disposal activities that are initiated after December 31, 2002.
RECLASSIFICATIONS - Certain reclassifications to prior year amounts
have been made in order to conform to the current year presentation.
45
4. OTHER ASSETS
(in thousands of dollars)
JUNE 29, JUNE 30,
2002 2001
-------------- --------------
Goodwill (a) $ - $ 73,416
Accumulated amortization (a) - (17,747)
-------------- --------------
- 55,669
Deferred financing costs $ 9,514 8,769
Accumulated amortization (4,342) (3,252)
-------------- --------------
5,172 5,517
Other assets 4,502 3,330
-------------- --------------
$ 9,674 $ 64,516
============== ==============
(a) During the fourth quarter of 2002, the Company recognized
impairment losses of $52.3 million related to the goodwill
acquired (See Note 15).
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
(in thousands of dollars)
JUNE 29, JUNE 30,
2002 2001
-------------- --------------
Senior Notes, 10.0% due May 15,2008 (a) $ 143,954 $ 142,745
Borrowings under credit agreement (b) 53,414 50,250
Capital lease obligations 1,745 1,859
-------------- --------------
199,113 194,854
Less current maturities of long-term debt and
capital lease obligations (2,150) (1,643)
-------------- --------------
$ 196,963 $ 193,211
============== ==============
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. There are no restrictions on the ability
of Parent or La Petite to obtain funds from its subsidiaries
by dividend or loan. The Senior Notes contain certain
covenants that, among other things, limit Parent and La
Petite's ability to incur additional debt, transfer or sell
assets, and pay cash dividends.
To reduce interest expense on the $145 million Senior Notes,
the Company entered into an interest rate swap transaction of
the same notional amount and an interest rate collar during
the third quarter of fiscal year 1999. The effect of this
transaction was that the fixed rate debt was essentially
exchanged for a variable rate arrangement based on LIBOR plus
a fixed percentage. The interest rate collar covered the LIBOR
portion of variable rate swap, effectively setting maximum and
minimum interest rates of 10.9% and 9.2%, respectively. On
January 11, 2001, the Company entered into an agreement with
the counter party to terminate
46
the interest rate swap on the Senior Notes. The termination
agreement required the Company to pay the counter party
$575,000 on February 28, 2001, which was recorded as interest
expense.
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 the 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. As of June 29, 2002, the Credit
Agreement had a maturity date of May 2005 and payments due
under the term loan were $1.0 million in fiscal year 2003,
$7.8 million in fiscal year 2004, and $27.5 million in fiscal
year 2005. The payment schedule was modified in the amendment
to the Credit Agreement, described in Note 17- Subsequent
Events, such that payments due under the term loan will be
$1.0 million in fiscal years 2003 and 2004, $5.5 million in
fiscal year 2005, and $28.8 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). At June
29, 2002 there was $17.2 million outstanding on the revolver,
outstanding letters of credit in an aggregate amount equal to
$7.4 million, and $0.4 million was available for working
capital purposes under the Credit Agreement.
To reduce the impact of interest rate changes on the term
loan, the Company entered into interest rate collar agreements
during the second quarter of fiscal year 1999. The collar
agreements covered the LIBOR interest rate portion of the term
loan, effectively setting maximum and minimum interest rates
of 9.5% and 7.9%, respectively. On December 19, 2001, the
interest rate collar agreement on the term loan was terminated
effective as of January 28, 2002. Pursuant to the termination,
the Company paid the counter party $0.8 million in
satisfaction of an accrued mark-to-market obligation under the
interest rate collar agreement.
At June 29, 2002, the Company was not in compliance with
certain of the financial covenants contained in the Credit
Agreement. See Note 17 for further information regarding the
waiver of such default and other defaults under the Credit
agreement and a description of subsequent amendments to the
financial covenants, maturity dates and other terms of the
Credit Agreement.
Scheduled maturities and mandatory prepayments of long-term debt and
capital lease obligations during the five years subsequent to June 29,
2002, adjusted for the impact of the amendment of the Credit Agreement,
are as follows (in thousands of dollars):
47
CAPITAL LEASES
FISCAL YEAR ENDING: LONG-TERM
COMPUTERS VEHICLES DEBT TOTAL
2003 $ 594 $ 556 $ 1,000 $ 2,150
2004 588 7 1,000 1,595
2005 5,500 5,500
2006 45,914 45,914
2007 0
2008 and thereafter 143,954 143,954
--------- -------- --------- ---------
$ 1,182 $ 563 $ 197,368 $ 199,113
========= ======== ========= =========
6. OTHER LONG-TERM LIABILITIES
(in thousands of dollars)
JUNE 29, JUNE 30,
2002 2001
----------- ---------
Unfavorable leases (a) $ 1,111 $ 2,542
Reserve for closed academies (b) 2,765 2,731
Interest rate swap agreement 10
Long-term insurance liabilities (c) 7,344 5,007
--------- ---------
$ 11,220 $ 10,290
========= =========
(a) In connection with the acquisitions of La Petite and Bright
Start, a liability for unfavorable operating leases was
recorded and is being utilized over the remaining life of the
leases.
(b) The reserve for closed academies includes the long-term
liability related primarily to leases for Academies that were
closed and are no longer operated by the Company.
(c) Long-term insurance liabilities reflect the Company's
obligation for incurred but not reported workers'
compensation, auto and general liability claims.
7. 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):
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JUNE 29, JUNE 30, JULY 1,
2002 2001 2000
------------ ---------- ----------
(Refundable) Payable Currently:
Federal $ (3,412) $ (503) $ (446)
State 176 187 192
------------ --------- ----------
Total (3,236) (316) (254)
------------ --------- ----------
Deferred:
Federal 13,834 (4,357)
State 2,686 (842)
------------ --------- ----------
Total 16,520 (5,199)
------------ --------- ----------
$ (3,236) $ 16,204 $ (5,453)
============ ========= ==========
48
A reconciliation between the statutory federal income tax rate and the
effective income tax rate is as follows (in thousands of dollars):
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JUNE 29, JUNE 30, JULY 1,
2002 2001 2000
---------- ---------- ---------
Expected tax benefit at federal statutory
rate of 35% $ (28,003) $ (4,195) $ (5,789)
State income tax benefit, net of federal
income tax effect (4,480) (671) (926)
Goodwill amortization and impairment 22,593 1,315 1,126
Tax credits (526) (1,222)
Valuation allowance adjustment 6,255 20,870
Other 925 107 136
---------- ----------- ---------
Total $ (3,236) $ 16,204 $ (5,453)
========== =========== =========
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
June 29, 2002 and June 30, 2001 are estimated as follows (in thousands
of dollars):
JUNE 29, JUNE 30,
2002 2001
---------- -----------
Current deferred taxes:
Accruals not currently deductible $ 5,493 $ 3,726
Supplies (1,100) (3,083)
Prepaids and other 122 45
---------- -----------
Gross current deferred tax assets 4,515 688
Noncurrent deferred taxes:
Unfavorable leases 451 1,032
Insurance reserves 2,982 2,033
Reserve for closed academies 1,123 1,418
Net operating loss and tax credit carry 8,975 10,462
forwards
Property and equipment 7,784 5,522
Intangible assets 363 324
Original issue discount 992
Derivative financial instruments (425) (911)
Other 365 302
---------- -----------
Gross noncurrent deferred tax assets 22,610 20,182
---------- -----------
Total gross deferred tax assets 27,125 20,870
Less valuation allowance (27,125) (20,870)
---------- -----------
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
June 29, 2002 and June 30, 2001 would not be realized. Therefore, the
Company has recorded a valuation allowance to fully reserve those
deferred tax assets at both fiscal 2001 and 2002 year-end. The
provision for income taxes at June 29, 2002 and June 30, 2001 includes
$6.2 million and $20.9 million, respectively to record these valuation
allowances.
49
The Company has federal net operating loss carry-forwards and tax
credit carry-forwards of $17.8 million and $1.7 million, respectively.
These carry-forwards expire in fiscal years 2004 through 2022.
8. 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 and vehicle
leases are operating leases. Rental expenses for these leases were
$50.9 million, $51.9 million, and $54.5 million, for the 52 weeks ended
June 29, 2002, June 30, 2001, and July 1, 2000, respectively.
Contingent rental expense of $2.0 million, $2.3 million and $1.9
million were included in rental expense for the 52 weeks ended June 29,
2002, June 30, 2001, and July 1, 2000, respectively.
Aggregate minimum future rentals payable under facility leases as of
June 29, 2002 were as follows (in thousands of dollars):
Fiscal year ending:
2003 $ 42,528
2004 35,471
2005 28,355
2006 23,970
2007 15,245
2008 and thereafter 55,352
----------
$ 200,921
----------
9. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
The authorized stock of Parent as of June 29, 2002 consists of:
(i) 45,000 shares of Series A redeemable preferred stock, $.01 par
value, (Series A preferred stock) all of which were issued and
outstanding as of June 29, 2002 and June 30, 2001. 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 per share was $1,522.514 as of
June 29, 2002 and $1,360.563 as of June 30, 2001. Accrued
dividends were $23.8 million and $16.2 million at June 29,
2002 and June 30, 2001, 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.
50
(ii) 6,900,000 shares of Series B convertible participating
redeemable preferred stock, $.01 par value, (Series B
preferred stock) of which 6,899,724 shares were issued and
outstanding as of June 29, 2002 and no shares were issued and
outstanding June 30, 2001. 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 per share was $2.207
as of June 29, 2002. Accrued dividends were $0.2 million at
June 29, 2002. 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. 6,900,000 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) 14,980,000 shares of Class A common stock, $.01 par value,
(Class A common stock) of which 564,985 shares were issued and
outstanding as of June 29, 2002 and June 30, 2001. At June 29,
2002, 230,000 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, $.01 par value, (Class
B common stock) of which 20,000 shares were issued and
outstanding as of June 29, 2002 and June 30, 2001. 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.
(v) Warrants to purchase 64,231 shares of Class A common stock at
a purchase price of $.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 $8,596,000 to
the warrants representing the fair value of the warrants when
issued.
(vi) Warrants to purchase 562,500 shares of Class A common stock at
a purchase price of $.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; the Company did not recognize
discounts on the Series B preferred stock, as the warrants had
no fair value when issued.
10. BENEFIT PLAN
Through May 31, 1999, the Company sponsored a defined contribution plan
(the "Plan") for substantially all employees. Until January 1, 1998
eligible participants could make contributions to the Plan from 1% to
20% of their compensation (as defined). The Company also made
contributions at the discretion of the Board of Directors. Contribution
and plan administration expense attributable to this Plan was $15,679,
and $0.3 million for the 52 weeks ended June 30, 2001, and July 1,
2000, respectively. Company terminated the Plan effective May 31, 1999.
The Company sponsors a new 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
51
contributions at the discretion of the Board of Directors. The Company
made no contributions for fiscal years 2002 and 2001.
11. ACQUISITION
On July 21, 1999, the Company acquired all the outstanding shares of
Bright Start for $10.4 million in cash and assumed approximately $2.0
million in debt. At the time of the acquisition, Bright Start operated
43 preschools in the states of Minnesota, Wisconsin, Nevada, and New
Mexico with one new school under construction. The acquisition was
accounted for as a purchase and, accordingly, the purchase price has
been allocated to the fair value of net assets acquired and resulted in
an allocation to goodwill of $10.1 million, which was being amortized
on a straight-line basis over 20 years (See Note 15 regarding
impairment charges in fiscal 2002). The Company's financial statements
reflect the results of operations of Bright Start during the period
subsequent to July 21, 1999.
12. 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, results of operations or cash flows. The Company
also has employment contracts with certain executive officers.
13. 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 become 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.
52
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 July 3,1999 20,717 $ 19.19 43,350 $ 66.92 14,405 $ 133.83
------ -------- ------- -------- ------ -------- ----- --------
Granted 4,400 $ 66.92
Exercised 4,959 $ 18.00
Canceled 11,795 $ 19.01 33,450 $ 66.92 9,605 $ 133.83
------ -------- ------- -------- ------ -------- ----- --------
Options outstanding
at July 1,2000 3,963 $ 21.22 9,900 $ 66.92 4,800 $ 133.83 4,400 $ 66.92
------ -------- ------- -------- ------ -------- ----- --------
Granted 182,285 $ 66.92
Exercised
Canceled 750 $ 18.00 2,575 $ 66.92 4,200 $ 133.83 500 $ 66.92
------ -------- ------- -------- ------ -------- ----- --------
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
====== ======== ======= ======== ====== ======== ===== ========
Options exercisable
at June 29, 2002 3,213 67,221 2,762
====== ======= ====== =====
Options available for
grant at June 29, 2002 95,374 14,416 6,100
====== ======= ====== =====
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 3.2 years $ 18.00 2,463 $ 18.00
$ 35.00 750 4.5 years $ 35.00 750 $ 35.00
- ------------------------------------------------------------------------------------
$ 18.00 to $ 35.00 3,213 3.5 years $ 21.97 3,213 $ 21.97
====================================================================================
1998 Tranche A:
$ 66.92 119,610 7.7 years $ 66.92 67,221 $ 66.92
====================================================================================
1998 Tranche B
$133.83 600 5.9 years $133.83
====================================================================================
1999 Plan
$ 66.92 3,900 7.1 years $ 66.92 2,762 $ 66.92
====================================================================================
53
The Company accounts for all options in accordance with APB Opinion No.
25, which requires compensation cost to be recognized only on the
excess, if any, between the fair value of the stock at the date of
grant and the amount an employee must pay to acquire the stock. Under
this method, no compensation cost has been recognized for stock options
granted.
The weighted average fair value at date of grant for options granted
during fiscal years 2001 and 2000 was $0.00, and $5.08, respectively,
which for the purposes of this disclosure, is assumed to amortize over
the respective vesting periods of the grants. There were no options
granted in 2002. 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 above is assumed to be
amortized over the vesting period.
14. RESTRUCTURING CHARGES
The Company closed and or committed to close 7 Academies in 2002, 15
Academies in 2001 and 49 Academies in 2000, in areas where the
demographic conditions no longer supported an economically viable
operation. The Company also closed one divisional office in 2002 as
part of the relocation to a new corporate headquarters office and
closed two regional offices in 2001. Accordingly, the Company recorded
restructuring charges of $3.2 million, $2.5 million and $7.7 million in
fiscal years 2002, 2001 and 2000, respectively, to provide for costs
associated with the Academy closures, the office closures and
associated restructuring. The charges consisted principally of the
present value of rent, real estate taxes, common area maintenance
charges, and utilities, net of anticipated sublease income, 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 $1.5 million, $0.8
million and $1.7 million in fiscal years 2002, 2001 and 2000
respectively. As of June 29, 2002, 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 2003 and 2014. A summary of the restructuring reserve
activity is as follows, with dollars in thousands:
Balance at July 3, 1999 $ 4,048
Reserves recorded in fiscal year 2000 7,705
Amount utilized in fiscal year 2000 (3,220)
----------
Balance at July 1, 2000 8,533
Reserves recorded in fiscal year 2001 2,455
Amount utilized in fiscal year 2001 (4,423)
----------
Balance at June 30, 2001 6,565
Reserves recorded in fiscal year 2002 3,208
Amount utilized in fiscal year 2002 (5,175)
----------
Balance at June 29, 2002 $ 4,598
----------
54
15. ASSET IMPAIRMENTS
During the fourth quarter of fiscal 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.
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a reconciliation of amounts reported herein with amounts
previously reported in the Company's Quarterly Reports on Form 10-Q. As
discussed in Note 2, as a result of a review by the Audit Committee of
the Board of Directors, the Company determined that certain asset,
liability, revenue and expense items were incorrectly reported or
recognized in prior quarterly periods of previously issued financial
statements.
IN THOUSANDS OF DOLLARS 16 WEEKS 16 WEEKS 12 WEEKS 12 WEEKS
ENDED ENDED ENDED ENDED
OCTOBER OCTOBER JANUARY JANUARY
20, 2001 20, 2001 12, 2002 12, 2002
------------- ------------ ------------- -----------
AS PREVIOUSLY AS PREVIOUSLY
FISCAL YEAR 2002 REPORTED AS RESTATED REPORTED AS RESTATED
------------- ------------ ------------- -----------
Operating revenue $ 117,307 $ 114,398 $ 85,719 $ 86,469
Operating expenses:
Salaries, wages and benefits 65,039 65,100 47,173 47,390
Facility lease expense 13,985 13,882 10,597 10,472
Depreciation and amortization 4,588 4,541 3,462 3,424
Restructuring charges 1,160 349
Asset impairments
Provision for doubtful accounts 882 1,052 663 725
Other 30,785 32,020 20,793 22,879
--------- --------- --------- --------
Total operating expenses 115,279 117,755 82,688 85,239
--------- --------- --------- --------
Operating income (loss) 2,028 (3,357) 3,031 1,230
Interest expense 7,001 7,144 4,992 5,562
Interest income (85) (85) (16) (16)
--------- --------- --------- --------
Net interest costs 6,916 7,059 4,976 5,546
--------- --------- --------- --------
Loss before income taxes (4,888) (10,416) (1,945) (4,316)
Benefit for income taxes (1,652) 0 (513) 0
--------- --------- --------- --------
Net loss $ (3,236) $ (10,416) $ (1,432) $ (4,316)
========= ========= ========= ========
(continued)
55
IN THOUSANDS OF DOLLARS 12 WEEKS 12 WEEKS 12 WEEKS
ENDED ENDED ENDED
APRIL APRIL JUNE
6, 2002 6, 2002 29, 2002
------------- ----------- --------
AS PREVIOUSLY
FISCAL YEAR 2002 REPORTED AS RESTATED
------------- -----------
Operating revenue $ 93,598 $ 94,548 $ 95,790
Operating expenses:
Salaries, wages and benefits 51,634 51,329 51,753
Facility lease expense 10,739 10,616 10,584
Depreciation and amortization 3,430 3,391 3,308
Restructuring charges 429 1,270
Asset impairments 57,436
Provision for doubtful accounts 733 714 460
Other 22,234 22,919 32,312
-------- -------- --------
Total operating expenses 88,770 89,398 157,123
-------- -------- --------
Operating income (loss) 4,828 5,150 (61,333)
Interest expense 4,495 4,483 4,713
Interest income (40) (40) (63)
-------- -------- --------
Net interest costs 4,455 4,443 4,650
-------- -------- --------
Income (loss) before income taxes 373 707 (65,983)
Benefit for income taxes 418 (3,236) 0
-------- -------- --------
Net income (loss) $ (45) $ 3,943 $(65,983)
======== ======== ========
IN THOUSANDS OF DOLLARS 16 WEEKS 16 WEEKS 12 WEEKS 12 WEEKS
ENDED ENDED ENDED ENDED
OCTOBER OCTOBER JANUARY JANUARY
21, 2000 21, 2000 13, 2001 13, 2001
------------- ----------- ------------- -----------
AS PREVIOUSLY AS PREVIOUSLY
FISCAL YEAR 2001 REPORTED AS RESTATED REPORTED AS RESTATED
------------- ----------- ------------- -----------
Operating revenue $ 114,274 $ 110,931 $ 84,861 $ 85,788
Operating expenses:
Salaries, wages and benefits 65,011 65,407 48,028 47,853
Facility lease expense 13,689 13,717 10,213 10,233
Depreciation and amortization 4,798 4,713 3,564 3,500
Restructuring costs 246 452
Provision for doubtful accounts 888 888 1,117 1,118
Other 28,119 29,035 20,061 20,278
--------- ---------- --------- ---------
Total operating expenses 112,505 114,006 82,983 83,434
--------- ---------- --------- ---------
Operating income (loss) 1,769 (3,075) 1,878 2,354
Interest expense 7,441 7,441 3,044 2,468
Interest income (28) (28) (20) (19)
--------- ---------- --------- ---------
Net interest costs 7,413 7,413 3,024 2,449
--------- ---------- --------- ---------
Loss before income taxes (5,644) (10,488) (1,146) (95)
Provision (benefit) for income taxes (2,083) (3,897) (210) 183
--------- ---------- --------- ---------
Net loss $ (3,561) $ (6,591) $ (936) $ (278)
========= ========== ========= =========
(continued)
56
IN THOUSANDS OF DOLLARS 12 WEEKS 12 WEEKS 12 WEEKS 12 WEEKS
ENDED ENDED ENDED ENDED
APRIL APRIL JUNE JUNE
7, 2001 7, 2001 30, 2001 30, 2001
------------- ----------- ------------- -----------
AS PREVIOUSLY AS PREVIOUSLY
FISCAL YEAR 2001 REPORTED AS RESTATED REPORTED AS RESTATED
------------- ----------- ------------- -----------
Operating revenue $ 93,109 $ 94,253 $ 92,593 $ 93,952
Operating expenses:
Salaries, wages and benefits 50,420 50,387 52,559 52,650
Facility lease expense 10,429 10,436 10,420 10,429
Depreciation and amortization 3,436 3,369 3,454 3,384
Restructuring charges 1,757
Provision for doubtful accounts 1,333 1,333 1,193 1,326
Other 19,854 20,455 19,359 23,540
--------- -------- -----------------------
Total operating expenses 85,472 85,980 86,985 93,086
--------- -------- -----------------------
Operating income 7,637 8,273 5,608 866
Interest expense 5,675 5,675 5,163 4,903
Interest income (18) (18) (19) (20)
--------- -------- -----------------------
Net interest costs 5,657 5,657 5,144 4,883
--------- -------- -----------------------
Income (loss) before income taxes 1,980 2,616 464 (4,017)
Provision for income taxes 1,052 1,291 596 18,628
--------- --------- -----------------------
Net income (loss) $ 928 $ 1,325 $ (132) $ (22,645)
========= ========= =======================
17. SUBSEQUENT EVENTS
The Company was not in compliance with certain of the financial and
informational covenants contained in the Credit Agreement for the third
quarter ended April 6, 2002 and the fourth quarter ended June 29, 2002.
Furthermore, following the restatement of the Company's financial
information for the fiscal years 1999, 2000 and 2001, the Company was
not in compliance with certain of the financial covenants for each of
the quarters ending in fiscal years 1999, 2000 and 2001 and the first
two quarters of fiscal year 2002. In addition, the Company was not in
compliance with certain of the financial and informational covenants
for the first quarter of fiscal year 2003. The Company received limited
waivers of noncompliance with the foregoing financial and informational
covenants through February 7, 2003. The amendment to the Credit
Agreement dated as of February 10, 2003, permanently waived such
defaults and an expected default for the second quarter of fiscal year
2003.
On February 10, 2003, Parent, La Petite and its senior secured lenders
entered into Amendment No. 5 to the Credit Agreement. The amendment
waived existing defaults of Parent and La Petite in connection with (a)
the failure to satisfy certain financial covenants for the quarterly
periods ended (i) during 1999, 2000, 2001 and 2002 and (ii) nearest to
September 30, 2002 and December 31, 2002; (b) the failure to deliver
timely financial information to the senior secured lenders; (c) the
failure to file reports with the Securities and Exchange Commission;
(d) the failure to obtain the consent of the senior lenders prior to
the disposition of certain assets; and (e) the failure to deliver
required documents to the senior lenders prior to the disposition of
other assets. Additionally, the amendment 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
57
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 are required to
be used to prepay the term loans 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"), Parent may issue up to 6,669,733 shares of its series B
convertible preferred stock and warrants to purchase shares
representing up to 10% of its class A common stock. Parent will issue a
pro rata portion of the warrants to each Electing Stockholder. All of
the proceeds received by Parent from the issuance of the series B
preferred stock, if any, 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 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.
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,
the aggregate number of shares to be purchased by the Electing
Stockholders, if any, 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 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 shall be reduced by the
number of shares of series B preferred stock purchased prior to the
expiration of such fiscal quarter. 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 6,669,733 shares of series B preferred stock; (b) the date
the obligations (other than contingent obligations and liabilities) of
Parent and its subsidiaries under the Credit Agreement are terminated;
and (c) the date the lenders under the Credit Agreement agree to
release the Electing Stockholders from their obligations under the
Securities Purchase Agreement.
LPA has agreed to commit to purchase, in accordance with the terms of
the Securities Purchase Agreement, 96.2% of the series B preferred
stock being offered and will receive warrants to purchase shares of
Parent's class A common stock in connection with such commitment. LPA
has committed to purchase, in accordance with the terms of the
Securities Purchase Agreement, the respective pro rata amount of each
stockholder of Parent that exercises less than 100% of their respective
preemptive right to acquire the series B preferred stock.
Management is instituting a series of plans and actions designed to
improve the Company's operating results and cash flow and to strengthen
the Company's financial position. These plans include cost reductions
resulting from continued academy closures and personnel reductions, as
well as targeted reductions in certain overhead costs and optimization
of the Company's real estate portfolio.
Since June 29, 2002, the Company has closed 45 Academies. On December
12, 2002, the Company promoted Gary A. Graves from Chief Operating
Officer to Chief Executive Officer and President. Judith A. Rogala, the
former President and Chief Executive Officer of the Company had
resigned to pursue other business opportunities in her home state of
California. The Company and Ms. Rogala have entered into a Separation
Agreement dated December 11, 2002. In addition, in September 2002, the
Company appointed Michael F. Czlonka as its Chief Financial Officer.
58
Management believes that implementation of their plans to improve
operations and cash flows, coupled with the amendment of the financial
covenants contained in the Credit Agreement and the additional
contingent equity commitments provided by LPA and the other
stockholders of Parent, if any, will allow the Company to comply with
its required financial covenants, meet its obligations as they come due
and provide adequate liquidity to operate the business for the next
twelve months. However, there can be no assurance in this regard.
Furthermore, there can be no assurance that the Company's lenders will
waive any future violations of the Credit Agreement that may occur or
agree to future amendments of the Credit Agreement. There also can be
no assurance that the Company can obtain additional funding from Parent
beyond that as noted above or any other external source.
* * * * * * * * *
ITEM9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
59
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 ....................................... 40 Chairman of the Board and Director
Gary A. Graves........................................... 43 Chief Executive Officer, President,
Chief Operating Officer and Director
Mitchell J. Blutt, M.D .................................. 45 Director
Terry D. Byers .......................................... 48 Director
Robert E. King .......................................... 67 Director
Kevin G. O'Brien ........................................ 37 Director
Ronald L. Taylor ........................................ 58 Director
Michael F. Czlonka ...................................... 46 Chief Financial Officer and Secretary
Damaris M. Campbell ..................................... 49 Vice President, Eastern Region
Lisa J. Miskimins ....................................... 42 Vice President, Central Region
Rebecca L. Perry ........................................ 47 Vice President, Operations
Bill Buckland ........................................... 56 Vice President, People
Paul G. Kreuser ......................................... 41 Vice-President, Field Support Services
Stephen A. Murphy ...................................... 45 General Counsel and Assistant Secretary
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
director of The International Cornerstone Group, Zoots, Cabela's, Risk Metrics
Group, Erisk, The Excite Network and National Waterworks, Inc.
Gary A. Graves joined the Company 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. He has a BS in Chemical Engineering from the University
of Michigan and a MBA from the University of Chicago.
Mitchell J. Blutt, M.D. has been a Director of the Company since May 1998. Dr.
Blutt has served as an Executive Partner of JPMP since 1992. From 1988 to 1992
he was a General Partner of JPMP. Dr. Blutt has a BA and a MD from the
University of Pennsylvania and a MBA from The Wharton School of the University
of Pennsylvania. He is an Adjunct Professor of Medicine at the Weill Medical
College and Graduate School of Medical Sciences of Cornell University. Dr. Blutt
is a director of the Hanger Orthopedic Group, DJ Orthopedics, Inc, Ryko Corp.,
MedQuest Associates Inc., National Surgical Care Inc., and Medsite, Inc. He is a
member of the Board of Trustees of the University of Pennsylvania and a member
of the Board of Overseers of the University of Pennsylvania's School of Arts and
Sciences, and a member of the Executive Committee and Board of Penn Medicine. He
is also on the Board of the Brearley School and the Michael J. Fox Foundation
for Parkinson's Research. He formerly served on the Board of the National
Venture Capital Association.
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
60
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
Collegis, Inc., a diversified education services provider serving the
post-secondary education market sector. 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.
Ronald L. Taylor has been a Director of the Company since April 1999. Mr. Taylor
has been President and Chief Operating Officer of DeVry, Inc. since 1987. He is
Chairman of the Proprietary Schools Advisory Committee for the Illinois Board of
Higher Education; a member of the Institutional Action Committee for the North
Central Association of Colleges and Schools; a Commissioner for the Commission
on Governmental Relations of the American Council on Education; and a member of
the Board of Directors of the Illinois State Chamber of Commerce. He also 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.
Michael F. Czlonka joined the Company as Senior Vice President and Chief
Financial Officer in September 2002. From August 2001 until joining the Company,
he served as Interim Vice President and Corporate Controller for Quality Stores,
Inc. From 1997 to 2001, he was the Corporate Controller for Crate & Barrel.
Prior to 1997, his experience includes senior level financial positions with
Follett Corporation and the Chicago Sun-Times newspaper. Mr. Czlonka began his
career with Arthur Andersen & Co. and was a senior audit manager in their retail
practice. Mr. Czlonka has a BS in accounting from Indiana University and a MBA
from the Kellogg Graduate School of Management at Northwestern University.
Damaris M. Campbell became the Vice President of the Eastern Region for the
Company in June 2000. She is responsible for the supervision of 15 states. From
1997 to 2000, Ms. Campbell was an Area Vice President with supervisory
responsibility for the operations of the Company in five states. She was a
Divisional Director of 54 schools in three states from 1993 to 1997. From 1983
to 1993, she supervised 13 academies in the Charlotte, NC Region. She began her
career with the Company in 1980 as a teacher.
Lisa J. Miskimins became the Vice President of the Central Region of the Company
in June 2000. She is responsible for the supervision of over 250 locations in 13
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 50 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.
Rebecca L. Perry became the Vice President of Operations in April 2000. 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
61
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 child care
industry. Ms. Perry studied childhood education at The University of South
Florida.
Bill 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 Kreuser became Vice President, Field Support Services of the Company in
November of 2002, 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.
Stephen A. Murphy joined the Company in 1999 as Assistant General Counsel. He
became General Counsel in 2000. Prior to joining the Company, Mr. Murphy was
engaged in the private practice of law. From 1996 to 1998, he practiced with the
firm of Spencer Fane Britt & Browne, LLP. From 1993 to 1995, he was with the
Resolution Trust Corporation. From 1982 to 1992, he was with the firm of Gage &
Tucker. He holds a BA from Georgetown University and his Juris Doctor is from
the University of Kansas.
BOARD COMMITTEES AND COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has an Audit Committee consisting of Robert E. King and
Stephen P. Murray, and a Compensation Committee consisting of Stephen P. Murray
and Kevin G. O'Brien. The Audit Committee reviews the scope and results of
audits and internal accounting controls and all other tasks performed by our
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.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
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 $1,000 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
62
ITEM 11. EXECUTIVE COMPENSATION
The following table provides certain summary information concerning compensation
earned for the 52 weeks ended June 29, 2002 (2002), June 30, 2001 (2001), and
July 1, 2000 (2000), 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 fiscal year:
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
---- ------ ----- -----------------
Judith A. Rogala 2002 $357,308 $ 375,000(1)
Former Chief Executive Officer 2001 350,000 550,000(1) 49,810
and President (Separated from 2000 180,385(2) 275,000(1)
Company on December 11, 2002)
Tom McGarry 2002 144,230
Former Vice President, Field Support 2001 103,845(3) 20,000
(Separated from Company on
October 8, 2002)
Bill Buckland 2002 129,230(4)
Vice President, People
Damaris Campbell 2002 121,448 15,000
Vice President, Eastern Region 2001 115,702 19,325
2000 84,323 7,000
Lisa J. Miskimins 2002 121,448
Vice President, Central Region 2001 115,780 19,325 $14,879(5)
2000 74,703 2,000
(1) Includes vested portion of deferred signing bonus in the amount of $187,500
in Fiscal 2000 and $375,000 in Fiscal 2001 and Fiscal 2002 (See "Employment
Contracts").
(2) Fiscal 2000 compensation covers 27 weeks from December 21, 1999 through
July 1, 2000.
(3) Fiscal 2001 compensation covers 37 weeks from October 16, 2000 through June
30, 2001.
(4) Fiscal 2002 compensation covers 51 weeks from July 9, 2001 through June 29,
2002.
(5) Represents payments made to Ms. Miskimins related to her relocation to the
Chicago, IL area.
63
The following tables present information relating to grants to the named
executive officers of options to purchase common stock of Company:
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(2)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) REALIZED UNEXERCISABLE UNEXERCISABLE
Judith A. Rogala 31,131 / 18,679(1) 0 / 0
Tom McGarry 8,333 / 11,667(1) 0 / 0
Bill Buckland None / None n/a / n/a
Damaris Campbell 10,338 / 9,663(1) 0 / 0
Lisa J. Miskimins 10,338 / 9,663(1) 0 / 0
(1) The Board of Directors granted to certain key executives Tranche A options
at $66.92 per share, an amount that approximates the fair value of a share
of common stock of the Company at the date of the grant. These options
become exercisable ratably over forty-eight months and expire ten years
from the date of grant.
(2) The equity of the Company is not traded and there is no market for pricing
the value of the options. "In the Money" calculations are based on the
estimated enterprise value of the Company adjusted for debt, preferred
stock, common shares issued and retired, warrants and options and
adjustments for market liquidity and a control premium.
OPTIONS/SAR GRANTS
IN LAST FISCAL YEAR
NUMBER OF POTENTIAL REALIZABLE
SECURITIES % OF TOTAL VALUE AT ASSUMED ANNUAL
UNDERLYING OPTIONS/SAR's EXERCISE OR RATES OF STOCK PRICE
OPTIONS/SAR's GRANTED TO BASE PRICE EXPIRATION APPRECIATION FOR OPTION TERM
NAME GRANTED EMPLOYEES ($/SHARE) DATE 5%($) 10%($)
---- ------- ---------- --------- ---- ----- ------
FISCAL YEAR 2001
Judith A. Rogala None n/a n/a n/a n/a n/a
Tom McGarry None n/a n/a n/a n/a n/a
Bill Buckland None n/a n/a n/a n/a n/a
Damaris Campbell None n/a n/a n/a n/a n/a
Lisa J. Miskimins None n/a n/a n/a n/a n/a
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
64
$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.
The Company has entered into a Letter Agreement with Michael F. Czlonka that
sets forth the terms of Mr. Czlonka's employment by the Company. The Letter
Agreement provides for Mr. Czlonka to receive a base salary, subject to annual
performance adjustments, of $220,000 plus a bonus of up to 80% of base salary.
With the approval of the Board, Mr. Czlonka is also entitled to receive a cash
Interim Bonus with respect to the Company's fiscal year ending in June, 2003.
Mr. Czlonka also is entitled to receive options to purchase 90,000 shares of the
Company's stock upon approval by the Board. The Letter Agreement provides that
Mr. Czlonka is entitled to participate in the health and welfare benefits
available to the Company's other senior executives. The Letter Agreement also
provides for severance in the case of termination without 'cause' or a
resignation with 'good reason'. The severance payments shall initially be in an
amount equal to six months of base salary plus benefits if the executive is
terminated in the first year of employment, and shall increase up to a maximum
of twelve months of salary and benefits based upon Mr. Czlonka's employment
beyond such one-year period. Pursuant to the Letter Agreement, Mr. Czlonka shall
be required to sign a customary non-compete and confidentiality agreement.
The Company entered into an employment agreement with Judith A. Rogala 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.
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
65
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 501,035 shares of Parent's common stock have been granted pursuant to
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
January 31, 2003, LPA Investment LLC (LPA) owned 89.6% of the outstanding
common stock of Parent (approximately 90.7% 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
3.6%, 1.6% and 5.2%, respectively, of the outstanding common stock of Parent
(approximately 0.2%, 5.9% and 0.3%, 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 7.1% 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 our
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 Stockholders'
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, Blutt, 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 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 our Parent's common stock.
66
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"), Parent may
issue up to 6,669,733 shares of its series B convertible preferred stock and
warrants to purchase shares representing up to 10% of its class A common stock.
Parent will issue a pro rata portion of the warrants to each Electing
Stockholder. All of the proceeds received by Parent from the issuance of the
series B preferred stock, if any, 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 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. LPA has agreed to commit to
purchase, in accordance with the terms of the Securities Purchase Agreement,
96.2% of the series B preferred stock being offered and will receive warrants to
purchase shares of Parent's class A common stock in connection with such
commitment. LPA has committed to purchase, in accordance with the terms of the
Securities Purchase Agreement, the respective pro rata amount of each
stockholder of Parent that exercises less than 100% of their respective
preemptive right to acquire the series B preferred stock. As of the filing date
of this report, Parent has not issued any securities pursuant to the Securities
Purchase Agreement.
For information regarding securities authorized for issuance under equity
compensation, see Note 13 of the Notes to Consolidated Financial Statements.
67
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, and is the trustee under the indenture governing the Senior
Notes. LPA, an affiliate of JPMP, JPMorgan Chase Bank and JPMSI, owns 89.6% of
the outstanding common stock of Parent (approximately 90.7% on a fully diluted
basis as of January 31, 2003). LPA owns $45 million of Parent's Series A
preferred stock, $15.0 million of Parent's Series B preferred stock, and
warrants to purchase 7.1% 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 our 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 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 and May 2002 Parent sold
additional equity to LPA. See "Item 1. Business -Organization"
ITEM 14. CONTROLS AND PROCEDURES
On September 13, 2002, the Company filed a Form 8-K, indicating that in
connection with our preparation of financial statements for the fiscal year
ended June 29, 2002, the Company identified that it expected to take charges to
earnings, which may be reflected in the restatement of certain of the Company's
historical financial statements, herein referred to as the Restatement Process.
To determine the scope, magnitude, timing and cause of the charges and to
improve internal accounting controls, the audit committees of the boards of
directors of LPA Holding Corp. and La Petite Academy conducted an internal
review. The audit committees retained independent outside advisors, including
legal counsel and accountants, to assist the audit committees in the performance
of their review, herein referred to as the Audit Committee Review. The review
has been completed and the Consolidated Financial Statements and related notes,
included in Item 8, reflect the restatement of La Petite's Consolidated Balance
Sheet as of June 30, 2001, Consolidated Statements of Operations and
Comprehensive Loss for the years ending June 30, 2001 and July 1, 2000,
Consolidated Statements of Stockholders' Deficit for the years ending June 30,
2001 and July 1, 2000, Consolidated Statements of Cash Flows for the years
ending June 30, 2001 and July 1, 2000, and Consolidated Statements of Operations
and Comprehensive Loss for the quarters ending April 6, 2002, January 12, 2002,
October 20, 2001, April 7, 2001, June 30, 2001, January 13, 2001 and October 21,
2000.
The Company maintains a set of disclosure controls and procedures 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. Within the 90 days prior to the date of this
report, the Company carried out an evaluation, under the supervision and with
the participation of our management, including its Chief Executive Officer, Gary
A. Graves, and its Chief Financial Officer, Michael F. Czlonka, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Rule 13a-14 of the Exchange Act. In view of the
Company's inability to complete the preparation of its Annual Report on Form
10-K for the fiscal year ended June 29, 2002, within the Exchange Act's
prescribed time and resultant restatement that was required, these officers
directed that steps be taken to enhance the short-term and long-term operation
and effectiveness of disclosure controls and procedures to ensure timely
decisions regarding required disclosures and reporting under the Exchange Act.
Since the inception of the Restatement Process and Audit Committee Review, the
Company has made a number of significant changes that strengthened the internal
controls over its accounting, reporting and disclosure procedures and intends on
making additional changes going forward. These changes included, but were not
necessarily
68
limited to, (i) communicating a tone from senior management regarding the proper
conduct in these matters, (ii) strengthening the financial management
organization and reporting process, (iii) requiring stricter account
reconciliation standards, (iv) expanding the financial accounting procedures for
the year ended June 29, 2002, (v) temporarily supplementing the Company's
existing staff with additional contractor-based support to collect and analyze
the information necessary to prepare the Company's financial statements, related
disclosures and other information requirements contained in the Company's SEC
periodic reporting until the Company implements changes to the current
organization and staffing, (vi) increasing financial field audits of academies,
(vii) increasing divisional financial staff to ensure field adherence to
financial policies and internal controls and (viii) commencing a comprehensive,
team-based process to further assess and enhance the efficiency and
effectiveness of the Company's financial processes, including support efforts
which better integrate current and evolving financial information system
initiatives, and addressing any remaining weaknesses.
The Company is committed to continuing the process of identifying, evaluating
and implementing corrective actions where required to improve the effectiveness
of its disclosure controls and procedures. While the Company is in the process
of implementing a more efficient and reliable system of disclosure controls and
procedures, the Company has, on an immediate basis, instituted interim
compensating controls and procedures to ensure that information required to be
disclosed in this Annual Report on Form 10-K has been recorded, processed,
summarized and reported to our senior management. The changes made to date as
discussed above have also enabled the Company to restate its previous filings
where required.
There have been no significant changes in the Company's internal controls, or in
other factors that could affect the Company's internal controls, subsequent to
the date of their evaluation.
69
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See pages 28 to 56 of this Annual Report on Form 10-K for financial
statements of LPA Holding Corp. as of June 29, 2002 and June 30, 2001
and for the 52 weeks ended June 29, 2002, for the 52 weeks ended June
30, 2001, and for the 52 weeks ended July 1, 2000.
(a) 2. Financial Statement Schedules
The following additional financial data should be read in conjunction
with the consolidated financial statements for the 52 weeks ended June
29, 2002, for the 52 weeks ended June 30, 2001, and for the 52 weeks
ended July 1, 2000. 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* Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of LPA Holding Corp.,
filed on February 10, 2003.
3.11* 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.
70
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* 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.
71
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.
72
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.
10.34(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.
10.35* 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.
10.36(xiv) Separation Agreement dated as of December 11, 2002
among LPA Holding Corp., La Petite Academy, Inc. and
Judith A. Rogala.
10.37* 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.
10.38* Employment Agreement dated August 26, 2002 among LPA
Holding Corp., La Petite Academy, Inc. and Gary A.
Graves.
10.39* Amendment No. 1 to 1998 Stock Option Plan for LPA
Holding Corp
10.40* Employment Letter Agreement dated as of September 5,
2002 among La Petite Academy, Inc and Michael F.
Czlonka.
10.41* 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.
10.42* 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.
12.1* Statement regarding computation of ratios.
21.1(vi) Subsidiaries of Registrant.
(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.
73
(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.
(*) 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.
74
LPA HOLDING CORP.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
JUNE 29, JUNE 30,
BALANCE SHEETS 2002 2001
----------- -------------
AS RESTATED,
SEE NOTE 2
-------------
ASSETS: $ - $ -
=========== =============
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Payable to La Petite Academy, Inc. 40,132 55,132
----------- -------------
Total current liabilities 40,132 55,132
Equity in net loss of La Petite Academy, Inc in excess of 127,873 51,016
investment
Series A 12% redeemable preferred stock ($.01 par value per share); 63,397 54,941
45,000 shares authorized, issued and outstanding as of
June 29, 2002 and June 30, 2001; aggregate liquidation
preference of $68.5 million and $61.2 million, respectively
Series B 5% convertible redeemable participating preferred stock 15,227
($.01 par value per share); 6,900,000 shares authorized, 6,899,724
issued and outstanding as of June 29 2002; aggregate liquidation
preference of $15.2 million, and no shares authorized, issued and
outstanding as of June 30, 2001
Stockholders' deficit:
Class A common stock ($.01 par value per share); 14,980,000 shares 6 6
authorized and 564,985 shares issued and outstanding as of June
29, 2002 and June 30, 2001
Class B common stock ($.01 par value per share); 20,000 shares
authorized, issued and outstanding as of June 29, 2002 and June
30, 2001
Common stock warrants 8,596 8,596
Accumulated other comprehensive income 246 331
Accumulated deficit (255,477) (170,022)
----------- -------------
Total stockholders' deficit (246,629) (161,089)
----------- -------------
$ - $ -
=========== =============
See notes to consolidated financial statements included in Part II of the Annual
Report on Form 10-K.
75
LPA HOLDING CORP.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS OF DOLLARS)
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JUNE 29, JUNE 30, JULY 1,
STATEMENTS OF OPERATIONS 2002 2001 2000
--------------- ----------------------------------
AS RESTATED, AS RESTATED,
SEE NOTE 2 SEE NOTE 2
----------------------------------
Equity in net loss of La Petite Academy, Inc. $ (76,772) $ (28,188) $ (11,086)
-------------- -------------- --------------
Net loss (76,772) (28,188) (11,086)
-------------- -------------- --------------
Other Comprehensive income (loss):
Derivative adjustments, net 492
Amounts reclassified into operations (85) (161)
-------------- -------------- --------------
Total other comprehensive income (loss) (85) 331
-------------- -------------- --------------
Comprehensive loss $ (76,857) $ (27,857) $ (11,086)
-------------- -------------- --------------
See notes to consolidated financial statements included in Part II of the Annual
Report on Form 10-K.
76
LPA HOLDING CORP.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS OF DOLLARS)
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JUNE 29, JUNE 30, JULY 1,
STATEMENTS OF CASH FLOWS 2002 2001 2000
--------- ------------- -------------
AS RESTATED, AS RESTATED,
SEE NOTE 2 SEE NOTE 2
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (76,772) $ (28,188) $ (11,086)
Adjustments to reconcile net loss to net cash from operating
activities:
Non cash items (85) 331
Equity in comprehensive loss of La Petite Academy, Inc. 76,857 27,857 11,086
--------- ------------- ------------
Net cash from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in La Petite Academy, Inc. (15,000) (14,992)
--------- ------------ ------------
Net cash used in investing activities (15,000) (14,992)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of redeemable preferred stock 15,000 14,992
and warrants, net of expenses
--------- ------------ ------------
Net cash provided by financing activities 15,000 14,992
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 the Annual
Report on Form 10-K.
77
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 30, COSTS AND JUNE 29,
DESCRIPTION 2001 (a) EXPENSES WRITE-OFFS 2002
---------------- -------------- ------------- ---------------
Allowance for doubtful accounts $ 671 $ 2,951 $ 2,708 $ 914
---------------- -------------- ------------- ---------------
BALANCE AT CHARGED TO BALANCE AT
JULY 1, COSTS AND JUNE 30,
DESCRIPTION 2000 EXPENSES (a) WRITE-OFFS 2001 (a)
---------------- -------------- ------------- ---------------
Allowance for doubtful accounts $ 406 $ 4,665 $ 4,400 $ 671
---------------- -------------- ------------- ---------------
BALANCE AT CHARGED TO BALANCE AT
JULY 3, COSTS AND JULY 1,
DESCRIPTION 1999 EXPENSES WRITE-OFFS 2000
---------------- -------------- ------------- ---------------
Allowance for doubtful accounts $ 306 $ 2,931 $ 2,831 $ 406
---------------- -------------- ------------- ---------------
(a) As restated - See notes to consolidated financial statements included in
Part II of the Annual Report on Form 10-K
(continued)
78
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 30, COSTS AND CHARGED TO JUNE 29,
DESCRIPTION 2001(a) EXPENSES RESERVE 2002
------------- ------------- ------------- ----------
Reserve for Closed Academies $ 6,565 $ 3,208 $ 5,175 $ 4,598
------------- ------------- ------------- ----------
BALANCE AT CHARGED TO BALANCE AT
JULY 1, COSTS AND CHARGED TO JUNE 30,
DESCRIPTION 2000 EXPENSES (a) RESERVE (a) 2001 (a)
------------- ------------- ------------- ----------
Reserve for Closed Academies $ 8,533 $ 2,455 $ 4,423 $ 6,565
------------- ------------- ------------- ----------
BALANCE AT CHARGED TO BALANCE AT
JULY 3, COSTS AND CHARGED TO JULY 1,
DESCRIPTION 1999 EXPENSES (a) RESERVE (a) 2000 (a)
------------- ------------- ------------- ----------
Reserve for Closed Academies $ 4,048 $ 7,705 $ 3,220 $ 8,533
------------- ------------- ------------- ----------
(a) As restated - See notes to consolidated financial statements included in
Part II of the Annual Report on Form 10-K
79
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 February 19, 2003.
LPA Holding Corp.
/s/ Michael F. Czlonka
----------------------------------
By: Michael F. Czlonka
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 February 19, 2003.
/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/ Mitchell J. Blutt, M.D. /s/ Terry D. Byers
- ------------------------------------- ----------------------------------
By: Mitchell J. Blutt, M.D. 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
80
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 February 19, 2003.
La Petite Academy, Inc.
/s/ Michael F. Czlonka
----------------------------------
By: Michael F. Czlonka
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 February 19, 2003.
/s/ Gary A. Graves /s/ Stephen P. Murray
- -------------------- ----------------------------------
By: Gary A. Graves By: Stephen P. Murray
Chief Executive Officer, President and Chairman of the Board and Director
Director
/s/ Mitchell J. Blutt, M.D. /s/ Terry D. Byers
- ------------------------------------- ----------------------------------
By: Mitchell J. Blutt, M.D. 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
81
CERTIFICATION
I, Gary A. Graves, certify that:
1. I have reviewed this annual report on Form 10-K of LPA Holding Corp. and La
Petite Academy, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the LPA Holding Corp. and La Petite Academy, Inc. as of, and for, the
periods presented in this annual report;
February 19, 2003
/s/ Gary A. Graves
- -----------------------
By: Gary A. Graves
Chief Executive Officer
82
CERTIFICATION
I, Michael F. Czlonka, certify that:
1. I have reviewed this annual report on Form 10-K of LPA Holding Corp. and La
Petite Academy, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the LPA Holding Corp. and La Petite Academy, Inc. as of, and for, the
periods presented in this annual report;
February 19, 2003
/s/ Michael F. Czlonka
- -----------------------
By: Michael F. Czlonka
Chief Financial Officer
83